INCOME TAXES

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Deferred Income Taxes

Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. The Company has a net deferred tax liability, primarily due to differences in depreciation rates for federal income tax purposes and for financial reporting purposes.

Deferred tax (assets) and liabilities comprise the following (in millions):

	2019		2018
Excess of tax over book depreciation	$	1,233	$	1,066
Intangibles - net	16		15
Operating lease liabilities	416		—
Other - net	58		43
Deferred tax liabilities	1,723		1,124
Mileage Plan™	(337)		(315)
Inventory obsolescence	(15)		(15)
Employee benefits	(179)		(172)
Acquired net operating losses	(13)		(64)
Operating lease assets	(417)		—
Other - net	(48)		(48)
Deferred tax assets	(1,009)		(614)
Valuation allowance	1		2
Net deferred tax liabilities	$	715	$	512

At December 31, 2019, the Company had federal NOLs of approximately $45 million that expire beginning in 2032 and continuing through 2036, and state NOLs of approximately $55 million that expire beginning in 2029 and continuing through 2036.

Virgin America experienced multiple “ownership changes” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), the most recent being its acquisition by the Company. Section 382 of the Code imposes an annual limitation on the utilization of pre-ownership change NOLs. Any unused annual limitation may, subject to certain limits, be carried over to later years. The combined Company’s ability to use the NOLs will also depend on the amount of taxable income generated in future periods.

Valuation allowances are provided to reduce the related deferred income tax assets to an amount which will, more likely than not, be realized. The valuation allowance was not material at both December 31, 2019 and December 31, 2018.

Components of Income Tax Expense

The components of income tax expense are as follows (in millions): 

	2019		2018		2017
Current income tax expense (benefit):
Federal	$	26	$	(5)	$	127
State	13		9		35
Total current income tax expense	39		4		162
Deferred income tax expense (benefit):
Federal	175		125		(3)
State	33		19		40
Total deferred income tax expense (benefit)	208		144		37
Income tax expense	$	247	$	148	$	199

Income Tax Rate Reconciliation

Income tax expense reconciles to the amount computed by applying the 2019 U.S. federal rate of 21% to income before income tax and for deferred taxes as follows (in millions):

	2019			2018			2017
Income before income tax	$	1,016		$	585		$	1,159
Expected tax expense	213			123			406
Nondeductible expenses	9			9			5
State income taxes	36			21			28
State income sourcing	1			—			9
Tax law changes	(9)			(7)			(237)
Other - net	(3)			2			(12)
Actual tax expense	$	247		$	148		$	199
Effective tax rate	24.3		%	25.3		%	17.2		%

As a result of the ASC 606 full retrospective adoption, 2017 tax expense increased by $26 million.

As a result of tax changes signed into law during 2017, with final regulations issued in 2019, the Company recorded a deferred tax benefit of $9 million in the current year.

In 2017, adjustments were made to the Company's position on income sourcing in various states due to updated guidance from state taxing authorities. The impact of this guidance is reflected as an increase in income tax expense of approximately $9 million for the year ended December 31, 2017.

Uncertain Tax Positions

The Company has identified its federal tax return and its state tax returns in Alaska, Oregon and California as “major” tax jurisdictions.  A summary of the Company's jurisdictions and the periods that are subject to examination are as follows:

Jurisdiction	Period
Federal	2007 to 2018
Alaska	2015 to 2018
California	2007 to 2018
Oregon	2003 to 2018

Certain tax years are open to the extent of net operating loss carryforwards.

Changes in the liability for gross unrecognized tax benefits during 2019, 2018 and 2017 are as follows (in millions):

	2019		2018		2017
Balance at January 1,	$	40	$	43	$	40
Additions related to prior years	—		1		16
Releases related to prior years	(1)		(4)		(2)
Additions related to current year activity	2		2		2
Releases due to settlements	—		(1)		(11)
Releases due to lapse of statute of limitations	(1)		(1)		(2)
Balance at December 31,	$	40	$	40	$	43

As of December 31, 2019, the Company had $40 million of accrued tax contingencies, of which $34 million, if fully recognized, would decrease the effective tax rate. As of December 31, 2019, 2018 and 2017, the Company has accrued interest and penalties, net of federal income tax benefit, of $7 million, $6 million, and $5 million. In 2019, 2018, and 2017, the

Company recognized an expense of $1 million, $1 million, and $2 million for interest and penalties, net of federal income tax benefit. At December 31, 2019, the Company has unrecognized tax benefits recorded as a liability and some reducing deferred tax assets. The Company's reserves for uncertain tax positions is unchanged in 2019 after statute lapses on reserves and current year activity. These uncertain tax positions could change as a result of the Company's ongoing audits, settlement of issues, new audits and status of other taxpayer court cases. The Company cannot predict the timing of these actions. Due to the positions being taken in various jurisdictions, the amounts currently accrued are the Company's best estimate as of December 31, 2019.