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, 2015

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



	Eleven Months Ended December 31,			Twelve Months Ended December 31,
	2013			2014			2015
	(in thousands)
Jurisdiction
Domestic	$	(24,005	)	$	(24,230	)	$	(163,460	)
Foreign	(2,918		)	(5,592		)	(7,751		)
Loss before provision for income taxes	$	(26,923	)	$	(29,822	)	$	(171,211	)

The provision for income taxes consists of the following:



	Eleven Months Ended December 31,			Twelve Months Ended December 31,
	2013			2014			2015
				(in thousands)
Current
Federal	$	—		$	—		$	—
State and local	7			353			9
International	87			231			214
Total current income tax expense	$	94		$	584		$	223
Deferred
Federal	(10,166		)	(9,996		)	(17,943		)
State and local	(2,027		)	(6,238		)	(2,174		)
Valuation allowance	12,193			16,234			18,344
Total deferred income tax expense (benefit)	$	—		$	—		$	(1,773	)
Total provision for (benefit from) income taxes	$	94		$	584		$	(1,550	)

The provision for income taxes decreased by $2.1 million during the twelve months ended December 31, 2015 as a result of benefits recognized from the valuation allowance release through acquisition accounting 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:



	Eleven Months Ended December 31,		Twelve Months Ended December 31,
	2013		2014		2015
U.S. federal taxes at statutory rate	34	%	34	%	34	%
State taxes, net of federal benefit	—		(1	)	—
Permanent differences	5		4		3
Foreign rate differential	(4	)	(7	)	(1	)
Federal and state credits, net of reserve	8		11		2
Impact of acquired DTAs and DTLs	—		—		1
Change in valuation allowance	(46	)	(55	)	(33	)
Change in rate	—		6		(1	)
Deferred adjustments	3		6		(4	)
Effective tax rate	—	%	(2	)%	1	%

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



	As of December 31,
	2014			2015
	(in thousands)
Deferred tax assets
Net operating loss carryforwards	$	27,487		$	91,658
Tax credit carryforwards	10,839			14,204
Allowances and other	13,832			21,802
Stock options	24,215			29,927
Depreciation and amortization	255			—
Total deferred tax assets	$	76,628		$	157,591
Valuation allowance	(73,983		)	(92,772		)
Total deferred tax assets, net of valuation allowance	$	2,645		$	64,819
Deferred tax liabilities
Convertible debt	—			(37,580		)
Depreciation and amortization	(2,645		)	(27,252		)
Total deferred tax liabilities	$	(2,645	)	$	(64,832	)
Net deferred tax assets (liabilities)	$	—		$	(13	)

During the year ended December 31, 2015, we released $1.8 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, 2015, we had federal net operating loss carryforwards of approximately $613.0 million and tax credit carryforwards of approximately $9.7 million. If realized, approximately $377.0 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, 2015, we had state net operating loss carryforwards of approximately $480.0 million which expire in years beginning in 2016. In addition, we had state tax credit carryforwards of approximately $10.7 million that do not expire and approximately $4.9 million of credits that will expire beginning in 2024.

At December 31, 2015, we had foreign net operating loss carryforwards of approximately $4.3 million which expire in years beginning in 2033.

Included in the net operating loss carryforward amounts above are approximately $67.6 million of federal, $42.9 million of state and $4.3 million of foreign net operating loss carryforwards related to acquisitions.

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 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.

During the twelve months ended December 31, 2015, our valuation allowance increased by $18.8 million. At December 31, 2014 and 2015, 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, 2014 and 2015 we have unrecognized tax benefits of approximately $5.8 million and $6.9 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:



	Twelve Months Ended December 31,
	2014			2015
	(in thousands)
Beginning balance	$	5,220		$	5,793
Increases related to tax positions taken during a prior year	1,161			—
Decreases related to tax positions taken during a prior year	(1,924		)	(74		)
Increases related to tax positions taken during the current year	1,336			1,145
Ending balance	$	5,793		$	6,864

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 eleven months ended December 31, 2013 and the twelve months ended December 31, 2014 and 2015.

We file income tax returns in the United States, California, other states and international jurisdictions. Tax years 2000 to 2015 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.