Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.6.0.2
Income Taxes
 12 Months Ended
Dec. 31, 2016
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 by our Canadian affiliate to us.  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,
 
2016
 
2015
 
2014
Current taxes:
 
 
 
 
 
Federal
$
—

 
$
—

 
$
—

State
(21,782
)
 
(15,916
)
 
(7,743
)
Foreign
(383
)
 
(825
)
 
(2,341
)
Total current taxes
(22,165
)
 
(16,741
)
 
(10,084
)
Deferred taxes:
 
 
 
 
 
Federal
(304,179
)
 
(318,933
)
 
(302,350
)
State
(19,383
)
 
(46,566
)
 
(25,111
)
Total deferred taxes
(323,562
)
 
(365,499
)
 
(327,461
)
Total income tax expense
$
(345,727
)
 
$
(382,240
)
 
$
(337,545
)

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,
 
2016
 
2015
 
2014
Federal tax expense, at statutory rate
35.0
 %
 
35.0
%
 
35.0
%
State income tax expense, net of federal benefit
2.8
 %
 
2.9
%
 
3.9
%
Change in valuation allowance
—
 %
 
4.9
%
 
—
%
Tax credit
(6.1
)%
 
—
%
 
—
%
Other, net
—
 %
 
0.1
%
 
1.7
%
Effective tax rate
31.7
 %
 
42.9
%
 
40.6
%

For the year ended December 31, 2016, we recorded a tax credit in the fourth quarter of 2016 under the Protecting Americans from Tax Hikes Act of 2015 related to research and development activities. For the year ended December 31, 2015, we recorded additional tax expense to increase our valuation allowance due to a tax law change in the District of Columbia which will reduce our future tax and thus will limit our ability to use certain net operating losses in the future.
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,
 
2016
 
2015
Deferred tax assets:
 
 
 
Net operating loss carryforwards and tax credits
$
1,376,012

 
$
1,447,159

Deferred revenue
760,774

 
730,239

Accrued bonus
35,225

 
31,458

Expensed costs capitalized for tax
19,610

 
19,584

Investments
44,129

 
46,857

Stock based compensation
74,544

 
66,030

Other
31,133

 
37,226

Total deferred tax assets
2,341,427

 
2,378,553

Deferred tax liabilities:
 
 
 
Depreciation of property and equipment
(259,491
)
 
(250,821
)
FCC license
(783,822
)
 
(779,145
)
Other intangible assets
(172,520
)
 
(190,442
)
Total deferred tax liabilities
(1,215,833
)
 
(1,220,408
)
Net deferred tax assets before valuation allowance
1,125,594

 
1,158,145

Valuation allowance
(47,682
)
 
(49,095
)
Total net deferred tax asset
$
1,077,912

 
$
1,109,050


Net operating loss carryforwards and tax credits decrease as a result of the utilization of net operating losses related to current year taxable income. For the year ended December 31, 2016, we recognized $293,896 of additional net operating losses related to excess share-based compensation deductions due to our adoption of ASU 2016-09, Compensation-Stock Compensation (Topic 718) and we recorded a $66,326 tax credit under the Protecting Americans from Tax Hikes Act of 2015 related to research and development activities. The net deferred tax assets were primarily related to gross federal net operating loss carryforwards of approximately $3,245,207.
As of December 31, 2016 and 2015, we had a valuation allowance related to deferred tax assets of $47,682 and $49,095, respectively, which were not likely to be realized due to certain state net operating loss limitations.  During the year ended December 31, 2016, we reduced our valuation allowance primarily related to our ability to utilize additional net operating losses as a result of a state income tax audit. The increase in valuation allowance during the year ended December 31, 2015 was primarily related to the tax law change in the District of Columbia for $44,392. These net operating loss carryforwards expire on various dates through 2035.
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, 2016 and 2015, the gross liability for income taxes associated with uncertain tax positions was $303,583 and $253,277, respectively.  If recognized, $198,664 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, 2016 and 2015, were $4,780 and $3,525, respectively.  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, 2016 will significantly increase or decrease during the twelve month period ending December 31, 2017. 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 $100 and $89 for the years ended December 31, 2016 and 2015, respectively, related to unrecognized tax benefits.
Changes in our uncertain income tax positions, from January 1 through December 31 are presented below:
 
2016
 
2015
Balance, beginning of year
$
253,277

 
$
1,432

Increases in tax positions for prior years
—

 
251,845

Increases in tax positions for current years
51,738

 
—

Decreases in tax positions for prior years
(1,432
)
 
—

Balance, end of year
$
303,583

 
$
253,277