Sirius XM Holdings Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Provision for Income Taxes

Provision for Income Taxes

12 Months Ended

Dec. 31, 2017

Loss before provision for income taxes by jurisdiction consists of the following:



	Year ended December 31,
	2015			2016			2017
	(in thousands)
Jurisdiction
Domestic	$	(163,460	)	$	(328,414	)	$	(499,803	)
Foreign	(7,751		)	(14,792		)	(19,382		)
Loss before provision for income taxes	$	(171,211	)	$	(343,206	)	$	(519,185	)

The provision for income taxes consists of the following:



	Year ended December 31,
	2015			2016			2017
				(in thousands)
Current
Federal	$	—		$	—		$	—
State and local	9			26			43
International	214			443			(2		)
Total current income tax expense	$	223		$	469		$	41
Deferred
Federal	(17,943		)	(96,852		)	58,116
State and local	(2,174		)	(10,750		)	(20,267		)
International	—			(1,032		)	2,178
Valuation allowance	18,344			107,937			(40,858		)
Total deferred income tax expense (benefit)	$	(1,773	)	$	(697	)	$	(831	)
Total provision for (benefit from) income taxes	$	(1,550	)	$	(228	)	$	(790	)

The income tax provision decreased by $0.6 million during the year ended December 31, 2017 as a result of valuation allowance releases resulting from provisions of the Tax Cut and Jobs Act.

The following table presents a reconciliation of the statutory federal rate and our effective tax rate:



	Year ended December 31,
	2015		2016		2017
U.S. federal taxes at statutory rate	34	%	34	%	34	%
State taxes, net of federal benefit	—		—		—
Permanent differences	3		2		(14	)
Foreign rate differential	(1	)	(2	)	(1	)
Federal and state credits, net of reserve	2		2		1
Impact of acquired deferred tax assets and liabilities	1		1		—
Change in valuation allowance	(33	)	(32	)	8
Change in rate	(1	)	—		(25	)
Deferred adjustments	(4	)	(5	)	(3	)
Effective tax rate	1	%	—	%	—	%

The major components of deferred tax assets and liabilities consist of the following:



	As of December 31,
	2016			2017
	(in thousands)
Deferred tax assets
Net operating loss carryforwards	$	167,961		$	245,442
Tax credit carryforwards	21,111			31,575
Allowances and other	27,729			15,293
Stock options	32,986			20,162
Depreciation and amortization	3,704			5,746
Total deferred tax assets	$	253,491		$	318,218
Valuation allowance	(200,797		)	(302,298		)
Total deferred tax assets, net of valuation allowance	$	52,694		$	15,920
Deferred tax liabilities
Convertible debt	(31,592		)	(16,348		)
Depreciation and amortization	(22,360		)	—
Total deferred tax liabilities	$	(53,952	)	$	(16,348	)
Net deferred tax liabilities	$	(1,258	)	$	(428	)

During the year ended December 31, 2016, we released $1.9 million of our valuation allowance as a result of acquisitions. Deferred tax liabilities were established for the book-tax basis difference related to acquired intangible assets. The net deferred tax liabilities provided an additional source of income to support the realizability of pre-existing deferred tax assets.

At December 31, 2017, we had federal net operating loss carryforwards ("NOLs") of approximately $972.7 million and tax credit carryforwards of approximately $20.5 million. The federal net operating losses and tax credits expire in years beginning in 2021. At December 31, 2017, we had state net operating loss carryforwards of approximately $640.2 million, which expire in years beginning in 2018. In addition, we had state tax credit carryforwards of approximately $22.0 million that do not expire and $6.2 million of credits that will expire beginning in 2024.

Included in the net operating loss carryforward amounts above are approximately $62.4 million of federal and $41.3 million of state net operating loss carryforwards related to acquisitions.

Under Section 382 and 383 of the Internal Revenue Code of 1986, as amended (the "Code"), if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change income may be limited. In general, an "ownership change" will occur if there is a cumulative change in our ownership by "5-percent shareholders" that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. Utilization of our net operating loss and tax credit carryforwards may be subject to annual limitations due to ownership changes. Such annual limitations could result in the expiration of our net operating loss and tax credit carryforwards before utilized.

