Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.8.0.1
Income Taxes
 12 Months Ended
Dec. 31, 2017
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,
 
2017
 
2016
 
2015
Current taxes:
 
 
 
 
 
Federal
$
—

 
$
—

 
$
—

State
(32,579
)
 
(21,782
)
 
(15,916
)
Foreign
(202
)
 
(383
)
 
(825
)
Total current taxes
(32,781
)
 
(22,165
)
 
(16,741
)
Deferred taxes:
 
 
 
 
 
Federal
(564,171
)
 
(304,179
)
 
(318,933
)
State
(19,349
)
 
(19,383
)
 
(46,566
)
Total deferred taxes
(583,520
)
 
(323,562
)
 
(365,499
)
Total income tax expense
$
(616,301
)
 
$
(345,727
)
 
$
(382,240
)

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,
 
2017
 
2016
 
2015
Federal tax expense, at statutory rate
35.0
 %
 
35.0
 %
 
35.0
%
State income tax expense, net of federal benefit
2.8
 %
 
2.8
 %
 
2.9
%
Change in valuation allowance
(0.1
)%
 
—
 %
 
4.9
%
Tax credit
(1.7
)%
 
(6.1
)%
 
—
%
Stock-based compensation
(2.9
)%
 
(0.6
)%
 
—
%
Federal tax reform - deferred rate change
14.6
 %
 
—
 %
 
—
%
Other, net
1.0
 %
 
0.6
 %
 
0.1
%
Effective tax rate
48.7
 %
 
31.7
 %
 
42.9
%

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that affects 2017, including, but not limited to, accelerated depreciation that will allow for full expensing of qualified property. The Tax Act also establishes new tax laws that will affect 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 35% to 21%.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act.  SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes.  In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.  To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record and provisional estimate in the financial statements.
As a result of the reduction of the federal corporate income tax rate, we have revalued our net deferred tax asset, excluding after tax credits, as of December 31, 2017.  Based on this revaluation, we have recorded a net tax expense of $184,599 to reduce our net deferred tax asset balance, which was recorded as additional income tax expense for the year ended December 31, 2017. Our effective tax rate increased by 14.6% to 48.7% primarily as a result of the revaluation of our net deferred tax asset. We have recorded provisional adjustments but we have not completed our accounting for income tax effects for certain elements of the Tax Act, principally due to the accelerated depreciation that will allow for full expensing of qualified property.
For the year ended December 31, 2017 and 2016, we recorded a tax credit 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 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,
 
2017
 
2016
Deferred tax assets:
 
 
 
Net operating loss carryforwards and tax credits
$
686,277

 
$
1,376,012

Deferred revenue
500,461

 
760,774

Accrued bonus
24,150

 
35,225

Expensed costs capitalized for tax
13,914

 
19,610

Investments
29,881

 
44,129

Stock based compensation
50,065

 
74,544

Other
20,819

 
31,133

Total deferred tax assets
1,325,567

 
2,341,427

Deferred tax liabilities:
 
 
 
Depreciation of property and equipment
(156,003
)
 
(259,491
)
FCC license
(506,578
)
 
(783,822
)
Other intangible assets
(105,471
)
 
(172,520
)
Other
(7,273
)
 
—

Total deferred tax liabilities
(775,325
)
 
(1,215,833
)
Net deferred tax assets before valuation allowance
550,242

 
1,125,594

Valuation allowance
(52,883
)
 
(47,682
)
Total net deferred tax asset
$
497,359

 
$
1,077,912


Net operating loss carryforwards decreased as a result of the utilization of net operating losses related to current year taxable income and due to the Tax Act. For the years ended December 31, 2017 and 2016, we recorded a $21,700 and a $66,326 tax credit, respectively, under the Protecting Americans from Tax Hikes Act of 2015 related to research and development activities. 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). Our net deferred tax assets were primarily related to gross federal net operating loss carryforwards of approximately $1,977,407.
As of December 31, 2017 and 2016, we had a valuation allowance related to deferred tax assets of $52,883 and $47,682, respectively, which were not likely to be realized due to certain state net operating loss limitations.  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 upon which the valuation allowance is assessed are projected to 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, 2017 and 2016, the gross liability for income taxes associated with uncertain tax positions was $334,254 and $303,583, respectively.  If recognized, $256,525 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, 2017 and 2016, were $12,190 and $4,780, 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, 2017 will significantly increase or decrease during the twelve month period ending December 31, 2018. 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 $708 and $100 for the years ended December 31, 2017 and 2016, respectively, related to unrecognized tax benefits.
Changes in our uncertain income tax positions, from January 1 through December 31 are presented below:
 
2017
 
2016
Balance, beginning of year
$
303,583

 
$
253,277

Increases in tax positions for prior years
14,530

 
—

Increases in tax positions for current years
16,141

 
51,738

Decreases in tax positions for prior years
—

 
(1,432
)
Balance, end of year
$
334,254

 
$
303,583