19. Income Taxes

The Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.

The following table presents domestic and foreign components of (loss) income before income taxes for the periods presented (in thousands):

	Year Ended December 31,
	2015			2014			2013
United States	$	(1,467,184	)	$	(718,416	)	$	(272,603	)
Noncontrolling interest and redeemable
noncontrolling interests		710,492			319,196			95,968
Foreign		(8,804	)		(2,746	)		78
Total	$	(765,496	)	$	(401,966	)	$	(176,557	)

The income tax provision (benefit) is composed of the following (in thousands):

	Year Ended December 31,
	2015			2014			2013
Current:
Federal	$	2,946		$	10		$	10
State		812			473			80
Foreign		95			100			26
Total current provision		3,853			583			116
Deferred:
Federal		13			(26,528	)		(22,691	)
State		3			(791	)		(2,224	)
Foreign		(543	)		—			—
Total deferred provision		(527	)		(27,319	)		(24,915	)
Total provision (benefit) for income taxes	$	3,326		$	(26,736	)	$	(24,799	)

The following table presents a reconciliation of the federal statutory rate and the Company’s effective tax rate for the periods presented:

	Year Ended December 31,
	2015			2014			2013
Tax benefit at federal statutory rate		(35.00	)%		(34.00	)%		(34.00	)%
State income taxes (net of federal benefit)		(5.66	)		(1.71	)		(0.88	)
Foreign income and withholding taxes		(0.04	)		0.44			1.41
Noncontrolling interests and redeemable noncontrolling interests adjustment		27.99			5.18			(16.62	)
Investment in certain financing funds		(0.45	)		16.49			36.20
Stock-based compensation		0.89			2.35			1.77
Prepaid tax expense		(19.38	)		(5.45	)		(1.39	)
Other		0.03			1.24			(3.74	)
Tax credits		(1.65	)		(1.49	)		(1.75	)
Change in valuation allowance		33.70			10.30			4.96
Effective tax rate		0.43	%		(6.65	)%		(14.04	)%

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 presents significant components of the Company’s deferred tax assets and liabilities for the periods presented (in thousands):

	As of December 31,
	2015			2014
Deferred tax assets:
Accruals and reserves	$	156,225		$	29,142
Net operating losses		23,869			86,322
Accelerated gain on assets		26,005			25,710
Investment in certain financing funds		485,159			288,556
Tax rebate revenue		43,037			41,710
Stock-based compensation		47,605			21,769
Other deferred tax assets		9,887			5,507
Tax credits		7,946			10,849
Gross deferred tax assets		799,733			509,565
Valuation allowance		(369,157	)		(111,222	)
Net deferred tax assets		430,576			398,343
Deferred tax liabilities:
Depreciation and amortization		(279,492	)		(239,170	)
Investment in certain financing funds		—			(86,518	)
Initial direct costs related to customer solar energy system lease acquisition costs and Other deferred tax liabilities		(152,457	)		(72,700	)
Gross deferred tax liabilities		(431,949	)		(398,388	)
Net deferred taxes	$	(1,373	)	$	(45	)

An analysis of current and noncurrent deferred tax assets and liabilities is as follows (in thousands):

	As of December 31,
	2015			2014
Current:
Deferred tax assets	$	—		$	17,381
Less: valuation allowance		—			(4,232	)
Net current deferred tax assets	$	—		$	13,149
Noncurrent:
Deferred tax assets	$	367,784		$	488,043
Deferred tax liabilities		—			(394,247	)
Total noncurrent gross deferred tax assets		367,784			93,796
Less: valuation allowance		(369,157	)		(106,990	)
Net noncurrent deferred tax liabilities	$	(1,373	)	$	(13,194	)

As of December 31, 2015 and 2014, the Company had federal net operating loss, or NOL, carryforwards of $29.5 million and $439.8 million, respectively. The NOL carryforwards expire at various dates beginning in 2028 if not utilized. In addition, the Company had NOLs for California income tax purposes of $27.9 million and $228.4 million as of December 31, 2015 and 2014, respectively, which expire at various dates beginning in 2028 if not utilized. The Company also had NOLs for other state income tax purposes of $235.5 million and $77.7 million, as of December 31, 2015 and 2014, respectively, which expire at various dates beginning in 2016 if not utilized. Included in the other state NOL carryovers above, $155.7 million relates to stock option windfall deductions that, when realized, will be credited to equity.

As of December 31, 2015 and 2014, the Company had investment tax credit carryforwards of $0.0 and $6.6 million and federal research and development tax credit carryforwards of $11.1 million and $0.6 million, respectively. The federal research and development tax credit carryforward begins to expire in 2026 if not utilized. As of December 31, 2015 and 2014, the Company had California research and development tax credit carryforwards of $8.7 million and $1.6 million, respectively. California research and development tax credit carryforwards can be carried forward indefinitely. As of December 31, 2015 and 2014, the Company had federal minimum tax credit carryforwards of $19.0 million and $0.3 million, respectively, which can be carried forward indefinitely. As of December 31, 2015 and 2014, the Company had California minimum tax credit carryforwards of $3.5 million and $0.2 million, respectively, which can be carried forward indefinitely. As of December 31, 2015 and 2014, the Company had foreign tax credit carryforwards of $2.2 million and $2.2 million, respectively, which begin to expire in 2023 if not utilized. When realized the majority of these carryforwards will be credited to equity.

