Income Taxes

6 Months Ended

Jun. 30, 2012

Disclosure Text Block

Income Taxes

4. Income Taxes

U.S. Cellular is included in a consolidated federal income tax return and in certain state income tax returns with other members of the TDS consolidated group. For financial statement purposes, U.S. Cellular and its subsidiaries compute their income tax expense as if they comprised a separate affiliated group and were not included in the TDS consolidated group.

U.S. Cellular's overall effective tax rate on Income before income taxes for the three and six months ended June 30, 2012 was 36.9%and 32.0%, respectively, and for the three and six months ended June 30, 2011 was 30.0% and 32.9%, respectively.

The effective tax rate for the three months ended June 30, 2011 was lower than the rate for the three months ended June 30, 2012 primarily as a result of tax benefits from the expiration of the statutes of limitation for certain tax years in 2011. The benefits from this change, along with other discrete items, decreased income tax expense for the three months ended June 30, 2011 by $4.5 million; absent these benefits, the effective tax rate for such period would have been higher by 8.4 percentage points.

The effective tax rate for the six months ended June 30, 2012 was lower than the rate for the six months ended June 30, 2011 primarily as a result of tax benefits related to the expiration of the statutes of limitation for certain tax years in 2012 and correction of deferred tax balances related to certain partnership investments in 2012. The amount of the correction was $3.7 million and relates to the quarter ended December 31, 2011. The benefits from this change, along with other discrete items, decreased income tax expense for the six months ended June 30, 2012 by $8.4 million; absent these benefits, the effective tax rate for such period would have been higher by 4.5 percentage points.

U.S. Cellular incurred a federal net operating loss in 2011 largely attributable to 100% bonus depreciation applicable to qualified capital expenditures. U.S. Cellular carried back this federal net operating loss to prior tax years, and received a $58.2 million refund in 2012 for carrybacks to 2009 and 2010 tax years. U.S. Cellular's future federal income tax liabilities associated with the benefits realized from bonus depreciation are accrued as a component of Net deferred income tax liability (noncurrent) in the Consolidated Balance Sheet. The bonus depreciation rate for federal income tax purposes is 50% for 2012 and will expire at the end of the year. U.S. Cellular expects federal income tax payments to substantially increase beginning in 2012 and remain at a higher level for several years as the amount of U.S. Cellular's federal tax depreciation deduction substantially decreases.