Liberty Broadband Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2018

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 Securities and Exchange Commission ("SEC") issued guidance on accounting for the tax effects of the Tax Act. The Company reflected the income tax effects of those aspects of the Tax Act for which the accounting was known as of December 31, 2017 and made immaterial revisions to such amounts during the allowed one year measurement period. As of December 31, 2018, the Company has completed its analysis of the tax effects of the Tax Act.

Holdco was included in the federal combined income tax return of Qurate Retail prior to the HoldCo Split-Off. For periods prior to the HoldCo Split-Off, the tax provision included in these financial statements was prepared on a stand-alone basis, as if the Company was not part of Qurate Retail. Certain HoldCo income tax related balances as of the date of the HoldCo Split-Off were recorded as equity contributions from Qurate Retail in the net amount of $1.3 billion as shown in the consolidated statement of equity. Subsequent to the HoldCo Split-Off, GCI Liberty's consolidated tax return will include HoldCo. Although the acquisition of GCI Liberty was accounted for as a reverse acquisition under GAAP, the consolidated income tax return of GCI Liberty for 2018 will include a full year of GCI Liberty’s financials results (including activity prior to the Transactions) and the partial year of financial results of HoldCo for the period subsequent to the HoldCo Split-Off.

Income tax benefit (expense) consists of:



	Years Ended December 31,
	2018			2017		2016
	amounts in thousands
Current:
Federal	$	607		—		—
State and local	(24		)	—		575
	583			—		575
Deferred:
Federal	190,931			160,150		(436,260	)
State and local	(8,207		)	(26,628	)	(60,560	)
	182,724			133,522		(496,820	)
Income tax benefit (expense)	$	183,307		133,522		(496,245	)

Income tax benefit (expense) differs from the amounts computed by applying the U.S. federal income tax rate of 21% for the year ended December 31, 2018 and 35% for both of the years ended December 31, 2017 and 2016 as a result of the following:



	Years Ended December 31,
	2018			2017		2016
	amounts in thousands
Computed expected tax benefit (expense)	$	221,962		(206,862	)	(460,885	)
State and local income taxes, net of federal income taxes	74,105			(17,001	)	(38,991	)
Dividends received deductions	—			—		1,969
Executive compensation	(7,114		)	—		—
Change in valuation allowance affecting tax expense	(189		)	(384	)	—
Change in state tax rate due to acquisition	(117,496		)	—		—
Change in state tax rate due to law change	37,073			—		—
Change in tax rate due to Tax Act	—			347,979		—
Deductible stock compensation	(131		)	14,116		1,700
Goodwill impairment	(28,513		)	—		—
Other, net	3,610			(4,326	)	(38	)
Income tax benefit (expense)	$	183,307		133,522		(496,245	)

For the year ended December 31, 2018, the income tax benefit was lower than the U.S. statutory tax rate of 21% primarily due to a change in the effective state tax rate used to measure deferred taxes due to the acquisition as discussed in notes 1 and 4 and a goodwill impairment that is not deductible for tax purposes, partially offset by a change in the state effective tax rate used to measure deferred taxes resulting from a state law change.

For the year ended December 31, 2017, the most significant reconciling item is a net tax benefit for the effect of the change in the U.S. federal corporate tax rate from 35% to 21% on deferred taxes. Income tax expense was higher than the U.S. statutory tax rate of 35% in 2016 due to state tax expense related to unrealized gains on the Company’s investments.

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:



	December 31,
	2018			2017
	amounts in thousands
Deferred tax assets:
Loss and capital carryforwards	$	153,931		48,898
Deferred revenue	23,716			—
Inventory	115			—
Accrued stock compensation	3,598			6,999
Debt	6,209			—
Other accrued liabilities	20,108			362
Other future deductible amounts	19,074			63
Deferred tax assets	226,751			56,322
Valuation allowance	(1,326		)	(433	)
Net deferred tax assets	225,425			55,889
Deferred tax liabilities
Investments	573,016			697,393
Fixed assets	232,899			—
Intangible assets	213,206			1,892
Other	—			30
Deferred tax liabilities	1,019,121			699,315
Net deferred tax liabilities	$	793,696		643,426

During the year ended December 31, 2018 there was an increase in the valuation allowance of $893,000 of which $189,000 affected tax expense. During the year ended December 31, 2017, there was an increase in the valuation allowance of $384,000 of which all of the increase affected tax expense.

At December 31, 2018, the Company had federal and state net operating losses and interest expense carryforwards for income tax purposes aggregating approximately $154 million (on a tax effected basis). Of the $154 million, $39 million are carryforwards with no expiration. The future use of the remaining carryforwards of $115 million are subject to limitation and expire at certain future dates. Based on current projections, $1 million of these carryforwards may expire unused and accordingly are subject to a valuation allowance. The carryforwards that are expected to be utilized will begin to expire in 2021.

As of December 31, 2018, the Company had not recorded tax reserves related to unrecognized tax benefits for uncertain tax positions.

As of December 31, 2018, none of GCI’s tax years prior to the HoldCo Split-Off are under audit. Qurate Retail’s tax years prior to 2015 are closed for federal income tax purposes and the IRS has completed its examination of Qurate Retail’s 2015, 2016 and 2017 tax years. Qurate Retail’s 2018 tax year is being examined currently as part of the IRS's Compliance Assurance Process program. Various states are currently examining Qurate Retail’s prior years’ state income tax returns.