The Company’s recognition of deferred tax liabilities from the Silevo acquisition in September 2014 triggered the release of $27.3 million of deferred tax asset valuation allowances, which was accounted for outside of the purchase accounting for Silevo and was recognized as a benefit of income taxes in 2014.

The deferred tax liabilities supporting the realizability of the deferred tax assets in the above acquisitions will reverse in the same periods, are in the same jurisdiction and are of the same character as the temporary differences that gave rise to these deferred tax assets.

The Company’s valuation allowance increased by $257.9 million during the year ended December 31, 2015 and increased by $51.3 million during the year ended December 31, 2014. The increase in the valuation allowance was primarily related to the Company’s investment in the financing funds. The valuation allowance is determined in accordance with the provisions of ASC 740, Income Taxes, which requires an assessment of both negative and positive evidence when measuring the need for a valuation allowance. Based on the available objective evidence and the Company’s history of losses, the Company believes it is more likely than not that the net deferred tax assets will not be realized. As of December 31, 2015 and 2014, the Company has applied a valuation allowance against its deferred tax assets net of the expected income from the reversal of its deferred tax liabilities.

In the current year, the Company utilized all available NOL carryforwards from prior years. The utilization of the remaining NOL carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the IRC Section 382 and similar state provisions. The annual limitation may result in the expiration of NOL carryforwards and credits before utilization. The Company completed an IRC Section 382 analysis through December 31, 2015. Based on the analysis, the NOL carryforwards presented have accounted for any limited and potential lost attributes due to any ownership changes and expiration dates. The Company also analyzed the NOL carryovers related to our acquisitions of Zep Solar and Silevo. Based on the analysis, there were no significant limitations to the utilization of either Zep Solar’s or Silevo’s NOL carryforwards. The NOL carryforwards presented are not expected to expire unutilized.

As part of its asset monetization strategy, the Company has agreements to sell solar energy systems to joint venture funds. The gain on the sale of the assets has been eliminated in the consolidated financial statements. These transactions are treated as inter-company sales, and as such, income taxes are not recognized on the sales until the Company no longer benefits from the underlying assets. Since the assets remain within the consolidated group, the income tax expense incurred related to the sales is being deferred and amortized over the estimated useful life of the assets, which has been estimated to be 30 years. The deferral of income tax expense results in the recording of a prepaid tax expense that is included in the consolidated balance sheets as other assets. In 2015, the Company’s tax profitability resulted in the utilization of the available net operating loss carryovers including net operating losses related to excess tax benefits from stock options. The utilization of excess tax benefits from stock options was recognized as an increase in additional paid in capital. The Company, pursuant to ASC 810, Consolidation, deferred the impact of both the current tax payable as well as the amount recorded in additional paid in capital on the consolidated balance sheet as an increase of the prepaid tax expense. As of December 31, 2015 and 2014, the Company had recorded an increase in prepaid tax expense of $105.8 million and $3.7 million, respectively, net of amortization. The amortization of the prepaid tax expense in each period makes up the major component of income tax expense.

As a result of the Company’s acquisition of the noncontrolling interest in certain of its financing funds in second quarter of 2014, the Company accounted for the direct impacts of the acquisition as an adjustment to additional paid in capital, while the indirect impacts of the acquisition were accounted for in the consolidated statements of operations. Since the Company owns 100% of these financing funds, they were treated as terminated for U.S. income tax purposes. Due to the deemed liquidation of these financing funds, no gain was recognized from the liquidating distributions of cash and assets. The Company also recognized a net deferred tax liability of $1.6 million resulting mainly from accelerated depreciation previously taken for tax purposes but not for book purposes. The impact of setting up this deferred tax liability was offset by a release of the valuation allowance, resulting in a net zero impact to the consolidated statements of operations.

The Company had an immaterial amount of undistributed earnings of foreign subsidiaries as of December 31, 2015. Those earnings are considered to be indefinitely reinvested; accordingly, no provisions for federal or state income taxes have been provided thereon. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable due to the complexities associated with its hypothetical calculation. In addition, unrecognized foreign tax credit carryforwards would be available to reduce a portion of such U.S. tax liability. An immaterial amount of withholding taxes may be payable upon remittance of all previously unremitted earnings as of December 31, 2015.

Uncertain Tax Positions

The Company applies a two-step approach with respect to uncertain tax positions. This approach involves recognizing any uncertain tax positions that are more-likely-than-not of being ultimately realized and then measuring those positions to determine the amounts to be recognized. The Company has $10.1 million of unrecognized tax benefits as of December 31, 2015, and $5.0 million of the balance at December 31, 2015 would affect the Company’s effective tax rate if recognized. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):

Balance, January 1, 2013	$	—
Acquired from Zep Solar		120
Balance, December 31, 2013		120
Acquired from Silevo		434
True-up to prior year ending balance		(23	)
Balance, December 31, 2014		531
Additions related to positions from the current year		1,384
Additions related to positions from the prior years		8,181
Balance, December 31, 2015	$	10,096

The interest and penalties for uncertain tax positions is presented in the consolidated statements of operations as income tax expense. There were no interest and penalties accrued for any uncertain tax positions as of December 31, 2015, 2014 and 2013.

The Company does not anticipate any significant changes either increase or decrease to the total amount of gross unrecognized benefits within the 12 months after December 31, 2015.

The Company is subject to taxation and files income tax returns in the U.S. and various state, local and foreign jurisdictions. The U.S. and state jurisdictions have statutes of limitations that generally range from three to five years. Due to the Company’s net losses for years prior to 2015, substantially all of its federal, state, local and foreign income tax returns since inception are still subject to audit.