NetFlix 2005 Annual Report Download - page 88

NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share and per share data and percentages)
Provision for (benefit from) income taxes differed from the amounts computed by applying the U.S. federal
income tax rate of 35 percent to pretax income as a result of the following:
Year Ended December 31,
2003 2004 2005
Expected tax expense at U.S. federal statutory rate
of35% ...................................... $2,214 $ 7,404 $ 2,917
State income taxes, net of Federal income tax effect ..... — 28 377
Valuation allowance .............................. (5,914) (3,816) (35,596)
Stock-based compensation ......................... 3,644 (3,471) (1,433)
Other .......................................... 56 36 43
Provision for (benefit from) income taxes ............. $ — $ 181 $(33,692)
The tax effects of temporary differences and tax carryforwards that give rise to significant portions of the
deferred tax assets and liabilities are presented below:
Year Ended December 31,
2004 2005
Deferred tax assets:
Net operating loss carryforwards ......................... $30,491 $ 9,905
Accruals and reserves ................................. 853 3,880
Depreciation ......................................... 843 10,841
Stock-based compensation .............................. 6,978 9,728
Other .............................................. 14 647
Gross deferred tax assets ................................... 39,179 35,001
Valuation allowance against deferred tax assets ................. (39,179) (96)
Net deferred tax assets ..................................... $ — $34,905
The total valuation allowance for the years ended December 31, 2004 and 2005 decreased by $5,671 and
$39,083, respectively.
The Company continuously monitors the circumstances impacting the expected realization of its deferred
tax assets. As of December 31, 2004, the Company’s deferred tax assets were offset in full by a valuation
allowance because of its history of losses, limited profitable quarters to date and the competitive landscape of
online DVD rentals. As a result of the Company’s analysis of expected future income at December 31, 2005, it
was considered more likely than not that substantially all deferred tax assets would be realized, resulting in the
release of the previously recorded valuation allowance, and generating a $34,905 tax benefit. In evaluating its
ability to realize the deferred tax assets, the Company considered all available positive and negative evidence,
including its past operating results and the forecast of future market growth, forecasted earnings, future taxable
income, and prudent and feasible tax planning strategies. The remaining valuation allowance is related to capital
losses which can only be offset against future capital gains.
As of December 31, 2005, the Company had net operating loss carryforwards for federal tax purposes of
approximately $27 million, excluding approximately $65 million attributable to excess tax deductions related to
stock options, the benefit of which will be credited to equity when realized. The federal net operating loss
carryforwards will expire from 2019 to 2025, if not previously utilized.
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