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, 2014

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



	Twelve months ended January 31,			Eleven months ended December 31,			Twelve months ended December 31,
	2013			2013			2014
	(in thousands)
Jurisdiction
Domestic	$	(39,891	)	$	(24,005	)	$	(24,230	)
Foreign	1,748			(2,918		)	(5,592		)
Loss before provision for income taxes	$	(38,143	)	$	(26,923	)	$	(29,822	)

The provision for income taxes consists of the following:



	Twelve months ended January 31,			Eleven months ended December 31,			Twelve months ended December 31,
	2013			2013			2014
				(in thousands)
Current
Federal	$	—		$	—		$	—
State and local	(4		)	7			353
International	9			87			231
Total current income tax expense	$	5		$	94		$	584
Deferred
Federal	(10,098		)	(10,166		)	(9,996		)
State and local	(1,573		)	(2,027		)	(6,238		)
Valuation allowance	11,671			12,193			16,234
Total deferred income tax expense	$	—		$	—		$	—
Total provision for income taxes	$	5		$	94		$	584

The provision for income taxes increased by $0.5 million during the twelve months ended December 31, 2014 as a result of an increase in foreign income taxes and state income taxes computed without the benefit of stock options.

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



	Twelve months ended January 31,		Eleven months ended December 31,		Twelve months ended December 31,
	2013		2013		2014
U.S. federal taxes at statutory rate	34	%	34	%	34	%
State taxes, net of federal benefit	—		—		(1	)
Permanent differences	(2	)	5		4
Foreign rate differential	(2	)	(4	)	(7	)
Federal and state credits, net of reserve	2		8		11
Change in valuation allowance	(30	)	(46	)	(55	)
Change in rate	(2	)	—		6
Deferred adjustments	—		3		6
Effective tax rate	—	%	—	%	(2	)%

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



	As of December 31,
	2013			2014
	(in thousands)
Deferred tax assets
Net operating loss carryforwards	$	34,525		$	27,487
Tax credit carryforwards	5,745			10,839
Allowances and other	7,037			13,832
Stock options	10,159			24,215
Depreciation and amortization	323			255
Total deferred tax assets	$	57,789		$	76,628
Deferred tax liabilities
Depreciation and amortization	(41		)	(2,645		)
Total deferred tax liabilities	$	(41	)	$	(2,645	)
Valuation allowance	(57,748		)	(73,983		)
Net deferred tax assets	$	—		$	—

At December 31, 2014, we had federal net operating loss carryforwards of approximately $447.0 million and tax credit carryforwards of approximately $7.9 million. If realized, approximately $378.0 million of the net operating loss carryforwards will be recognized as a benefit through additional paid in capital. The federal net operating losses and tax credits expire in years beginning in 2021. At December 31, 2014, we had state net operating loss carryforwards of approximately $496.0 million which expire in years beginning in 2015. In addition, we had state tax credit carryforwards of approximately $8.3 million that do not expire and approximately $3.7 million of credits that will expire beginning in 2024.

Under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, or 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 tax 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 they are utilized.

During the twelve months ended December 31, 2014, our valuation allowance increased by $16.2 million. At December 31, 2013 and 2014, 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 - 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, 2013 and 2014 we have unrecognized tax benefits of approximately $5.2 million and $5.8 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:



	Eleven months ended December 31,		Twelve months ended December 31,
	2013		2014
	(in thousands)
Beginning balance	$	2,633	$	5,220
Increases related to tax positions taken during a prior year	108		1,161
Decreases related to tax positions taken during a prior year	—		(1,924		)
Increases related to tax positions taken during the current year	2,479		1,336
Ending balance	$	5,220	$	5,793

The total unrecognized tax benefits, if recognized, would not affect our 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 twelve months ended January 31, 2013, the eleven months ended December 31, 2013 or the twelve months ended December 31, 2014.

We file income tax returns in the United States, California, other states and international jurisdictions. Tax years 2000 to 2014 remain subject to examination for U.S. federal, state and international purposes. All net operating losses and tax credits generated to date are subject to adjustment for U.S. federal and state purposes. We are not currently under examination in any federal, state or international jurisdictions.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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