Note 16 – Income Taxes
A provision for income taxes of $31.5 million, $26.7 million and $13.0 million has been recognized for the years ended December 31, 2017, 2016 and 2015, respectively, related primarily to our subsidiaries located outside of the U.S. Our loss before provision for income taxes for the years ended December 31, 2017, 2016 and 2015 was as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Domestic |
|
$ |
993,113 |
|
|
$ |
130,718 |
|
|
$ |
415,694 |
|
|
Noncontrolling interest and redeemable noncontrolling interest |
|
|
279,178 |
|
|
|
98,132 |
|
|
|
— |
|
|
Foreign |
|
|
936,741 |
|
|
|
517,498 |
|
|
|
459,930 |
|
|
Loss before income taxes |
|
$ |
2,209,032 |
|
|
$ |
746,348 |
|
|
$ |
875,624 |
|
The components of the provision for income taxes for the years ended December 31, 2017, 2016 and 2015 consisted of the following (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(9,552 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
2,029 |
|
|
|
568 |
|
|
|
525 |
|
|
Foreign |
|
|
42,715 |
|
|
|
53,962 |
|
|
|
10,342 |
|
|
Total current |
|
|
35,192 |
|
|
|
54,530 |
|
|
|
10,867 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Foreign |
|
|
(3,646 |
) |
|
|
(27,832 |
) |
|
|
2,172 |
|
|
Total deferred |
|
|
(3,646 |
) |
|
|
(27,832 |
) |
|
|
2,172 |
|
|
Total provision for income taxes |
|
$ |
31,546 |
|
|
$ |
26,698 |
|
|
$ |
13,039 |
|
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (“Tax Act”) was enacted into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. We are required to recognize the effect of the tax law changes in the period of enactment, such as re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. The Tax Act did not give rise to any material impact on the consolidated balance sheets and consolidated statements of operations due to our historical worldwide loss position and the full valuation allowance on our net U.S. deferred tax assets.
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows us to record provisional amounts during a measurement period not to extend beyond one year from the enactment date. Since the Tax Act was enacted late in the fourth quarter of 2017 (and ongoing guidance and accounting interpretations are expected over the next 12 months), we consider the accounting of deferred tax re-measurements and other items, such as state tax considerations, to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118. We do not expect any subsequent adjustments to have any material impact on the consolidated balance sheets or statements of operations due to our historical worldwide loss position and the full valuation allowance on our net U.S. deferred tax assets.
Deferred tax assets (liabilities) as of December 31, 2017 and 2016 consisted of the following (in thousands):
|
|
|
December 31, |
|
|
December 31, |
|
||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carry-forwards |
|
$ |
1,575,952 |
|
|
$ |
648,652 |
|
|
Research and development credits |
|
|
306,808 |
|
|
|
208,499 |
|
|
Other tax credits |
|
|
117,997 |
|
|
|
106,530 |
|
|
Deferred revenue |
|
|
200,531 |
|
|
|
268,434 |
|
|
Inventory and warranty reserves |
|
|
74,578 |
|
|
|
95,570 |
|
|
Stock-based compensation |
|
|
96,916 |
|
|
|
120,955 |
|
|
Financial Instruments |
|
|
3,080 |
|
|
|
— |
|
|
Investment in certain financing funds |
|
|
24,471 |
|
|
|
237,759 |
|
|
Accruals and others |
|
|
23,336 |
|
|
|
67,769 |
|
|
Total deferred tax assets |
|
|
2,423,669 |
|
|
|
1,754,168 |
|
|
Valuation allowance |
|
|
(1,843,713 |
) |
|
|
(1,022,705 |
) |
|
Deferred tax assets, net of valuation allowance |
|
|
579,956 |
|
|
|
731,463 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(537,613 |
) |
|
|
(679,969 |
) |
|
Other |
|
|
(18,734 |
) |
|
|
(3,779 |
) |
|
Financial Instruments |
|
|
— |
|
|
|
(22,033 |
) |
|
Total deferred tax liabilities |
|
|
(556,347 |
) |
|
|
(705,781 |
) |
|
Deferred tax assets, net of valuation allowance and deferred tax liabilities |
|
$ |
23,609 |
|
|
$ |
25,682 |
|
As of December 31, 2017, we recorded a valuation allowance of $1.84 billion for the portion of the deferred tax asset that we do not expect to be realized. The valuation on our net deferred taxes increased by $821.0 million during the year ended December 31, 2017. The valuation allowance increase is primarily due to additional U.S. deferred tax assets incurred in the current year, as well as an increase relating to adoption of ASU 2016-09, and offset by the re-measurement of the federal portion of our deferred tax assets as of December 31, 2017 from 35% to the new 21% tax rate. Management believes that based on the available information, it is more likely than not that the U.S. deferred tax assets will not be realized, such that a full valuation allowance is required against all U.S. deferred tax assets. We have net $46.5 million of deferred tax assets in foreign jurisdictions, which management believes are more-likely-than-not to be fully realized given the expectation of future earnings in these jurisdictions.
