Income Taxes

9 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

	Three Months Ended						Nine Months Ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
	(in thousands, except percentages)
Provision for income taxes	$	71,484		$	347,079		$	473,693		$	632,952
Effective tax rate	8		%	34		%	18		%	33		%

On June 29, 2020, California enacted legislative changes that impose an annual cap of $5 million on the amount of business incentive tax credits the Company can utilize in California effective for tax years 2020 through 2022.

As of September 30, 2020, the Company had a California research and development ("R&D") credit carryforward of $239 million which can be carried forward indefinitely. In the second quarter of 2020 we evaluated the Company’s ability to realize the California R&D credit, the Company considered all available positive and negative evidence, including operating results, ongoing tax planning, and forecasts of future taxable income and determined it is more likely than not that the pre-2020 credits and a portion of the current year R&D credit would not be realized. In the nine months ended September 30, 2020, the Company has recorded a valuation allowance of $239 million. The Company will monitor its business strategies, weighing positive and negative evidence in assessing its realization of this asset in the future and in the event there is a need to release the valuation allowance, a tax benefit will be recorded.

The effective tax rates for the three and nine months ended September 30, 2020 differed from the Federal statutory rate primarily due to the recognition of excess tax benefits of stock-based compensation, partially offset by the establishment of a valuation allowance on the California R&D credit in the second quarter of 2020. The effective tax rates for the three and nine months ended September 30, 2019 differed from the Federal statutory rate primarily due to changes from the global corporate structure simplification, state taxes, foreign taxes, non-deductible expenses, and the international provisions of U.S. tax reform that became effective in 2018, partially offset by the recognition of excess tax benefits of stock-based compensation, and Federal and California R&D credits.

The decrease in effective tax rates for the three and nine months ended September 30, 2020, as compared to the same period in 2019 was primarily due to the United States Treasury issuance of final regulations that made certain aspects related to the Tax Cuts and Jobs Act of 2017 no longer applicable to the Company and the recognition of excess tax benefits of stock-based compensation, partially offset by the establishment of a valuation allowance on the California R&D credit in the second quarter of 2020. For the three and nine months ended September 30, 2020, the Company recognized a discrete tax benefit related to the excess tax benefits from stock-based compensation of $66 million and $223 million, respectively, compared to the three and nine months ended September 30, 2019 of $27 million and $114 million, respectively.

Gross unrecognized tax benefits were $85 million and $67 million as of September 30, 2020 and December 31, 2019, respectively. The gross unrecognized tax benefits, if recognized by the Company, will result in a reduction of approximately $49 million to the provision for income taxes thereby favorably impacting the Company’s effective tax rate. As of September 30, 2020, gross unrecognized tax benefits of $24 million were classified as “Other non-current liabilities” and $30 million as a reduction to deferred tax assets which was classified as "Other non-current assets" in the Consolidated Balance Sheets. The Company includes interest and penalties related to unrecognized tax benefits within the "Provision for income taxes" on the Consolidated Statements of Operations and “Other non-current liabilities” in the Consolidated Balance Sheets. Interest and penalties included in the Company’s “Provision for income taxes” were not material in any of the periods presented.

Deferred tax assets of $429 million and $658 million were classified as “Other non-current assets” on the Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, respectively. In evaluating its ability to realize the net deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. The Company has a valuation allowance of $371 million and

$135 million as of September 30, 2020 and December 31, 2019, respectively. The valuation allowance is related to the California R&D credits and certain foreign tax credits that the Company does not expect to realize.

The Company files U.S. Federal, state and foreign tax returns. The Company is currently under examination by the IRS for 2016 through 2018 and is subject to examination for 2019. The 2011 through 2019 state tax returns are subject to examination by various state tax authorities. The Company is also currently under examination in the U.K. for 2018 and 2019. The Company has no other significant foreign jurisdiction audits underway. The years 2014 through 2019 remain subject to examination by foreign tax authorities.

Given the potential outcome of the current examinations as well as the impact of the current examinations on the potential expiration of the statute of limitations, it is reasonably possible that the balance of unrecognized tax benefits could significantly change within the next twelve months. At this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.