Earthlink 2015 Annual Report Download - page 89

Table of Contents
EARTHLINK HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Deferred tax assets and liabilities include the following as of December 31, 2014 and 2015 :
As of December 31,
2014
2015
(in thousands)
Deferred tax assets:
Net operating loss carryforwards
$ 267,058
$ 270,922
Capital loss carryforward
1,549
1,493
Alternative minimum tax carryforward
14,952
14,952
Accrued liabilities and reserves
9,654
7,501
Accrued bonus
12,163
13,217
Subscriber base and other intangible assets
33,169
48,286
Other
12,383
16,990
Valuation allowance
(333,627)
(348,791)
Total deferred tax assets
17,301
24,570
Deferred tax liabilities:
Fixed assets
(11,681)
(19,280)
Accrued liabilities and reserves
(4,394)
(4,334)
Indefinite lived intangible assets
(3,236)
(3,922)
Other
(1,189)
(910)
Total deferred tax liabilities
(20,500)
(28,446)
Net deferred tax liabilities
$ (3,199)
$ (3,876)
Effective tax rate. The effective rate of -6.7% for the year ended December 31, 2015 differs from the federal statutory rate of 35% primarily due to the change in
valuation allowance, the impact of state taxes including the impact of changes in enacted state tax rates and the change in uncertain tax positions. The change in the
valuation allowance recorded for the year ended December 31, 2015 decreases the effective tax rate by approximately 37.5% . Changes to the Company's state
deferred income tax rates and the resulting impact on the re-measurement of deferred tax assets and liabilities recorded on the balance sheet as of December 31,
2014 decreased the effective tax rate by 5.1% . S tate tax expense for the year end December 31, 2015 increased the effective tax rate by 3.3% . Changes in
uncertain tax positions decreases the effective tax rate by approximately 2.9% . The current tax provision for the year ended December 31, 2015 was primarily
related to the recording of an uncertain tax position, including applicable interest, related to certain tax positions that the Company has taken during prior years,
expense for Canadian tax amounts payable and current year state taxes. The non-cash deferred tax expense was due primarily to the amortization of deferred tax
liabilities with indefinite useful lives.
Valuation allowance. A deferred tax asset is reduced by a valuation allowance if based on the weight of all available evidence, it is more likely than not (a
likelihood of more than 50%) that the value of such assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the
amount that is more likely than not to be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence,
including both positive and negative evidence. The realization of deferred tax assets, including carryforwards and deductible temporary differences, depends upon
the existence of sufficient taxable income of the same character during the carryback or carryforward period. All sources of taxable income available to realize the
deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and
carryforwards, taxable income in carryback years and tax-planning strategies, should be considered.
During the three months ended December 31, 2013, the Company entered into a cumulative loss position. For purposes of assessing the realization of the deferred
tax assets, this cumulative loss position is considered significant negative evidence. This cumulative loss position, along with the evaluation of all sources of
taxable income available to realize the deferred tax asset, has caused management to conclude that the Company will not be able to fully realize its deferred tax
assets in the future. During the three months ended December 31, 2013, the Company recorded a $266.3 million , or $2.61 per share, non-cash charge to record a
valuation allowance against its deferred tax assets, which is included in the income tax provision in the Consolidated Statement of Comprehensive Loss.
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