Income Taxes

3 Months Ended

12 Months Ended

Mar. 31, 2016

Dec. 31, 2015

NOTE 8—INCOME TAXES

In order to determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates. Certain significant or unusual items are separately recognized in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

The Company’s effective income tax rate for the three months ended March 31, 2016 was approximately negative 2.55%. In computing income tax expense, the Company estimates its annual effective income tax rate jurisdiction by jurisdiction and entity by entity for which tax attributes must be separately considered for the calendar year ending December 31, 2015, excluding discrete items. Each jurisdictional or entity estimated annual tax rate is applied to actual year-to-date pre-tax book income (loss) of each jurisdiction or entity. The Company had no discrete items that affected the calculated income tax benefit or expense for the three months ended March 31, 2016. Both the 2016 and 2015 effective tax rates are less than the statutory rate primarily due to the combination of not recognizing benefit for expected pre-tax losses of the US jurisdiction and recognizing current state income tax expense for minimum state taxes.

For 2016, the Company expects to realize a loss before income taxes and expects to record a full valuation allowance against the net deferred tax assets of the consolidated group within the US, Canadian and New Zealand jurisdictions. The Company has recorded tax expense for state and local taxes. A valuation allowance is required when there is significant uncertainty as to the ability to realize the deferred tax assets. Because the realization of the deferred tax assets related to the Company’s net operating losses (NOLs) is dependent upon future income related to domestic and foreign jurisdictional operations that have historically generated losses, management determined that the Company continues to not meet the “more likely than not” threshold that those NOLs will be realized. Accordingly, a valuation allowance is required. A similar history of losses is present in the Company’s Canadian and New Zealand jurisdictions. However, as of March 31, 2016, the deferred tax assets related to the Company’s Canadian and New Zealand jurisdictions’ NOLs are offset by existing deferred income tax liabilities resulting in a net deferred tax liability position in both jurisdictions.

NOTE 13—INCOME TAXES

APX Group files a consolidated federal income tax return with its wholly-owned subsidiaries.

Income tax provision consisted of the following (in thousands):


	Year ended December 31,
	2015			2014			2013
Current income tax:
Federal	$	—		$	—		$	(579	)
State		392			779			(1,351	)
Foreign		(1	)		—			(145	)

Total		391			779			(2,075	)
Deferred income tax:
Federal		—			(925	)		8,614
State		—			(181	)		(1,938	)
Foreign		(40	)		841			(1,009	)

Total		(40	)		(265	)		5,667

Provision for income taxes	$	351		$	514		$	3,592

The following reconciles the tax expense computed at the statutory federal rate and the Company’s tax expense (in thousands):


	Year ended December 31,
	2015			2014			2013
Computed expected tax expense	$	(94,737	)	$	(81,107	)	$	(41,113	)
State income taxes, net of federal tax effect		259			395			(2,171	)
Foreign income taxes		202			1,645			136
Permanent differences		1,980			2,261			1,215
Change in valuation allowance		92,647			77,320			45,525

Provision for income taxes	$	351		$	514		$	3,592

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities were as follows (in thousands):


	December 31,
	2015			2014
Gross deferred tax assets:
Net operating loss carryforwards	$	642,391		$	544,793
Deferred subscriber income		13,722			7,433
Accrued expenses and allowances		15,415			9,474
Purchased intangibles		10,576			4,579
Inventory reserves		9,333			4,156
Property and Equipment		3,257			—
Alternative minimum tax credit and research and development credit		41			41
Valuation allowance		(234,771	)		(139,585	)

		459,964			430,891
Gross deferred tax liabilities:
Deferred subscriber acquisition costs		(466,783	)		(437,595	)
Property and equipment		—			(1,715	)
Prepaid expenses		(705	)		(644	)

		(467,488	)		(439,954	)

Net deferred tax liabilities	$	(7,524	)	$	(9,063	)

The long-term portion of the net deferred tax liability was approximately $7.5 million and $9.0 million at December 31, 2015 and 2014, respectively. The current portion of the net deferred tax liability was approximately $0 and $36,000 at December 31, 2015 and 2014, respectively, and is included in accrued expenses and other liabilities on the Company’s Consolidated Balance Sheet as of December 31, 2014.

The Company had net operating loss carryforwards as follows (in thousands):


	December 31,
	2015		2014
Net operating loss carryforwards:
United States	$	1,695,386	$	1,355,632
State		1,338,742		1,301,462
Canada		28,629		30,688
New Zealand		5,518		4,203

U.S. and state net operating loss carryforwards will begin to expire in 2026, if not used. Included in both the U.S. and state net operating loss carryforwards are approximately $11.5 million and $11.5 million at December 31, 2015 and 2014, respectively of net operating loss carryforwards for which a benefit will be recorded in Additional Paid in Capital when realized. The Company had U.S. research and development credits of approximately $41,000 at December 31, 2015, and December 31, 2014, which begin to expire in 2030.

Canadian net operating loss carryforwards will begin to expire in 2029.

Realization of the Company’s net operating loss carryforwards and tax credits is dependent on generating sufficient taxable income prior to their expiration. Although a portion of these carryforwards are subject to the provisions of Internal Revenue Code Section 382, we have not performed a formal study to determine the amount of the limitation. The use of the net operating loss carryforwards may have additional limitations resulting from future ownership changes or other factors under Section 382 of the Internal Revenue Code.

The Company has considered and weighed the available evidence, both positive and negative, to determine whether it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. Based on available information, management does not believe it is more likely than not that its deferred tax assets will be utilized. Accordingly, the Company has established a valuation allowance to the extent of and equal to the net deferred tax assets. The Company recorded a valuation allowance for U.S. deferred tax assets of approximately $234.8 million and $139.4 million at December 31, 2015 and 2014, respectively. In addition to the change in valuation allowance from operations, the valuation allowance changes include impact of acquisition and disposition related items.

As of December 31, 2015, the Company’s income tax returns for the tax years 2012 through 2015, remain subject to examination by the Internal Revenue Service and state authorities. The Company’s income tax returns for the years ended December 31, 2012 and December 31, 2013 are currently under examination by the Internal Revenue Service.