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Components of Income Tax Expense (Benefit) | | | | | |
Year ended December 31 (in millions) | 2017 |
| | 2016 |
| | 2015 |
|
Current Expense (Benefit): | | | | | |
Federal | $ | 2,411 |
| | $ | 3,190 |
| | $ | 3,210 |
|
State | 277 |
| | 480 |
| | 570 |
|
Foreign | 389 |
| | 194 |
| | 221 |
|
| 3,077 |
| | 3,864 |
| | 4,001 |
|
Deferred Expense (Benefit): | | | | | |
Federal | (10,659 | ) | | 1,192 |
| | 890 |
|
State | 10 |
| | 154 |
| | 66 |
|
Foreign | (6 | ) | | 98 |
| | 2 |
|
| (10,655 | ) | | 1,444 |
| | 958 |
|
Income tax expense (benefit) | $ | (7,578 | ) | | $ | 5,308 |
| | $ | 4,959 |
|
Our income tax expense (benefit) differs from the federal statutory amount because of the effect of the items detailed in the table below.
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Year ended December 31 (in millions) | 2017 |
| | 2016 |
| | 2015 |
|
Federal tax at statutory rate | $ | 5,363 |
| | $ | 5,024 |
| | $ | 4,680 |
|
State income taxes, net of federal benefit | 298 |
| | 373 |
| | 326 |
|
Foreign income taxes, net of federal credit | 70 |
| | 65 |
| | 13 |
|
Nontaxable income attributable to noncontrolling interests | (45 | ) | | (128 | ) | | (69 | ) |
Adjustments to uncertain and effectively settled tax positions, net | (62 | ) | | 24 |
| | 15 |
|
Accrued interest on uncertain and effectively settled tax positions, net | 3 |
| | 17 |
| | 73 |
|
Excess tax benefits recognized on share-based compensation | (297 | ) | | — |
| | — |
|
2017 federal tax reform enactment | (12,679 | ) | | — |
| | — |
|
Other | (229 | ) | | (67 | ) | | (79 | ) |
Income tax expense (benefit) | $ | (7,578 | ) | | $ | 5,308 |
| | $ | 4,959 |
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We base our provision for income taxes on our current period income, changes in our deferred income tax assets and liabilities, income tax rates, changes in estimates of our uncertain tax positions, and tax planning opportunities available in the jurisdictions in which we operate. We recognize deferred tax assets and liabilities when there are temporary differences between the financial reporting basis and tax basis of our assets and liabilities and for the expected benefits of using net operating loss carryforwards. When a change in the tax rate or tax law has an impact on deferred taxes, we apply the change based on the years in which the temporary differences are expected to reverse. We record the change in our consolidated financial statements in the period of enactment.
The determination of the income tax consequences of a business combination includes identifying the tax basis of assets and liabilities acquired and any contingencies associated with uncertain tax positions assumed or resulting from the business combination. Deferred tax assets and liabilities related to temporary differences of an acquired entity are recorded as of the date of the business combination and are based on our estimate of the ultimate tax basis that will be accepted by the various tax authorities. We record liabilities for contingencies associated with prior tax returns filed by the acquired entity based on criteria set forth in the appropriate accounting guidance. We adjust the deferred tax accounts and the liabilities periodically to reflect any revised estimated tax basis and any estimated settlements with the various tax authorities. The effects of these adjustments are recorded to income tax expense (benefit).
From time to time, we engage in transactions in which the tax consequences may be subject to uncertainty. In these cases, we evaluate our tax position using the recognition threshold and the measurement attribute in accordance with the accounting guidance related to uncertain tax positions. Examples of these transactions include business acquisitions and dispositions, including consideration paid or received in connection with these transactions, certain financing transactions, and the allocation of income among state and local tax jurisdictions. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We determine whether it is more likely than not that a tax position will be sustained on examination, including the resolution of any related appeals or litigation processes, based on the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to be recognized in our consolidated financial statements. We classify interest and penalties, if any, associated with our uncertain tax positions as a component of income tax expense (benefit).
