Amazon.com 2004 Annual Report Download - page 51

including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable
income, the carryforward periods available to us for tax reporting purposes, and other relevant factors.
Significant judgment is required in making this assessment, and it is very difficult to predict when, if ever, our
assessment may conclude that the remaining portion of our deferred tax assets are realizable.
We had a net current tax benefit in 2004 of $233 million, representing $0.57 and $0.55 of basic and diluted
earnings per share, resulting primarily from the effect of changes in our valuation assessment of deferred tax
assets during 2004. In connection with this assessment we also recorded a net credit to “Stockholders’ Deficit” of
$106 million on our consolidated balance sheet in 2004.
At December 31, 2004, our net deferred tax assets are $363 million, comprised of approximately $270
million relating to our NOLs, with the remaining portion related to temporary timing differences between tax and
financial reporting. Classification of deferred tax assets between current and long-term categories is based on the
expected timing of realization, and the valuation allowance is allocated ratably.
At December 31, 2004, our gross deferred tax assets related to our NOLs were approximately $800 million
(relating to approximately $2.6 billion of NOLs), offset by a valuation allowance of approximately $530 million
due to uncertainty about their future realization. If in the future, we determine that the remaining $530 million of
NOL deferred tax assets is more likely than not to be realizable, substantially all would be credited to
“Stockholders’ Deficit” rather than the income statement since they primarily relate to tax-deductible stock-based
compensation in excess of amounts recognized for financial reporting purposes. The majority of our NOLs expire
after 2016.
We also have approximately $70 million of deferred tax assets relating to approximately $225 million
capital loss carryforwards that expire in 2005 and thereafter. Due to uncertainty regarding future realization, we
have provided a full valuation allowance for this portion of our deferred tax asset.
Additionally, we expect net income for 2005 to decline because we expect a tax provision in 2005 rather
than the large tax benefit we received in 2004. We expect our cash taxes paid in 2005 to be approximately $25
million, compared with $4 million in 2004 and $2 million in 2003.
Net Income
Net income was $588 million and $35 million in 2004 and 2003, and net loss was $149 million in 2002. We
believe that our reported net income for 2004 should not be viewed, on its own, as a material positive event, and
the year-over-year increases in net income of $553 million and $184 million in 2004 and 2003 are not necessarily
predictive of our future results for a variety of reasons. For example, in 2004 we had a net benefit from income
taxes of $233 million, representing $0.57 and $0.55 of basic and diluted earnings per share, resulting primarily
from changes in valuation of deferred tax assets associated with our net operating loss carryforwards attributable
to continuing operations. Additionally, the remeasurement of our 6.875% PEACS and intercompany balances
resulted in significant gains and charges associated with the effect of movements in currency exchange rates.
Accordingly, we encourage readers of our financial statements to evaluate the effect on our operating trends of
these items since future income taxes and change in currency exchange rates may create significant variability in
our future operating results.
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