INCOME TAXES
The Company files a consolidated federal income tax return with its wholly-owned subsidiaries.
The income tax provision consisted of the following (in thousands):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Current income tax: | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 151 |
| | 545 |
| | 392 |
|
Foreign | (24 | ) | | 95 |
| | (1 | ) |
Total | 127 |
| | 640 |
| | 391 |
|
Deferred income tax: | | | |
Federal | (326 | ) | | — |
| | — |
|
State | (53 | ) | | — |
| | — |
|
Foreign | 1,330 |
| | (573 | ) | | (40 | ) |
Total | 951 |
| | (573 | ) | | (40 | ) |
Provision for income taxes | $ | 1,078 |
| | $ | 67 |
| | $ | 351 |
|
The following reconciles the tax expense computed at the statutory federal rate and the Company’s tax expense (in thousands):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Computed expected tax expense | $ | (139,100 | ) | | $ | (93,770 | ) | | $ | (94,737 | ) |
State income taxes, net of federal tax effect | 65 |
| | 360 |
| | 259 |
|
Foreign income taxes | (299 | ) | | (949 | ) | | 202 |
|
Other reconciling items | (344 | ) | | 666 |
| | — |
|
Permanent differences | 2,008 |
| | 1,688 |
| | 1,980 |
|
Effect of Federal law change | 166,876 |
| | — |
| | — |
|
Change in valuation allowance | (28,128 | ) | | 92,072 |
| | 92,647 |
|
Provision for income taxes | $ | 1,078 |
| | $ | 67 |
| | $ | 351 |
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities were as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Gross deferred tax assets: | |
Net operating loss carryforwards | $ | 591,619 |
| | $ | 799,302 |
|
Deferred subscriber income | 72,389 |
| | 19,866 |
|
Accrued expenses and allowances | 17,633 |
| | 15,452 |
|
Purchased intangibles and deferred financing costs | 15,191 |
| | 14,776 |
|
Inventory reserves | 6,662 |
| | 6,999 |
|
Property and equipment | 1,176 |
| | 3,482 |
|
Research and development credits | 41 |
| | 41 |
|
Valuation allowance | (304,509 | ) | | (328,991 | ) |
Total | 400,202 |
| | 530,927 |
|
Gross deferred tax liabilities: | |
Deferred subscriber acquisition costs | (408,610 | ) | | (537,387 | ) |
Prepaid expenses | (633 | ) | | (744 | ) |
Total | (409,243 | ) | | (538,131 | ) |
Net deferred tax liabilities | $ | (9,041 | ) | | $ | (7,204 | ) |
The Company had net operating loss carryforwards as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Net operating loss carryforwards: | | | |
Federal | $ | 2,355,153 |
| | $ | 2,084,897 |
|
States | 1,715,004 |
| | 1,553,812 |
|
Canada | 27,326 |
| | 33,526 |
|
Total | $ | 4,097,485 |
| | $ | 3,672,237 |
|
U.S. federal net operating loss carryforwards will begin to expire in 2026, if not used. State net operating loss carryforwards expire over different periods and some have already begun to expire. The Company had United States research and development credits of approximately $41,000 at December 31, 2017, and December 31, 2016, which begin to expire in 2030.
Canadian net operating loss carryforwards will begin to expire in 2029.
Realization of the Company’s federal and state net operating loss carryforwards and tax credits is dependent on generating sufficient taxable income prior to their expiration. Although a portion of these net operating loss carryforwards are subject to the provisions of Internal Revenue Code Section 382, the Company has not performed a formal study to determine the amount of any limitation. The use of the net operating loss carryforwards may have additional limitations resulting from future ownership changes or other factors under Section 382 of the Internal Revenue Code.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Reform”) was signed into law. Among other changes in the Tax Reform, the U.S. statutory tax rate was lowered from 35% to 21% effective January 1, 2018. ACS Topic 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment; therefore, the Company was required to revalue its deferred tax assets and liabilities as of December 31, 2017, at the newly enacted tax rate. The recorded impact of the revaluation of deferred tax assets and liabilities was offset by a corresponding impact to the Company’s valuation allowance.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which provides guidance on accounting for the tax effects of Tax Reform. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting relating to Tax Reform under ASC Topic 740. In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of Tax Reform is incomplete, but it is able to determine a reasonable estimate, the company should report a provisional estimate in its financial statements. Where a reasonable estimate cannot be determined, a company should continue to apply ASC Topic 740 based on the provisions of the tax laws that were in effect immediately before the enactment of Tax Reform.
Based on its initial analysis of Tax Reform, the Company recorded a provisional tax expense of $166.9 million for the year ended December 31, 2017, resulting from the remeasurement of its deferred tax balances due to the reduction in the U.S. corporate income tax rate from 35% to 21%. This expense was offset by a corresponding change in the valuation allowance, resulting in no change in net tax expense or benefit. For the reasons discussed below, the Company has not fully completed its accounting for the income tax effects of Tax Reform; however, as the Company was able to make reasonable estimates of the effects of Tax Reform, it has recorded provisional amounts in its consolidated financial statements. As part of the Company’s initial analysis, it performed the following:
| |
• | Remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The Company continues to analyze certain aspects of the Tax Reform which could potentially affect the measurement of these balances or give rise to revised deferred tax amounts. The consolidated financial statements include provisional amounts for the impacts of deferred tax remeasurement. |
| |
• | Performed initial evaluations of the state conformity to Tax Reform. The Company continues to assess the conformity to Tax Reform of each state in which it operates, along with the changes in deductibility of certain expenses at the federal level, in order to finalize the impacts on the realizability of its state deferred tax assets and liabilities. The consolidated financial statements include provisional amounts for the impacts of state conformity. |
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• | Tax Reform creates a new requirement that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Reform and the application of ASC 740. Under U.S. GAAP, a company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into its measurement of deferred taxes. The Company has not yet completed the analysis of the GILTI tax rules primarily due to a lack of guidance from the U.S. Treasury Department and is not yet able to reasonably estimate the effect of this provision of the Tax Reform or make an accounting policy election for ASC 740 treatment of the GILTI tax. Therefore, the Company has not recorded any amounts related to potential GILTI tax, if any, in its financial statements and has not yet made a policy decision regarding whether to record deferred taxes on GILTI, if any. |
At December 31, 2017 and 2016, the Company had a full valuation allowance as it believes it is more likely than not that these benefits will not be realized. Significant judgment is required in determining the Company’s provision for income taxes, recording valuation allowances against deferred tax assets and evaluating the Company’s uncertain tax positions. The Company has considered and weighed the available evidence, both positive and negative, to determine whether it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Based on available information, management does not believe it is more likely than not that all of its deferred tax assets will be utilized. The Company recorded a valuation allowance for U.S. deferred tax assets of approximately $304.5 million and $329.0 million at December 31, 2017 and 2016, respectively. In addition to the change in valuation allowance from operations, the valuation allowance changes include impact of disposition related items.
As of December 31, 2017, the Company's income tax returns for the tax years 2013 through 2016, remain subject to examination by the Internal Revenue Service and various state taxing authorities.
During the first quarter of 2017, the Company adopted ASU 2016-09. Under the provisions of ASU 2016-09, the Company recognizes the impact of stock-based compensation award forfeitures when they occur with no adjustment for estimated forfeitures and recognizes excess tax benefits as a reduction of income tax expense regardless of whether the benefit reduces income taxes payable. The Company recognized no cumulative adjustment benefit for the excess tax benefit for the exercise of equity grants from prior fiscal years due to a full valuation allowance recorded against the excess tax benefits.