Current and deferred foreign income taxes are incurred primarily by NBCUniversal’s foreign subsidiaries. In 2017, 2016 and 2015, NBCUniversal had foreign income before taxes of $1.0 billion, $871 million and $704 million, respectively, on which foreign income tax expense (benefit) was recorded. We generally record U.S. income tax expense (benefit) on our allocable share of our subsidiaries’ income before domestic and foreign taxes, which is reduced by a U.S. tax credit equal to our allocable share of our subsidiaries’ foreign income tax expense (benefit).
Federal Tax Reform
On December 22, 2017, new federal tax reform legislation was enacted in the United States, resulting in significant changes from previous tax law. The 2017 Tax Act reduces the federal corporate income tax rate to 21% from 35% effective January 1, 2018. The rate change, along with certain immaterial changes in tax basis resulting from the 2017 Tax Act, resulted in a reduction of our net deferred tax liabilities of $12.4 billion and a corresponding deferred income tax benefit in 2017. Our federal income tax expense for periods beginning in 2018 will be based on the new rate.
The 2017 Tax Act also changes the taxation of foreign earnings, and companies generally will not be subject to United States federal income taxes upon the receipt of dividends from foreign subsidiaries and will not be permitted foreign tax credits related to such dividends. Beginning in 2018, we will no longer record United States federal income tax on our share of the income of our foreign subsidiaries, nor will we record a benefit for foreign tax credits related to that income. Accordingly, we reversed $382 million of net deferred tax liabilities related to our cumulative undistributed foreign earnings and deferred tax assets for related foreign tax credits, resulting in a corresponding net tax benefit in 2017. Additionally, upon enactment, there is a one-time deemed repatriation tax on undistributed foreign earnings and profits (the “transition tax”). We recognized tax expense of $101 million related to the transition tax in 2017.
The 2017 Tax Act also provides for immediate deduction of 100% of the costs of qualified property, including significant portions of our capital expenditures and film and television production costs, that are incurred and the property placed in service during the period from September 27, 2017 to December 31, 2022. This provision will begin to phase down by 20% per year beginning January 1, 2023 and will be completely phased out as of January 1, 2027.
The adjustments to deferred tax assets and liabilities and the liability related to the transition tax are provisional amounts estimated based on information available as of December 31, 2017. These amounts are subject to change as we obtain information necessary to complete the calculations. We will recognize any changes to the provisional amounts as we refine our estimates of our cumulative temporary differences, including those related to the immediate deduction for qualified property, and our interpretations of the application of the 2017 Tax Act. We expect to complete our analysis of the provisional items during the second half of 2018. The effects of other provisions of the 2017 Tax Act are not expected to have a material impact on our consolidated financial statements.
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Components of Net Deferred Tax Liability | | | |
December 31 (in millions) | 2017 |
| | 2016(a) |
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Deferred Tax Assets: | | | |
Net operating loss carryforwards | $ | 481 |
| | $ | 544 |
|
Nondeductible accruals and other | 2,026 |
| | 3,797 |
|
Less: Valuation allowance | 377 |
| | 266 |
|
| 2,130 |
| | 4,075 |
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Deferred Tax Liabilities: | | | |
Differences between book and tax basis of property and equipment and intangible assets | 25,154 |
| | 36,957 |
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Differences between book and tax basis of investments | 466 |
| | 498 |
|
Differences between book and tax basis of long-term debt | 673 |
| | 571 |
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Differences between book and tax basis of foreign subsidiaries and undistributed foreign earnings | 39 |
| | 862 |
|
| 26,332 |
| | 38,888 |
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Net deferred tax liability | $ | 24,202 |
| | $ | 34,813 |
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(a) Prior year amounts in the table above have been adjusted to appropriately classify certain deferred tax items. These adjustments had no impact on the net deferred tax liability recorded in our consolidated balance sheet.
