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, 2016

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



	Year ended December 31,
	2014			2015			2016
	(in thousands)
Jurisdiction
Domestic	$	(24,230	)	$	(163,460	)	$	(328,414	)
Foreign	(5,592		)	(7,751		)	(14,792		)
Loss before provision for income taxes	$	(29,822	)	$	(171,211	)	$	(343,206	)

The provision for income taxes consists of the following:



	Year ended December 31,
	2014			2015			2016
				(in thousands)
Current
Federal	$	—		$	—		$	—
State and local	353			9			26
International	231			214			443
Total current income tax expense	$	584		$	223		$	469
Deferred
Federal	(9,996		)	(17,943		)	(96,852		)
State and local	(6,238		)	(2,174		)	(10,750		)
International	—			—			(1,032		)
Valuation allowance	16,234			18,344			107,937
Total deferred income tax expense (benefit)	$	—		$	(1,773	)	$	(697	)
Total provision for (benefit from) income taxes	$	584		$	(1,550	)	$	(228	)

The benefit from income taxes decreased by $1.3 million during the year ended December 31, 2016 as a result of the tax amortization of indefinite lived assets acquired during the previous period.

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



	Year ended December 31,
	2014		2015		2016
U.S. federal taxes at statutory rate	34	%	34	%	34	%
State taxes, net of federal benefit	(1	)	—		—
Permanent differences	4		3		2
Foreign rate differential	(7	)	(1	)	(2	)
Federal and state credits, net of reserve	11		2		2
Impact of acquired DTAs and DTLs	—		1		1
Change in valuation allowance	(55	)	(33	)	(32	)
Change in rate	6		(1	)	—
Deferred adjustments	6		(4	)	(5	)
Effective tax rate	(2	)%	1	%	—	%

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



	As of December 31,
	2015			2016
	(in thousands)
Deferred tax assets
Net operating loss carryforwards	$	91,658		$	167,961
Tax credit carryforwards	14,204			21,111
Allowances and other	21,802			27,729
Stock options	29,927			32,986
Depreciation and amortization	—			3,704
Total deferred tax assets	$	157,591		$	253,491
Valuation allowance	(92,772		)	(200,797		)
Total deferred tax assets, net of valuation allowance	$	64,819		$	52,694
Deferred tax liabilities
Convertible debt	(37,580		)	(31,592		)
Depreciation and amortization	(27,252		)	(22,360		)
Total deferred tax liabilities	$	(64,832	)	$	(53,952	)
Net deferred tax assets (liabilities)	$	(13	)	$	(1,258	)

During the years ended December 31, 2015 and 2016, we released $1.8 million and $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, 2016, we had federal net operating loss carryforwards of approximately $818.5 million and tax credit carryforwards of approximately $14.8 million. If realized, approximately $377.3 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, 2016, we had state net operating loss carryforwards of approximately $552.2 million which expire in years beginning in 2017. In addition, we had state tax credit carryforwards of approximately $15.8 million that do not expire and approximately $5.7 million of credits that will expire beginning in 2024.

At December 31, 2016, we had foreign net operating loss carryforwards of approximately $8.2 million which expire in years beginning in 2033.

Included in the net operating loss carryforward amounts above are approximately $62.4 million of federal, $41.3 million of state and $3.8 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 year ended December 31, 2016, our valuation allowance increased by $108.0 million. At December 31, 2015 and 2016, 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, 2015 and 2016 we have unrecognized tax benefits of approximately $6.9 million and $9.4 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,
	2015			2016
	(in thousands)
Beginning balance	$	5,793		$	6,864
Increases related to tax positions taken during a prior year	—			—
Decreases related to tax positions taken during a prior year	(74		)	(13		)
Increases related to tax positions taken during the current year	1,145			2,561
Ending balance	$	6,864		$	9,412

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, 2014, 2015 and 2016.

We file income tax returns in the United States, California, other states and international jurisdictions. Tax years 2000 to 2016 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.