Income Taxes
CCO Holdings is a single member limited liability company not subject to income tax. CCO Holdings holds all operations through indirect subsidiaries. The majority of these indirect subsidiaries are limited liability companies that are not subject to income tax. Certain indirect subsidiaries that are required to file separate returns are subject to federal and state tax. CCO Holdings’ tax provision reflects the tax provision of the entities required to file separate returns.
Generally, the taxable income, gains, losses, deductions and credits of CCO Holdings are passed through to its indirect members, Charter and A/N. Charter is responsible for its share of taxable income or loss of CCO Holdings allocated to it in accordance with the Charter Holdings Limited Liability Company Agreement (“LLC Agreement”) and partnership tax rules and regulations. Charter also records financial statement deferred tax assets and liabilities related to its investment, and its underlying net assets, in CCO Holdings.
Income Tax Benefit (Expense)
For the years ended December 31, 2017, 2016, and 2015, the Company recorded deferred income tax benefit (expense) as shown below. The tax provision in future periods will vary based on current and future temporary differences, as well as future operating results.
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| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current expense: | | | | | | |
Federal income taxes | | $ | (1 | ) | | $ | — |
| | $ | (1 | ) |
State income taxes | | (15 | ) | | 3 |
| | (3 | ) |
Current income tax benefit (expense) | | (16 | ) | | 3 |
| | (4 | ) |
| | | | | | |
Deferred benefit: | | | | | | |
Federal income taxes | | — |
| | — |
| | 180 |
|
State income taxes | | (7 | ) | | (6 | ) | | 34 |
|
Deferred income tax benefit (expense) | | (7 | ) | | (6 | ) | | 214 |
|
Income tax benefit (expense) | | $ | (23 | ) | | $ | (3 | ) | | $ | 210 |
|
Income tax is recognized primarily through decreases (increases) in deferred tax liabilities, as well as through current federal and state income tax expense. Income tax benefit for the year ended December 31, 2015 was primarily the result of the deemed liquidation of Charter Holdco in July 2015. After the deemed liquidation of Charter Holdco, all taxable income, gains, losses, deductions and credits of Charter Holdco and its indirect subsidiaries were treated as income of Charter. The tax provision in future periods will vary based on future operating results, as well as future book versus tax differences.
In December 2017, the Tax Cuts & Jobs Act (“Tax Reform”) was enacted. While Charter received an income tax benefit as a result of Tax Reform, the Company was not materially impacted by the new provisions as it is a disregarded entity for federal tax purposes. Among other things, the primary provisions of Tax Reform impacting Charter was the reductions to the U.S. corporate income tax rate from 35% to 21% and temporary 100% bonus depreciation for certain assets. Where applicable, the change in tax law required Charter to remeasure existing net deferred tax liabilities using the lower rate in the period of enactment. Overall, the changes due to Tax Reform will favorably affect income tax expense on future U.S. earnings.
The Company’s effective tax rate differs from that derived by applying the applicable federal income tax rate of 35% for the years ended December 31, 2017, 2016, and 2015, respectively, as follows:
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| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Statutory federal income taxes | | $ | (317 | ) | | $ | (511 | ) | | $ | (50 | ) |
Statutory state income taxes, net | | (23 | ) | | (3 | ) | | (3 | ) |
Income allocated to limited liability companies not subject to income taxes | | 317 |
| | 511 |
| | 50 |
|
Change in valuation allowance | | — |
| | — |
| | 20 |
|
Organizational restructuring | | — |
| | — |
| | 192 |
|
Other | | — |
| | — |
| | 1 |
|
Income tax benefit (expense) | | $ | (23 | ) | | $ | (3 | ) | | $ | 210 |
|
Deferred Tax Assets (Liabilities)
The tax effects of these temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below.
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| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Loss carryforwards | | $ | 7 |
| | $ | — |
|
Accrued and other | | 5 |
| | 2 |
|
Deferred tax assets | | $ | 12 |
| | $ | 2 |
|
| | | | |
Deferred tax liabilities: | | | | |
Indefinite-lived intangibles | | $ | (25 | ) | | $ | (14 | ) |
Property, plant and equipment | | (17 | ) | | (11 | ) |
Other intangibles | | (2 | ) | | (2 | ) |
Deferred tax liabilities | | (44 | ) | | (27 | ) |
Net deferred tax liabilities | | $ | (32 | ) | | $ | (25 | ) |
Uncertain Tax Positions
In connection with the TWC Transaction, the Company assumed $181 million of gross unrecognized tax benefits, exclusive of interest and penalties, which are recorded within other long-term liabilities. The net amount of the unrecognized tax benefits recorded as of December 31, 2017 that could impact the effective tax rate is $144 million. The Company has determined that it is reasonably possible that its existing reserve for uncertain tax positions as of December 31, 2017 could decrease by approximately $58 million during the year ended December 31, 2018 related to various ongoing audits, settlement discussions and expiration of statute of limitations with various state and local agencies; however, various events could cause the Company’s current expectations to change in the future. These uncertain tax positions, if ever recognized in the financial statements, would be recorded in the consolidated statements of operations as part of the income tax provision. A reconciliation of the beginning and ending amount of unrecognized tax benefits, exclusive of interest and penalties, included in other long-term liabilities on the accompanying consolidated balance sheets of the Company is as follows:
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| | | |
BALANCE, December 31, 2015 | $ | — |
|
Additions on tax positions assumed in the TWC Transaction | 181 |
|
Reductions on settlements and expirations with taxing authorities | (22 | ) |
| |
BALANCE, December 31, 2016 | $ | 159 |
|
Reductions on settlements and expirations with taxing authorities | (25 | ) |
| |
BALANCE, December 31, 2017 | $ | 134 |
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The Company recognizes interest and penalties accrued on uncertain income tax positions as part of the income tax provision. Interest and penalties included in other long-term liabilities on the accompanying consolidated balance sheets of the Company were $38 million and $33 million as of December 31, 2017 and 2016, respectively.
No tax years for Charter, Charter Holdings, or Charter Holdco, the Company's indirect parent companies, for income tax purposes, are currently under examination by the Internal Revenue Service ("IRS"). Charter and Charter Holdings' 2016 and 2017 tax years remain open for examination and assessment. Legacy Charter’s tax years ending 2014 through the short period return dated May 17, 2016 remain subject to examination and assessment. Years prior to 2014 remain open solely for purposes of examination of Legacy Charter’s loss and credit carryforwards. The IRS is currently examining Legacy TWC’s income tax returns for 2011 through 2014. Legacy TWC’s tax year 2015 remains subject to examination and assessment. Prior to Legacy TWC’s separation from Time Warner Inc. (“Time Warner”) in March 2009 (the “Separation”), Legacy TWC was included in the consolidated U.S. federal and certain state income tax returns of Time Warner. The IRS is currently examining Time Warner’s 2008 through 2010 income tax returns. Time Warner’s income tax returns for 2005 to 2007, which are periods prior to the Separation, were settled with the exception of an immaterial item that has been referred to the IRS Appeals Division. The Company does not anticipate that these examinations will have a material impact on the Company’s consolidated financial position or results of operations. In addition, the Company is also subject to ongoing examinations of the Company’s tax returns by state and local tax authorities for various periods. Activity related to these state and local examinations did not have a material impact on the Company’s consolidated financial position or results of operations during the year ended December 31, 2017, nor does the Company anticipate a material impact in the future.