Changes in our net deferred tax liability in 2017 that were not recorded as deferred income tax benefit (expense) are primarily related to an increase of $108 million associated with items included in other comprehensive income (loss), an increase of $51 million related to acquisitions and a decrease of $112 million associated with our purchase of a noncontrolling interest. Our net deferred tax liability includes $15 billion related to cable franchise rights that will remain unchanged unless we recognize an impairment or dispose of a cable franchise or there is a change in the tax law.
As of December 31, 2017, we had federal net operating loss carryforwards of $348 million, and various state net operating loss carryforwards that expire in periods through 2037. As of December 31, 2017, we also had foreign net operating loss carryforwards of $387 million that are related to the foreign operations of NBCUniversal, the majority of which expire in periods through 2027. The determination of the realization of the state and foreign net operating loss carryforwards is dependent on our subsidiaries’ taxable income or loss, apportionment percentages, redetermination from taxing authorities, and state and foreign laws that can change from year to year and impact the amount of such carryforwards. We recognize a valuation allowance if we determine it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. As of December 31, 2017 and 2016, our valuation allowance was primarily related to state and foreign net operating loss carryforwards.
Uncertain Tax Positions
Our liability for uncertain tax positions as of December 31, 2017 totaled $809 million, which excludes the federal benefits on state tax positions that were recorded as deferred income taxes. Included in our liability for uncertain tax positions was $162 million related to tax positions of NBCUniversal and NBCUniversal Enterprise for which we have been indemnified by GE. We are indemnified by GE for any income tax liability attributable to the NBCUniversal contributed businesses for periods prior to the close of the NBCUniversal transaction in January 2011 and also for any income tax liability attributable to NBCUniversal Enterprise for periods prior to the date of the NBCUniversal redemption transaction in March 2013.
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Reconciliation of Unrecognized Tax Benefits | | | | | |
(in millions) | 2017 |
| | 2016(a) |
| | 2015(a) |
|
Gross unrecognized tax benefits, January 1 | $ | 1,443 |
| | $ | 1,441 |
| | $ | 1,455 |
|
Additions based on tax positions related to the current year | 121 |
| | 74 |
| | 67 |
|
Additions based on tax positions related to prior years | 319 |
| | 72 |
| | 98 |
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Additions from acquired subsidiaries | — |
| | 13 |
| | — |
|
Reductions for tax positions of prior years | (251 | ) | | (66 | ) | | (101 | ) |
Reductions due to expiration of statutes of limitations | (70 | ) | | (44 | ) | | (41 | ) |
Settlements with tax authorities | (65 | ) | | (47 | ) | | (37 | ) |
Gross unrecognized tax benefits, December 31 | 1,497 |
| | 1,443 |
| | 1,441 |
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Positions paid | (688 | ) | | (340 | ) | | (305 | ) |
Liability for uncertain tax positions | $ | 809 |
| | $ | 1,103 |
| | $ | 1,136 |
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(a) We have updated the presentation of the table above to include amounts related to positions previously paid and have updated prior year amounts to conform.
Our liability for uncertain tax positions represents the amounts recorded for potential payment obligations. Our gross unrecognized tax benefits also include amounts related to positions for which tax has been assessed and paid. If we were to recognize our gross unrecognized tax benefits in the future, $1.2 billion, which includes amounts indemnified by GE, would impact our effective tax rate and the remaining amount would increase our deferred income tax liability. The amount and timing of the recognition of any such tax benefit is dependent on the completion of examinations of our tax filings by the various tax authorities and the expiration of statutes of limitations. It is reasonably possible that certain tax contests could be resolved within the next 12 months that may result in a decrease in our effective tax rate.
As of December 31, 2017 and 2016, our accrued interest associated with our liability for uncertain tax positions was $173 million and $483 million, respectively. As of December 31, 2017 and 2016, $43 million and $39 million, respectively, of these amounts were related to tax positions of NBCUniversal and NBCUniversal Enterprise for which we have been indemnified by GE.
The IRS has completed its examination of our income tax returns for all years through 2014. Various states are examining our state tax returns and the tax years of those tax returns currently under examination vary by state, with most of the periods relating to tax years 2000 and forward.