Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

We are subject to income taxes in the United States (federal and state), Canada, and Serbia.

We recorded income tax expense of $1.3 million for the year ended December 31, 2021. The income tax expense is comprised of $4.5 million of tax expense related to state and foreign income taxes, partially offset by a $3.2 million income tax benefit from a decrease in the valuation allowance associated with our September 2021 acquisition of ShowingTime.

We recorded an income tax benefit of $7.5 million for the year ended December 31, 2020. The income tax benefit was primarily a result of a $9.7 million income tax benefit related to the $71.5 million non-cash impairment we recorded during the year ended December 31, 2020 related to the Trulia trade names and trademarks intangible asset. This income tax benefit was partially offset by an immaterial amount of current state and foreign income tax expense recorded for the year ended December 31, 2020. For additional information about the non-cash impairment, see Note 10 of our consolidated financial statements.

We recorded an income tax benefit of $4.3 million for the year ended December 31, 2019. The majority of the income tax benefit is a result of federal and state interest expense limitation carryforwards that are indefinite-lived deferred tax assets that can be offset against our indefinite-lived deferred tax liabilities. In addition, net operating losses generated after December 31, 2017 also can be offset against the indefinite-lived deferred tax liabilities. These items contributed to a release of the valuation allowance and the recognition of an income tax benefit for the year ended December 31, 2019.

The following table summarizes the components of our income tax expense (benefit) for the periods presented (in thousands):

	Year Ended December 31,
	2021		2020		2019
Current income tax expense:
State	$	3,851	$	588	$	304
Foreign	143		257		99
Total current income tax expense	3,994		845		403
Deferred income tax benefit:
Federal	(2,577)		(7,388)		(1,631)
State	(302)		(1,095)		(2,856)
Foreign	148		115		(174)
Total deferred income tax benefit	(2,731)		(8,368)		(4,661)
Total income tax expense (benefit)	$	1,263	$	(7,523)	$	(4,258)

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

	Year Ended December 31,
	2021		2020		2019
Tax expense at federal statutory rate	(21.0)	%	(21.0)	%	(21.0)	%
State income taxes, net of federal tax benefit	(5.8)		(11.2)		(3.0)
Share-based compensation	(17.0)		(52.5)		(0.9)
Section 162(m) of Internal Revenue Code	1.7		2.3		1.1
Research and development credits	(8.5)		(10.6)		(7.2)
Other	0.9		(0.5)		1.0
Valuation allowance	49.9		89.1		28.6
Effective tax rate	0.2	%	(4.4)	%	(1.4)	%

Deferred federal, state and foreign income taxes reflect the net tax impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. The following table presents the significant components of our deferred tax assets and liabilities as of the dates presented (in thousands):

	December 31,
	2021		2020
Deferred tax assets:
Federal and state net operating loss carryforwards	$	524,109	$	400,509
Research and development credits	133,173		88,823
Inventory	68,840		15,115
Share-based compensation	66,345		43,065
Interest expense limitation	58,155		30,921
Lease liability	41,402		57,606
Accruals and reserves	12,782		3,988
Depreciation and amortization	1,496		1,035
Other deferred tax assets	1,100		4,736
Total deferred tax assets	907,402		645,798
Deferred tax liabilities:
Debt discount on convertible senior notes	(60,448)		(80,280)
Website and software development costs	(43,814)		(32,021)
Right of use assets	(32,027)		(45,857)
Intangible assets	(21,697)		(12,968)
Goodwill	(4,631)		(3,267)
Total deferred tax liabilities	(162,617)		(174,393)
Net deferred tax assets before valuation allowance	744,785		471,405
Less: valuation allowance	(745,732)		(471,901)
Net deferred tax liabilities	$	(947)	$	(496)

Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. We have provided a full valuation allowance against the net deferred tax assets as of December 31, 2021 and 2020 because, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized. The valuation allowance increased by $273.8 million and $125.0 million, respectively, during the years ended December 31, 2021 and 2020.

We have accumulated federal tax losses of approximately $2.1 billion and $1.7 billion, as of December 31, 2021 and 2020, respectively, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $72.7 million and $53.2 million (tax effected) as of December 31, 2021 and 2020, respectively. Additionally, we have net research and development credit carryforwards of $133.2 million and $88.8 million as of December 31, 2021 and 2020, respectively, which are available to reduce future tax liabilities. The tax loss and research and development credit carryforwards begin to expire in 2025. Under Sections 382 and 383 of the Internal Revenue Code, if a corporation undergoes an ownership change, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income or income tax liability may be limited. In connection with our August 2013 public offering of our Class A common stock, we experienced an ownership change that triggered Sections 382 and 383, which may limit our ability to utilize net operating loss and tax credit carryforwards. In connection with our February 2015 acquisition of Trulia, Trulia experienced an ownership change that triggered Section 382 and 383, which may limit Zillow Group’s ability to utilize Trulia’s net operating loss and tax credit carryforwards.

Our material income tax jurisdiction is the United States (federal). With limited exceptions for state taxing authorities, which are not material to the financial statements, all tax years for which the Company has filed a tax return remain subject to examination due to the existence of net operating loss carryforwards.

Changes for unrecognized tax benefits for the periods presented are as follows (in thousands):

Balance at January 1, 2019	$	28,625
Gross increases—current period tax positions	9,021
Gross increases—prior period tax positions	1,786
Balance at December 31, 2019	$	39,432
Gross increases—current period tax positions	9,334
Gross increases—prior period tax positions	328
Balance at December 31, 2020	$	49,094
Gross increases—current period tax positions	16,627
Gross increases—prior period tax positions	9,257
Balance at December 31, 2021	$	74,978

At December 31, 2021, the total amount of unrecognized tax benefits of $75.0 million is recorded as a reduction to our deferred tax asset when available. We do not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. Accrued interest and penalties related to unrecognized tax benefits are recorded as income tax expense and are not material.