|12 Months Ended|
Dec. 31, 2017
(11) Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) bonus depreciation that will allow for full expensing of qualified property; (3) creating a new limitation on deductible interest expense; (4) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (5) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (6) limitations on the deductibility of certain executive compensation; and (7) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years. The SEC issued guidance on accounting for the tax effects of the Tax Act. The Company must reflect the income tax effects of those aspects of the Tax Act for which the accounting is known. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements and the Tax Act provides a measurement period that should not extend beyond one year from the Tax Act enactment date. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply the tax laws that were in effect immediately before the enactment of the Tax Act.
The corporate rate reduction was applied to our inventory of deferred tax assets and deferred tax liabilities which resulted in the net tax benefit in the period ending December 31, 2017. This net tax benefit is a provisional estimate. The Tax Act also provides for a mandatory one-time transition tax on deemed repatriated accumulated earnings and profits of foreign subsidiaries. Liberty estimates that its foreign subsidiaries have accumulated earnings and profits deficits and will not be subject to the transition tax. Based on a continued analysis of the estimate and further guidance and interpretations on the application of the law, additional revisions may occur throughout the allowable measurement period.
Income tax benefit (expense) consists of:
Income tax benefit (expense) differs from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of the following:
For the year ended December 31, 2017, the significant reconciling items, as noted in the table above, are a net tax benefit for the effect of the changes in the U.S. federal corporate tax rate from 35% to 21% on deferred taxes, a net tax benefit for a settlement reached by Formula 1 with the U.K. tax authorities and a net tax benefit for the effects of a new U.K. tax law that changed the Company’s judgment with respect to the future realization of U.K. tax losses.
For the year ended December 31, 2016 the significant reconciling item, as noted in the table above, is state income taxes offset with federal income tax credits claimed by SIRIUS XM related to research and development activities.
For the year ended December 31, 2015 the significant reconciling item, as noted in the table above, is a $44 million increase in the valuation allowance due to the effect of a tax law change in the District of Columbia (“D.C.”) which reduces the future allocation of SIRIUS XM’s taxable income in D.C. As a result, SIRIUS XM expects it will utilize less of its D.C. net operating losses in the future, resulting in a $44 million increase in the valuation allowance offsetting the deferred tax asset for these net operating losses.
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’s deferred tax assets and liabilities are included in the amounts above although SIRIUS XM’s deferred tax assets and liabilities are not offset with Liberty’s deferred tax assets and liabilities as SIRIUS XM is not included in the consolidated group tax return of Liberty. Liberty’s acquisition of a controlling interest in SIRIUS XM’s 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, 2017, the $62 million increase in the Company’s valuation allowance was primarily driven by a $274 million increase due to the acquisition of Formula 1, partially offset by changes in the valuation allowance affecting tax expense.
At December 31, 2017, the Company had federal and state net operating loss carryforwards for income tax purposes which, if not utilized to reduce taxable income in future periods, will expire on various dates through 2037. The Company’s federal net operating loss carryforwards are primarily attributable to those at the SIRIUS XM level ($1,977 million, $415 million tax effected). The Company has U.K. net operating loss carryforwards for income tax purposes, which have no expiration under current U.K. law.
A reconciliation of unrecognized tax benefits is as follows:
As of December 31, 2017, the Company had recorded tax reserves of $365 million related to unrecognized tax benefits for uncertain tax positions. If such tax benefits were to be recognized for financial statement purposes, approximately $257 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, 2017 will significantly increase or decrease during the twelve-month period ending December 31, 2018; 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, 2017, the Company’s tax years prior to 2014 are closed for federal income tax purposes, and the IRS has completed its examination of the Company’s 2014 through 2016 tax years. The Company’s tax loss carryforwards from its 2011 through 2015 tax years are still subject to adjustment. The Company’s 2017 tax year is 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, 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, 2017, the Company had less than $1 million dollars in accrued interest and penalties recorded related to uncertain tax positions.
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/presentationRef