On December 22, 2017, the Tax Cut and Jobs Act was signed into law, which enacted significant changes to U.S. tax and related laws. Some of the provisions of the new tax law affecting corporations include, but are not limited to a reduction of the federal corporate income tax rate from 35% to 21%, limiting the interest expense deduction, expensing of cost of acquired qualified property, elimination of the domestic production activities deduction and allows net operating losses generated in taxable years ending after December 31, 2017 to be carried forward indefinitely. The reduction in the federal corporate income tax rate reduced our net deferred tax assets by approximately $129.2 million with an offsetting reduction to our valuation allowance of approximately $130.0 million, which has been reflected in our financial statements for the tax year ended December 31, 2017. The rate reduction and the valuation allowance offset is included in the change in rate and change in valuation allowance line items in the reconciliation of the effective tax rate. The indefinite carryforward of the NOLs resulted in a release of federal valuation allowance of approximately $1.1 million, and is included in the change in valuation allowance line item in the reconciliation of the effective tax rate. We continue to evaluate the impact the new tax law will have on our financial condition and results of operations.

Additionally, on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the

application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cut and Jobs Act. The Company has recognized the provisional tax impacts related to the revaluation of net deferred tax assets of approximately $129.2 million, offset by a reduction in the valuation allowance of approximately $130.0 million, and the indefinite carryforward of NOLs generated in taxable years ending after December 31, 2017 of approximately $1.1 million and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The Company has also recognized the impact of the changes to the limitation on the deductibility of executive compensation, offset by the valuation allowance, which did not have a material impact to financial statement for the year ended December 31, 2017. The ultimate impact may differ from the provisional amounts, although the net impact is not expected to be material, due to, among other things, additional analysis, changes in interpretations and assumptions as applicable and additional regulatory guidance that may be issued, and the full valuation allowance recorded on the Company's net deferred tax assets. As the Company completes its analysis of the Tax Cut and Jobs Act, any subsequent adjustments will be made in the quarter of 2018 when the analysis is complete.

During the year ended December 31, 2017, our valuation allowance increased by $101.5 million. At December 31, 2016 and 2017, we maintained a full valuation allowance on our net deferred tax assets. The valuation allowance was determined in accordance with the provisions of Accounting Standards Codification 740—Accounting for Income Taxes, which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction by jurisdiction basis. Our history of cumulative losses, along with expected future U.S. losses required that a full valuation allowance be recorded against all net deferred tax assets. We intend to maintain a full valuation allowance on net deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.

At December 31, 2016 and 2017 we have unrecognized tax benefits of approximately $9.4 million and $12.4 million. The increase in our unrecognized tax benefits was primarily attributable to current year activities. A reconciliation of the beginning and ending amounts of unrecognized tax benefits (excluding interest and penalties) is as follows:



	Year ended December 31,
	2016			2017
	(in thousands)
Beginning balance	$	6,864		$	9,412
Increases related to tax positions taken during a prior year	—			—
Decreases related to tax positions taken during a prior year	(13		)	(37		)
Increases related to tax positions taken during the current year	2,561			2,995
Ending balance	$	9,412		$	12,370

The total unrecognized tax benefits, if recognized, would not affect the Company’s effective tax rate as the tax benefit would increase a deferred tax asset, which is currently offset with a full valuation allowance. We do not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next twelve months. Accrued interest and penalties related to unrecognized tax benefits are recorded in the provision for income taxes. We did not have such interest, penalties or tax benefits during the years ended December 31, 2015, 2016 and 2017.

We file income tax returns in the United States, California, other states and international jurisdictions. Tax years 2000 to 2017 remain subject to examination for U.S. federal, state and international purposes. All net operating loss and tax credits generated to date are subject to adjustment for U.S. federal and state purposes. We are not currently under examination in federal, state or international jurisdictions.