Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.10.0.1
Income Taxes
 12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
There is no current U.S. federal income tax provision, as all federal taxable income was offset by utilizing U.S. federal net operating loss carryforwards.  The current state income tax provision is primarily related to taxable income in certain states that have suspended or limited the ability to use net operating loss carryforwards or where net operating losses have been fully utilized.  The current foreign income tax provision is primarily related to foreign withholding taxes on dividends paid to us by Sirius XM Canada.  Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities.
We file a consolidated federal income tax return for all of our wholly-owned subsidiaries, including Sirius XM. Income tax expense consisted of the following:
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Current taxes:
 
 
 
 
 
Federal
$
—

 
$
—

 
$
—

State
12,038

 
(32,579
)
 
(21,782
)
Foreign
(144
)
 
(202
)
 
(383
)
Total current taxes
11,894

 
(32,781
)
 
(22,165
)
Deferred taxes:
 
 
 
 
 
Federal
(258,930
)
 
(564,171
)
 
(304,179
)
State
2,355

 
(19,349
)
 
(19,383
)
Total deferred taxes
(256,575
)
 
(583,520
)
 
(323,562
)
Total income tax expense
$
(244,681
)
 
$
(616,301
)
 
$
(345,727
)

The following table presents a reconciliation of the U.S. federal statutory tax rate and our effective tax rate:
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Federal tax expense, at statutory rate
21.0
 %
 
35.0
 %
 
35.0
 %
State income tax expense, net of federal benefit
3.6
 %
 
2.8
 %
 
2.8
 %
Change in valuation allowance
1.0
 %
 
(0.1
)%
 
—
 %
Tax credits
(6.8
)%
 
(1.7
)%
 
(6.1
)%
Stock-based compensation
(3.1
)%
 
(2.9
)%
 
(0.6
)%
Federal tax reform - deferred rate change
—
 %
 
14.6
 %
 
—
 %
Other, net
1.5
 %
 
1.0
 %
 
0.6
 %
Effective tax rate
17.2
 %
 
48.7
 %
 
31.7
 %

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act made broad and complex changes to the U.S. tax code, including, accelerated depreciation that will allow for full expensing of qualified property. The Tax Act also reduced the U.S. federal corporate income tax rate from 35% to 21%.
The effective tax rate of 17.2% for the year ended December 31, 2018 was primarily impacted by the reduced federal tax rate to 21%, the recognition of excess tax benefits related to share based compensation and a benefit related to state and federal research and development credits.  The effective tax rate of 48.7% for the year ended December 31, 2017 was negatively impacted by the revaluation of our net deferred tax assets, excluding after tax credits as of December 31, 2017 as a result of the reduction of the federal corporate income tax rate. This was offset by the recognition of excess tax benefits related to share based compensation and a benefit related to federal research and development credits, under the Protecting Americans from Tax Hikes Act of 2015.  Based on this revaluation, we recorded an additional tax expense of $184,599 to reduce our net deferred tax asset balance for the year ended December 31, 2017. The effective tax rate of 31.7% for the year ended December 31, 2016 was primarily impacted by the benefit related to federal research and development credits.
Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences can be carried forward under tax law.  Our evaluation of the realizability of deferred tax assets considers both positive and negative evidence, including historical financial performance, scheduled reversal of deferred tax assets and liabilities, projected taxable income and tax planning strategies.  The weight given to the potential effects of positive and negative evidence is based on the extent to which it can be objectively verified.  A valuation allowance is recognized when, based on the weight of all available evidence, it is considered more likely than not that all, or some portion, of the deferred tax assets will not be realized.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities, shown before jurisdictional netting, are presented below:
 
For the Years Ended December 31,
 
2018
 
2017
Deferred tax assets:
 
 
 
Net operating loss carryforwards and tax credits
$
952,316

 
$
686,277

Deferred revenue
88,502

 
500,461

Accrued bonus
26,825

 
24,150

Expensed costs capitalized for tax
15,978

 
13,914

Investments
11,965

 
29,881

Stock based compensation
55,436

 
50,065

Other
5,940

 
20,819

Total deferred tax assets
1,156,962

 
1,325,567

Deferred tax liabilities:
 
 
 
Depreciation of property and equipment
(230,053
)
 
(156,003
)
FCC license
(515,627
)
 
(506,578
)
Other intangible assets
(101,650
)
 
(105,471
)
Other
2,049

 
(7,273
)
Total deferred tax liabilities
(845,281
)
 
(775,325
)
Net deferred tax assets before valuation allowance
311,681

 
550,242

Valuation allowance
(66,229
)
 
(52,883
)
Total net deferred tax asset
$
245,452

 
$
497,359


Net operating loss carryforwards and tax credits increased as a result of accelerated tax benefits due to accounting methods changes and accelerated depreciation that allowed for full expensing on qualified property under the Tax Act offset by the utilization of net operating losses related to current year taxable income. For the years ended December 31, 2018 and 2017, we recorded $96,971 and $21,700 state and federal tax credits, respectively. Our gross federal net operating loss carryforwards are approximately $2,760,000.
As of December 31, 2018 and 2017, we had a valuation allowance related to deferred tax assets of $66,229 and $52,883, respectively, which were not likely to be realized due to the timing of certain federal and state net operating loss limitations.  During the year ended December 31, 2018, our allowance increased primarily due to time limitations associated with federal research and development credits. During the year ended December 31, 2017, our valuation allowance increased primarily due to the impact of the Tax Act as the federal rate decreases from 35% to 21% affected the value of the state valuation allowances. The net operating loss carryforwards and tax credits upon which the valuation allowance is assessed are projected to expire on various dates through 2037 and 2038, respectively.
ASC 740, Income Taxes, requires a company to first determine whether it is more likely than not that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information.  A tax position that meets this more likely than not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.  If the tax position is not more likely than not to be sustained, the gross amount of the unrecognized tax position will not be recorded in the financial statements but will be shown in tabular format within the uncertain income tax positions. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs due to the following conditions: (1) the tax position is “more likely than not” to be sustained, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute of limitations for the tax position has expired.  A number of years may elapse before an uncertain tax position is effectively settled or until there is a lapse in the applicable statute of limitations.  We record interest and penalties related to uncertain tax positions in Income tax expense in our consolidated statements of comprehensive income.
As of December 31, 2018 and 2017, the gross liability for income taxes associated with uncertain tax positions was $387,149 and $334,254, respectively.  If recognized, $306,675 of unrecognized tax benefits would affect our effective tax rate.  Uncertain tax positions are recognized in Other long-term liabilities which, as of December 31, 2018 and 2017, were $8,541 and $12,190, respectively, including accrued interest.  No penalties have been accrued.  
We have state income tax audits pending.  We do not expect the ultimate outcome of these audits to have a material adverse effect on our financial position or results of operations.  We also do not currently anticipate that our existing reserves related to uncertain tax positions as of December 31, 2018 will significantly increase or decrease during the year ending December 31, 2019. Various events could cause our current expectations to change. Should our position with respect to the majority of these uncertain tax positions be upheld, the effect would be recorded in our consolidated statements of comprehensive income as part of the income tax provision.  We recorded interest expense of $627 and $708 for the years ended December 31, 2018 and 2017, respectively, related to unrecognized tax benefits.
Changes in our uncertain income tax positions, from January 1 through December 31 are set forth below:
 
2018
 
2017
Balance, beginning of year
$
334,254

 
$
303,583

Increases in tax positions for prior years
65,099

 
14,530

Increases in tax positions for current years
14,594

 
16,141

Decreases in tax positions for prior years
(26,798
)
 
—

Balance, end of year
$
387,149

 
$
334,254