|12 Months Ended|
Dec. 31, 2020
(11) Income Taxes
Income tax benefit (expense) consists of:
The following table presents a summary of our domestic and foreign earnings (loss) before income taxes:
Expected income tax benefit (expense) differs from the amounts computed by applying the U.S. federal income tax rate of 21% for the years ended December 31, 2020, 2019 and 2018 as a result of the following:
For the year ended December 31, 2020, the significant reconciling items, as noted in the table above, are additional tax expense related to an impairment loss on goodwill that is not deductible for tax purposes and an increase in the Company’s valuation allowance, partially offset by tax benefits related to changes in the Company’s effective tax rate and federal tax credits.
For the year ended December 31, 2019, the significant reconciling items, as noted in the table above, are additional tax expense related to increases in the Company’s valuation allowance, changes in the Company’s effective state tax rate and the effect of state income taxes, partially offset by tax benefits related to deductible stock based compensation, earnings in foreign jurisdictions taxed at rates lower than the 21% U.S. federal tax rate and federal income tax credits.
For the year ended December 31, 2018, the significant reconciling items, as noted in the table above, are deductible stock-based compensation, benefits related to federal tax credits and the resolution of historical matters with various tax authorities, partially offset by changes in the valuation allowance and taxable dividends not recognized for book purposes.
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities are presented below:
Sirius XM Holdings’ deferred tax assets and liabilities are included in the amounts above although Sirius XM Holdings’ deferred tax assets and liabilities are not offset with Liberty’s deferred tax assets and liabilities as Sirius XM Holdings is not included in the consolidated group tax return of Liberty. Liberty’s acquisition of a controlling interest in Sirius XM Holdings’ outstanding common stock during January 2013 did not cause a change in control under Section 382 of the Code.
During the year ended December 31, 2020, there was a $69 million increase in the Company’s valuation allowance that affected tax expense and an $8 million increase that affected equity.
At December 31, 2020, the Company had a deferred tax asset of $1,436 million for federal, state and foreign net operating losses (“NOLs”), interest expense carryforwards and tax credit carryforwards. Of this amount, $745 million is recorded at the Sirius XM Holdings level. If not utilized to reduce income tax liabilities at Sirius XM Holdings in future periods, these loss carryforwards and tax credits will expire on various dates through 2040. The Company has $61 million of federal NOLs, $97 million of federal interest expense carryforwards, $300 million of foreign NOLs and $214 million of foreign interest expense carryforwards that may be carried forward indefinitely. The remaining $19 million of carryforwards expire at certain future dates. These carryforwards are expected to be utilized in future periods, except for $293 million of NOLs, interest expense carryforwards and tax credit carryforwards which, based on current projections, will not be utilized in the future and are subject to a valuation allowance.
A reconciliation of unrecognized tax benefits is as follows:
As of December 31, 2020, the Company had unrecognized tax benefits and uncertain tax positions of $432 million. If such tax benefits were to be recognized for financial statement purposes, approximately $310 million dollars would be reflected in the Company’s tax expense and affect its effective tax rate. We do not currently anticipate that our existing reserves related to uncertain tax positions as of December 31, 2020 will significantly increase or decrease during the twelve-month period ending December 31, 2020; however, various events could cause our current expectations to change in the future. The Company’s estimate of its unrecognized tax benefits related to uncertain tax positions requires a high degree of judgment.
As of December 31, 2020, the Company’s tax years prior to 2017 are closed for federal income tax purposes, and the IRS has completed its examination of the Company’s 2017 and 2018 tax years. The Company’s 2019 and 2020 tax years are being examined currently as part of the IRS’s Compliance Assurance Process program. Various states are currently examining the Company’s prior years’ state income tax returns. Sirius XM Holdings, which does not consolidate with Liberty for income tax purposes, has certain state income tax audits pending. We do not expect the ultimate disposition of these audits to have a material adverse effect on our financial position or results of operations.
As of December 31, 2020, the Company had less than $1 million dollars in accrued interest and penalties recorded related to uncertain tax positions.
On February 1, 2021, the Company entered into a tax sharing agreement with Sirius XM Holdings governing the allocation of consolidated U.S. income tax liabilities and setting forth agreements with respect to other tax matters. The tax sharing agreement was negotiated by the Company with a special committee of SiriusXM Holdings’ board of directors, all of whom are independent of the Company, and approved by the executive committee of the Company’s board of directors.
Under the Internal Revenue Code, two corporations may form a consolidated tax group, and file a consolidated federal income tax return, if one corporation owns stock representing at least 80% of the voting power and value of the outstanding capital stock of the other corporation. As of December 31, 2020, the Company beneficially owned, directly and indirectly, approximately 76% of the outstanding shares of Sirius XM Holdings’ common stock. The Company expects that it could beneficially own, directly and indirectly, over 80% of the outstanding shares of Sirius XM Holdings’ common stock at some time in 2021, and the Company and Sirius XM Holdings would then become members of the same consolidated tax group. Should that happen, the tax sharing agreement would govern certain matters related to the resulting consolidated federal income tax returns, as well as state and local returns filed on a consolidated or combined basis. The tax sharing agreement contains provisions that the Company believes are customary for tax sharing agreements between members of a consolidated group.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef