Income Taxes

12 Months Ended

Dec. 31, 2019

Note 13 – Income Taxes

Our sources of Income before income taxes were as follows:


	Year Ended December 31,
(in millions)	2019		2018		2017
U.S.	$	4,557	$	3,686	$	3,274
Puerto Rico	46		231		(113)
Income before income taxes	$	4,603	$	3,917	$	3,161

Income tax (expense) benefit is summarized as follows:


	Year Ended December 31,
(in millions)	2019		2018		2017
Current tax benefit (expense)
Federal	$	24	$	39	$	—
State	(70)		(63)		(28)
Puerto Rico	2		(25)		(1)
Total current tax expense	(44)		(49)		(29)
Deferred tax benefit (expense)
Federal	(954)		(750)		1,182
State	(125)		(160)		173
Puerto Rico	(12)		(70)		49
Total deferred tax (expense) benefit	(1,091)		(980)		1,404
Total income tax (expense) benefit	$	(1,135)	$	(1,029)	$	1,375

The reconciliation between the U.S. federal statutory income tax rate and our effective income tax rate is as follows:


	Year Ended December 31,
	2019		2018		2017
Federal statutory income tax rate	21.0	%	21.0	%	35.0	%
Effect of law and rate changes	0.4		1.9		(68.9)
Change in valuation allowance	(1.8)		(1.6)		(11.4)
State taxes, net of federal benefit	5.1		4.8		4.8
Equity-based compensation	(0.6)		(0.6)		(2.4)
Puerto Rico taxes, net of federal benefit	0.3		2.4		(1.5)
Permanent differences	1.2		1.3		0.5
Federal tax credits, net of reserves	(0.8)		(2.9)		0.3
Other, net	(0.1)		—		0.1
Effective income tax rate	24.7	%	26.3	%	(43.5)	%

Significant components of deferred income tax assets and liabilities, tax effected, are as follows:


(in millions)	December 31, 2019		December 31, 2018
Deferred tax assets
Loss carryforwards	$	823	$	1,526
Deferred rents	—		784
Lease liability	3,403		—
Reserves and accruals	659		668
Federal and state tax credits	331		340

Other	903		620
Deferred tax assets, gross	6,119		3,938
Valuation allowance	(129)		(210)
Deferred tax assets, net	5,990		3,728
Deferred tax liabilities
Spectrum licenses	5,902		5,494
Property and equipment	2,506		2,434
Lease right-of-use assets	2,881		—
Other intangible assets	19		40
Other	289		232
Total deferred tax liabilities	11,597		8,200
Net deferred tax liabilities	$	5,607	$	4,472

Classified on the balance sheet as:
Deferred tax liabilities	$	5,607	$	4,472

As of December 31, 2019, we have tax effected net operating loss (“NOL”) carryforwards of $470 million for federal income tax purposes and $710 million for state income tax purposes, expiring through 2039. Federal NOLs and certain state NOLs generated in and after 2018 do not expire. As of December 31, 2019, our tax effected federal and state NOL carryforwards for financial reporting purposes were approximately $138 million and $282 million, respectively, less than our NOL carryforwards for federal and state income tax purposes, due to unrecognized tax benefits of the same amount. The unrecognized tax benefit amounts exclude indirect tax effects of $63 million in other jurisdictions.

As of December 31, 2019, we have available Alternative Minimum Tax (“AMT”) credit carryforwards of $23 million. The AMT credits will be fully recovered by 2021. We also have research and development and foreign tax credit carryforwards with a combined value of $347 million for federal income tax purposes, which begin to expire in 2020.

As of December 31, 2019, 2018 and 2017, our valuation allowance was $129 million, $210 million and $273 million, respectively. The change from December 31, 2018 to December 31, 2019 primarily related to a reduction in the valuation allowance against deferred tax assets in certain state jurisdictions resulting from legal entity reorganizations. The change from December 31, 2017 to December 31, 2018 primarily related to a reduction in the valuation allowance against deferred tax assets in certain state jurisdictions from a change in tax status of certain subsidiaries. We will continue to monitor positive and negative evidence related to the utilization of the remaining deferred tax assets for which a valuation allowance continues to be provided. It is possible that our valuation allowance may change within the next twelve months.

We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions and in Puerto Rico. We are currently under examination by various states. Management does not believe the resolution of any of the audits will result in a material change to our financial condition, results of operations or cash flows. The IRS has concluded its audits of our federal tax returns through the 2013 tax year; however, NOL and other carryforwards for certain audited periods remain open for examination. We are generally closed to U.S. federal, state and Puerto Rico examination for years prior to 2000.

A reconciliation of the beginning and ending amount of unrecognized tax benefits were as follows:


	Year Ended December 31,
(in millions)	2019		2018		2017
Unrecognized tax benefits, beginning of year	$	462	$	412	$	410
Gross (decreases) increases to tax positions in prior periods	(7)		6		(10)
Gross increases due to current period business acquisitions	—		10		—
Gross increases to current period tax positions	59		34		12
Unrecognized tax benefits, end of year	$	514	$	462	$	412

As of December 31, 2019 and 2018, we had $367 million and $315 million, respectively, in unrecognized tax benefits that, if recognized, would affect our annual effective tax rate. Penalties and interest on income tax assessments are included in Selling, general and administrative expenses and Interest expense, respectively, in our Consolidated Statements of Comprehensive Income. The accrued interest and penalties associated with unrecognized tax benefits are insignificant.