Income Taxes

The following table presents the (income) loss before income taxes for the periods presented (in thousands):



	For the Year Ended December 31,
	2018			2017			2016
Income attributable to common stockholders	$	(35,979	)	$	(137,842	)	$	(131,392	)
Loss attributable to noncontrolling interest and redeemable noncontrolling interests	286,843			413,104			395,968
Loss before income taxes	$	250,864		$	275,262		$	264,576

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



	For the Year Ended December 31,
	2018			2017		2016
Current
Federal	$	(1,100	)	$	—	$	—
State	292			—		—
Total current expense	(808		)	—		—
Deferred
Federal	1,995			4,784		47,677
State	8,135			7,569		8,586
Total deferred provision	10,130			12,353		56,263
Total	$	9,322		$	12,353	$	56,263

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,
	2018		2017		2016
Tax provision (benefit) at federal statutory rate	(21.00	)%	(34.00	)%	(34.00	)%
State income taxes, net of federal benefit	0.32		1.94		2.99
Effect of noncontrolling and redeemable noncontrolling interests	24.01		51.03		50.88
Stock-based compensation	(1.77	)	0.70		0.69
Effect of prepaid tax asset	—		—		0.50
Tax credits	(1.35	)	(1.25	)	(1.63	)
Effect of federal rate change	—		(15.93	)	—
Effect of valuation allowance	3.04		0.81		0.25
Other	0.47		1.20		1.58
Total	3.72	%	4.50	%	21.26	%

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,
	2018			2017
Deferred tax assets
Accruals and prepaids	$	18,871		$	14,387
Deferred revenue	—			7,602
Net operating loss carryforwards	288,039			187,038
Stock-based compensation	5,681			4,994
Investment tax and other credits	28,551			22,940
Interest Expense	9,614			—
Interest rate derivatives	1,282			1,640
Total deferred tax assets	352,038			238,601
Less: Valuation allowance	(10,506		)	(2,892		)
Gross deferred tax assets	341,532			235,709
Deferred tax liabilities
Deferred revenue	17,526			—
Capitalized initial direct costs	54,823			38,751
Fixed asset depreciation	218,701			173,175
Deferred tax on investment in partnerships	144,115			106,902
Gross deferred tax liabilities	435,165			318,828
Net deferred tax liabilities	$	(93,633	)	$	(83,119	)

As of December 31, 2018, the Company has an investment tax credit carryforward of approximately $14.9 million which begins to expire in the year 2028, if not utilized and $1.0 million of California enterprise zone credits which begin to expire in the year 2023. As of December 31, 2017, the Company has an investment tax credit carryforward of approximately $11.5 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 no ownership changes were identified as of December 31, 2018.

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 $10.5 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 $7.6 million in 2018.

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. These transactions are treated as intercompany sales and any tax expense incurred related to these sales prior to fiscal year 2017 was deferred. As described in Note 2, Summary of Significant Accounting Policies – Recently Issued Accounting Standards, ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, requires entities to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. As a result, a reporting entity would recognize the tax expense from the sale of assets in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of the transaction are eliminated in the consolidated financial statements. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. As the Company sells solar energy systems to Funds, the Company records the current tax effect of the gain on the sale as well as a deferred tax asset related to the Company’s increased tax basis in the partnership as a result of the sale. With the adoption of ASU 2016-16 on January 1, 2017 the Company reversed net prepaid tax assets of $378.5 million and recorded the gross deferred tax assets associated with the historical intercompany sales of solar energy systems, which in turn reduced the deferred tax liabilities on investment in partnerships by $378.2 million with the remaining $0.3 million being recorded as a cumulative effect of adoption in the Company’s Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity. The adoption did not have an impact on the Company’s Consolidated Statement of Operations.

The Company adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, on January 1, 2017. As a result of the adoption, the Company has increased its federal and state deferred tax assets by $3.3 million for the cumulative unrecognized federal and state gross windfall net operating loss carryover at December 31, 2016 of $8.6 million and $6.8 million, respectively, with an offsetting adjustment to retained earnings of $3.3 million.

Tax Cuts and Jobs Act

On December 22, 2017, the US 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 US tax code including but not limited to, (1) reducing the US federal corporate tax rate from 35% to 21%; (2) immediate expensing of certain tangible personal property (3) creating a new limitation on deductible interest expense; (4) enacting special rules for taxable year of inclusion for certain revenues and (5) changing rules related to the uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income taxes. In accordance with SAB 118 a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. For 2017, and the first nine months of 2018, the Company recorded provisional amounts for changes due to the Tax Act because we had not yet completed our analysis of the tax expense related to the enactment-date effects of the Tax Act that included performance-based compensation plans within the new definitions under IRC Section 162(m) of the Internal Revenue Code.

In its final assessment of the Tax Act, the Company believes that performance based compensation provided prior to November 2, 2017 was provided pursuant to a written binding agreement and will be deductible. No adjustment has been made to current or deferred income tax expense in 2017 or 2018. While we have fully accounted for the impact of the Tax Act, the Company will continue to monitor additional clarification and guidance from the IRS, including guidance related to Section 451(c) income recognition. As of December 31, 2018, the Company has completed its accounting for all of the enactment-date income tax effects of the Act.

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).

Our 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 of December 31, 2018 and 2017, the Company had $0.6 million and $1.5 million, respectively, of unrecognized tax benefits related to an acquisition in 2015. In addition, there was $0.2 million and $0.4 million of interest and penalties for uncertain tax positions as of December 31, 2018 and 2017, respectively. During the 12 months ended December 31, 2018, the Company recorded an income tax benefit of $1.1 million, including penalties and interest, due to the expiration of federal and California statute of limitations. This benefit was fully offset by an indemnification asset that was written down to zero through operating expenses during the year. Due to the expiration of federal and California statute of limitations, the Company expects the total amount of gross unrecognized tax benefits will decrease by $0.6 million within 12 months of December 31, 2018.

The change in unrecognized tax benefits during 2018, 2017 and 2016, excluding penalties and interest, is as follows:



	For the Year Ended December 31,
	2018		2017	2016
Unrecognized tax benefits at beginning of the year	$1,525		$1,525	$1,525
Reversal of prior year unrecognized tax benefits due to the expiration of the statute of limitations	(878	)	—	—
Unrecognized tax benefits at end of the year	$647		$1,525	$1,525

One of our investment funds has recently been selected for audit by the Internal Revenue Service (the “IRS”). In addition, three of our investors are currently being audited by the IRS, and these investor audits involve a review of the fair market value determination of our solar energy systems. If these investor audits result in an adverse finding, we would be subject to an indemnity obligation to these investors. 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	2015 - 2018
State	2014 - 2018

Net Operating Loss Carryforwards

As a result of the Company’s net operating loss carryforwards as of December 31, 2018, the Company does not expect to pay income tax, including in connection with its income tax provision for the year ended December 31, 2018 until the Company’s net operating losses are fully utilized. As of December 31, 2018, the Company had net operating loss carryforwards for federal, California and other state income tax purposes of approximately $1.1 billion, $576.9 million and $535.8 million, respectively, which will begin to expire in the year 2028, 2028 and 2024, respectively, if not utilized. Federal and certain state net operating loss carryforwards generated in 2018 have indefinite carryover periods and do not expire. The Company performed an analysis to determine whether an ownership change under Section 382 of the Code had occurred and determined that no ownership changes were identified as of December 31, 2018.