NetFlix 2006 Annual Report Download - page 77

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,
2004 2005 2006
Expected tax expense at U.S. federal statutory rate of 35% ....... $7,404 $ 2,917 $28,111
State income taxes, net of Federal income tax effect ............ 28 377 3,866
Valuation allowance ..................................... (3,816) (35,596) (16)
Stock-based compensation ................................ (3,471) (1,433) (878)
Other ................................................. 36 43 153
Provision for (benefit from) income taxes ..................... $ 181 $(33,692) $31,236
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,
2005 2006
Deferred tax assets:
Net operating loss carryforwards ................................ $ 9,905 $ —
Accruals and reserves ........................................ 3,880 3,109
Depreciation ................................................ 10,841 1,393
Stock-based compensation ..................................... 9,728 12,769
Other ..................................................... 647 1,564
Gross deferred tax assets .......................................... 35,001 18,835
Valuation allowance against deferred tax assets ........................ (96) (80)
Net deferred tax assets ............................................ $34,905 $18,755
The total valuation allowance for the years ended December 31, 2005 and 2006 decreased by $39,083 and
$16, 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, 2006, the Company had unrecognized net operating loss carryforwards for federal tax
purposes of approximately $56 million for federal tax purposes 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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