Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.4
Income Taxes
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The following table presents the loss (income) before income taxes for the periods presented (in thousands): 
For the Year Ended December 31,
2020 2019 2018
Loss (income) attributable to common stockholders $ 233,967  $ (18,117) $ (35,979)
Loss attributable to noncontrolling interest and redeemable noncontrolling interests
 453,554  417,357  286,843 
Loss before income taxes $ 687,521  $ 399,240  $ 250,864 
The income tax provision (benefit) consists of the following (in thousands):
For the Year Ended December 31,
2020 2019 2018
Current
Federal
 $ —  $ (454) $ (1,100)
State
 —  (593) 292 
Foreign (1,422) 1,435  — 
Total current (benefit) expense (1,422) 388  (808)
Deferred
Federal
 (61,387) (7,634) 1,995 
State
 2,236  (972) 8,135 
Foreign —  —  — 
Total deferred (benefit) provision (59,151) (8,606) 10,130 
Total
 $ (60,573) $ (8,218) $ 9,322 
The following table represents a reconciliation of the statutory federal rate and the Company’s effective tax rate for the periods presented:
For the Year Ended December 31,
2020 2019 2018
Tax provision (benefit) at federal statutory rate
 (21.00) % (21.00) % (21.00) %
State income taxes, net of federal benefit
 (1.69) (0.97) 0.32 
Effect of noncontrolling and redeemable noncontrolling interests
 13.85  21.95  24.01 
Stock-based compensation
 (2.98) (1.96) (1.77)
ASC 740-10 Reserve —  (0.11) — 
Tax credits
 (0.77) (0.99) (1.35)
Effect of rate change —  —  — 
Effect of valuation allowance 3.45  0.40  3.04 
Other
 0.33  0.62  0.47 
Total
 (8.81) % (2.06) % 3.72  %
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table represents the components of the Company’s deferred tax assets and liabilities for the periods presented (in thousands):
December 31,
2020 2019
Deferred tax assets
Accruals and prepaids
 $ 53,845  $ 19,704 
Deferred revenue
 17,736  11,229 
Net operating loss carryforwards
 529,394  347,997 
Stock-based compensation
 22,224  7,104 
Investment tax and other credits
 86,175  32,878 
Interest Expense 16,627  12,394 
Interest rate derivatives 53,057  18,988 
Total deferred tax assets
 779,058  450,294 
Less: Valuation allowance
 (91,322) (12,120)
Gross deferred tax assets
 687,736  438,174 
Deferred tax liabilities
Capitalized costs to obtain a contract 93,441  66,247 
Fixed asset depreciation and amortization 333,970  263,917 
Deferred tax on investment in partnerships
 342,230  173,974 
Gross deferred tax liabilities
 769,641  504,138 
Net deferred tax liabilities
 $ (81,905) $ (65,964)
The Company accounts for investment tax credits as a reduction of income tax expense in the year in which the credits arise. As of December 31, 2020, the Company has an investment tax credit carryforward of approximately $66.0 million which begins to expire in the year 2028, if not utilized, $1.0 million of California enterprise zone credits which begin to expire in the year 2023, and $1.9 million of other state tax credits which begin to expire in the year 2021. As of December 31, 2019, the Company has an investment tax credit carryforward of approximately $18.8 million and California enterprise zone credits of approximately $1.0 million.
Generally, utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code (IRC) of 1986, as amended and similar state provisions. The Company performed an analysis to determine whether an ownership change under Section 382 of the Code had occurred and determined that only Vivint Solar, Inc. underwent an ownership change as of October 8, 2020.
Valuation allowances are provided against deferred tax assets to the extent that it is more likely than not that the deferred tax asset will not be realized. The Company’s management considers all available positive and negative evidence including its history of operating income or losses, future reversals of existing taxable temporary difference, taxable income in carryback years and tax-planning strategies. The Company has concluded that it is more likely than not that the benefit from certain federal tax credits, state net operating loss carryforwards, and state tax credits will not be realized. In recognition of this risk, the Company has provided a valuation allowance of $91.3 million on the deferred tax assets relating to these federal tax credits, state net operating loss carryforwards, and state tax credits which is an increase of $79.2 million in 2020.
The Company sells solar energy systems to investment Funds. As the investment Funds are consolidated by the Company, the gain on the sale of the assets has been eliminated in the consolidated financial statements. However, this gain is recognized for tax reporting purposes. The Company accounts for the income tax consequences of these intra-entity transfers, both current and deferred, as a component of income tax expense and deferred tax liability, net during the period in which the transfers occur.
Uncertain Tax Positions
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state and local jurisdictions, where applicable. The statute of limitations for the tax returns varies by jurisdictions.
We determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. We use a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We have analyzed the Company’s inventory of tax positions with respect to all applicable income tax issues for all open tax years (in each respective jurisdiction).
The Company’s policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated statements of operations.  
As a result of the acquisition of Vivint Solar, the Company established an unrecognized tax benefit of $1.0 million as of December 31, 2020 that, if recognized, would impact the Company’s effective tax rate. As a result of the expiration of statute of limitations, the Company had no uncertain tax positions as of December 31, 2019.
The change in unrecognized tax benefits during 2020, 2019 and 2018, excluding penalties and interest, is as follows:
For the Year Ended December 31,
2020 2019 2018
Unrecognized tax benefits at beginning of the year $ —  $ 647  $ 1,525 
Reversal of prior year unrecognized tax benefits due to the expiration of the statute of limitations
 —  (647) (878)
Increases/(decreases) in unrecognized tax benefits as a result of tax positions taken during the prior period 961  —  — 
Unrecognized tax benefits at end of the year $ 961  $ —  $ 647 
One of the Company’s investment funds covered by the Company’s 2018 insurance policy is currently being audited by the Internal Revenue Service (the “IRS”) in an audit involving a review of the fair market value determination of solar energy systems. If this audit results in an adverse finding, the Company may be subject to an indemnity obligation to its investor, which may result in certain out-of-pocket costs and increased insurance premiums in the future. The IRS audit is still ongoing, and the Company is unable to determine the potential tax liabilities, if any, at this time.
The Company is subject to taxation and files income tax returns in the U.S., its territories, and various state and local jurisdictions. Due to the Company’s net losses, substantially all of its federal, state and local income tax returns since inception are still subject to audit.
The following table summarizes the tax years that remain open and subject to examination by the tax authorities in the most significant jurisdictions in which the Company operates:
Tax Years
U.S. Federal 2017 - 2020
State 2016 - 2020
Net Operating Loss Carryforwards
As a result of the Company’s net operating loss carryforwards as of December 31, 2020, the Company does not expect to pay income tax, including in connection with its income tax provision for the year ended December 31, 2020. As of December 31, 2020, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $720.7 million and $2.1 billion, respectively, which will begin to expire in 2028 for federal purposes and in 2024 for state purposes. In addition, federal and certain state net operating loss carryforwards generated in tax years beginning after December 31, 2017 total $1.1 billion and $176.3 million, respectively, and have indefinite carryover periods and do not expire.