The reconciliation of taxes at the federal statutory rate to our provision for income taxes for the years ended December 31, 2017, 2016 and 2015 was as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Tax at statutory federal rate |
|
$ |
(773,162 |
) |
|
$ |
(261,222 |
) |
|
$ |
(306,470 |
) |
|
State tax, net of federal benefit |
|
|
2,029 |
|
|
|
568 |
|
|
|
525 |
|
|
Nondeductible expenses |
|
|
30,138 |
|
|
|
26,547 |
|
|
|
16,711 |
|
|
Excess tax benefits related to stock based compensation (1) |
|
|
(1,013,196 |
) |
|
|
— |
|
|
|
— |
|
|
Foreign income rate differential |
|
|
364,699 |
|
|
|
206,470 |
|
|
|
172,259 |
|
|
U.S. tax credits |
|
|
(109,501 |
) |
|
|
(162,865 |
) |
|
|
(43,911 |
) |
|
Noncontrolling interests and redeemable noncontrolling interests adjustment |
|
|
65,920 |
|
|
|
21,964 |
|
|
|
— |
|
|
Effect of U.S. tax law change (2) |
|
|
722,646 |
|
|
|
— |
|
|
|
— |
|
|
Bargain in purchase gain |
|
|
20,211 |
|
|
|
(31,055 |
) |
|
|
— |
|
|
Other reconciling items |
|
|
3,178 |
|
|
|
785 |
|
|
|
1,232 |
|
|
Change in valuation allowance |
|
|
718,584 |
|
|
|
225,506 |
|
|
|
172,693 |
|
|
Provision for income taxes |
|
$ |
31,546 |
|
|
$ |
26,698 |
|
|
$ |
13,039 |
|
|
|
(1) |
As of January 1, 2017, upon the adoption of ASU No. 2016-09, Improvements to Employee Share-based Payment Accounting, excess tax benefits from share-based award activity incurred from the prior and current years are reflected as a reduction of the provision for income taxes. The excess tax benefits result in an increase to our gross U.S. deferred tax assets that is offset by a corresponding increase to our valuation allowance. |
|
|
(2) |
Due to the Tax Act, our U.S. deferred tax assets and liabilities as of December 31, 2017 were re-measured from 35% to 21%. The change in tax rate resulted in a decrease to our gross U.S. deferred tax assets which is offset by a corresponding decrease to our valuation allowance. |
As of December 31, 2017, we had $6.42 billion of federal and $5.26 billion of state net operating loss carry-forwards available to offset future taxable income, which will not begin to significantly expire until 2024 for federal and 2028 for state purposes. A portion of these losses were generated by SolarCity prior to our acquisition in 2016 and, therefore, are subject to change of control provisions, which limit the amount of acquired tax attributes that can be utilized in a given tax year. We do not expect these change of control limitations to significantly impact our ability to utilize these attributes. Upon the adoption of ASU 2016-09, our gross U.S. deferred tax assets increased by $583.4 million, inclusive of the effect for the U.S. statutory corporate tax rate reduction from 35% to 21%, and is fully offset by a corresponding increase to our valuation allowance.
As of December 31, 2017, we had research and development tax credits of $209.0 million and $223.2 million for federal and state income tax purposes, respectively. If not utilized, the federal research and development tax credits will expire in various amounts beginning in 2024. However, the state research and development tax credits can be carried-forward indefinitely. In addition, we had other general business tax credits of $116.9 million for federal income tax purposes, which will not begin to significantly expire until 2033.
Collectively, we had no foreign earnings as of December 31, 2017 and therefore was not subject to the mandatory repatriation tax provisions of the Tax Act. However, some of our foreign subsidiaries do have accumulated earnings. No deferred tax liabilities for foreign withholding taxes have been recorded relating to the earnings of our foreign subsidiaries since all such earnings are intended to be indefinitely reinvested. The amount of the unrecognized deferred tax liability associated with these earnings is immaterial.
Federal and state laws can impose substantial restrictions on the utilization of net operating loss and tax credit carry-forwards in the event of an “ownership change”, as defined in Section 382 of the Internal Revenue Code. We determined that no significant limitation would be placed on the utilization of our net operating loss and tax credit carry-forwards due to prior ownership changes.
Uncertain Tax Positions
The changes to our gross unrecognized tax benefits were as follows (in thousands):
|
|
|
|
|
|
|
December 31, 2014 |
|
$ |
41,377 |
|
|
Increases in balances related to prior year tax positions |
|
|
6,626 |
|
|
Increases in balances related to current year tax positions |
|
|
51,124 |
|
|
December 31, 2015 |
|
|
99,127 |
|
|
Increase in balances related to prior year tax positions |
|
|
28,677 |
|
|
Increases in balances related to current year tax positions |
|
|
62,805 |
|
|
Assumed uncertain tax positions through acquisition |
|
|
13,327 |
|
|
December 31, 2016 |
|
|
203,936 |
|
|
Decrease in balances related to prior year tax positions |
|
|
(31,493 |
) |
|
Increases in balances related to current year tax positions |
|
|
84,352 |
|
|
Change in balances related to effect of U.S. tax law change |
|
|
(58,050 |
) |
|
December 31, 2017 |
|
$ |
198,745 |
|
As of December 31, 2017, accrued interest and penalties related to unrecognized tax benefits are classified as income tax expense and were immaterial. Unrecognized tax benefits of $191.0 million, if recognized, would not affect our effective tax rate since the tax benefits would increase a deferred tax asset that is currently fully offset by a full valuation allowance. We do not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months.
We file income tax returns in the U.S., California and various state and foreign jurisdictions. Tax years 2004 to 2016 remain subject to examination for federal income tax purposes, and tax years 2004 to 2016 remain subject to examination for California income tax purposes. All net operating losses and tax credits generated to date are subject to adjustment for U.S. federal and California income tax purposes. Tax years 2008 to 2016 remain subject to examination in other U.S. state and foreign jurisdictions.
The U.S. Tax Court issued a decision in Altera Corp v. Commissioner related to the treatment of stock-based compensation expense in a cost-sharing arrangement. As this decision can be overturned upon appeal, we have not recorded any impact as of December 31, 2017. In addition, any potential tax benefits would increase our U.S. deferred tax asset, which is currently offset with a full valuation allowance.