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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the temporary differences between the recognition of revenue and expenses for income tax and financial reporting purposes and between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. The Company records the effect of a tax rate or law change on the Company’s deferred tax assets and liabilities in the period of enactment.
Significant components of income (loss) before income taxes for the periods presented were as follows:
Years Ended December 31,
(in thousands)202120202019
United States$(473,504)$(782,256)$(422,674)
Foreign2,315 3,337 (99,518)
Income (loss) before income taxes$(471,189)$(778,919)$(522,192)
Significant components of income tax benefit for the periods presented were as follows:
Years Ended December 31,
(in thousands)202120202019
Current:
Federal$(174)$370 $(2,503)
State(8,367)(27,059)(14,501)
Foreign(570)— (2,843)
Current income tax expense(9,111)(26,689)(19,847)
Deferred:
Federal97,805 133,646 89,495 
State41,901 39,842 24,924 
Foreign(226)(73)3,470 
Deferred income tax benefit139,480 173,415 117,889 
Income tax benefit$130,369 $146,726 $98,042 
The reconciliation between the actual effective tax rate on continuing operations and the statutory U.S. federal income tax rate for the periods presented were as follows:
Years Ended December 31,
202120202019
Statutory federal tax rate21.0 %21.0 %21.0 %
Statutory state tax rate, net of federal benefits2.7 %2.9 %1.4 %
Non-deductible and non-taxable charges0.3 %(3.1)%0.5 %
Valuation allowance0.5 %(1.5)%(9.4)%
Acquisitions1.3 %0.2 %— %
Legislative changes0.8 %— %(1.2)%
Non-deductible goodwill impairment— %— %(2.3)%
Amended returns— %0.1 %1.9 %
Net capital losses from sale of business— %0.4 %6.8 %
Other1.1 %(1.2)%0.1 %
Effective tax rate27.7 %18.8 %18.8 %
The components of the Company's net deferred tax liabilities as of December 31, 2021 and 2020 were as follows:
(in thousands)December 31, 2021December 31, 2020
Deferred tax assets:
Accrued liabilities and reserves$113,085 $114,950 
Tax loss and credit carryforwards594,821 652,690 
Disallowed interest carryforward140,974 57,043 
Postretirement benefits9,273 10,221 
Deferred revenue140,604 104,791 
Other92,613 113,586 
Total deferred tax assets1,091,370 1,053,281 
Valuation allowance(60,157)(68,013)
Deferred tax assets, net of valuation allowance$1,031,213 $985,268 
Deferred tax liabilities:
Subscriber system assets$(729,548)$(684,110)
Intangible assets(1,139,927)(1,271,722)
Other(27,442)(18,610)
Total deferred tax liabilities(1,896,917)(1,974,442)
Net deferred tax liabilities$(865,704)$(989,174)
The valuation allowance for deferred tax assets relates to the uncertainty of the utilization of certain U.S. federal and state deferred tax assets. In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative evidence, which include its past operating results, the existence of cumulative losses in the most recent years, and its forecast of future taxable income. In estimating future taxable income, the Company develops assumptions related to the amount of future pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company is using to manage its underlying businesses. The Company believes that it is more-likely-than-not that it will generate sufficient future taxable income to realize its deferred tax assets, net of valuation allowance.
The changes in the valuation allowance for deferred tax assets for the periods presented were as follows:
Years Ended December 31,
(in thousands)202120202019
Beginning balance $(68,013)$(56,841)$(9,558)
Income tax benefit (expense)2,378 (11,999)(49,291)
Write-offs and other(1)
5,478 827 2,008 
Ending balance$(60,157)$(68,013)$(56,841)
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(1)Includes the removal of valuation allowances associated with certain tax attributes that expired during the current year. Both the expired attributes and related valuation allowances were removed concurrently.
As of December 31, 2021, the Company had approximately $2.2 billion of U.S. federal net operating loss (“NOL”) carryforwards with expiration periods between 2026 and 2041. Although future utilization will depend on the Company’s actual profitability and the result of income tax audits, the Company anticipates that the majority of its U.S federal NOL carryforwards will be fully utilized prior to expiration. Most of the Company’s U.S. federal NOL carryforwards are subject to limitation due to “ownership changes,” which have occurred under Internal Revenue Code (“IRC”) Section 382. The Company does not, however, expect that this limitation will impact its ability to utilize the U.S. federal NOL carryforwards.
As of December 31, 2021, the Company’s valuation allowance for deferred tax assets was primarily related to capital loss carryforwards in both the U.S. and Canada primarily generated in connection with the sale of ADT Canada during 2019. The remainder of the Company’s valuation allowance related to other tax attributes not expected to be realized prior to expiration or due to limitations.
The Tax Cuts and Jobs Act of 2017 introduced IRC Section 163(j), which limits the deductibility of interest expense and allows for the excess to be carried forward indefinitely. As of December 31, 2021, the Company has not recorded a valuation
allowance against the disallowed interest carryforward as the Company believes it has sufficient sources of future taxable income to realize the related tax benefit.
Unrecognized Tax Benefits
The Company recognizes positions taken or expected to be taken in a tax return in the consolidated financial statements when it is more-likely-than-not (i.e., a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit with greater than 50% likelihood of being realized upon ultimate settlement. The Company records liabilities for positions that have been taken but do not meet the more-likely-than-not recognition threshold. The Company adjusts the liabilities for unrecognized tax benefits in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a change to the estimated liabilities. The Company includes interest and penalties associated with unrecognized tax benefits as income tax expense and as a component of the recorded balance of unrecognized tax benefits, which is reflected in other liabilities or net of related tax loss carryforwards in the Consolidated Balance Sheets. Interest and penalties associated with unrecognized tax benefits were not material to the Company's consolidated financial statements for the periods presented.
The following is a rollforward of unrecognized tax benefits for the periods presented:
Years Ended December 31,
(in thousands)202120202019
Beginning balance$65,990 $65,117 $80,201 
Gross increase related to prior year tax positions373 1,348 5,666 
Gross decrease related to prior year tax positions— (732)(5,237)
Increases related to current year tax positions— — 1,000 
Increases related to acquisitions— 400 1,145 
Decreases related to dispositions— — (14,043)
Decrease related to settlements with taxing authorities— — (3,717)
Decreases related to lapse of statute of limitation(142)(143)(460)
Other changes not impacting the statement of operations— — 562 
Ending balance$66,221 $65,990 $65,117 
The Company’s unrecognized tax benefits relate to tax years that are subject to audit by the taxing authorities in the U.S. federal, state and local, and foreign jurisdictions. Based on the current tax statutes and status of its income tax audits, the Company does not expect any significant portion of its unrecognized tax benefits to be resolved in the next twelve months.
The Company files a consolidated return for its U.S. entities and separate returns for each Canadian entity. The income tax returns are subject to audit by the taxing authorities. These audits may culminate in proposed assessments which may ultimately result in a change to the estimated income taxes. The following is a summary of open tax years by jurisdiction:
JurisdictionYears
Open to Audit
Federal
2018 - 2020
State
2015 - 2020
Canada
2017 - 2020
COVID-19 Pandemic
In response to the COVID-19 Pandemic, the American Rescue Plan Act of 2021 (the “2021 Rescue Act”) and the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) were signed into law in March 2021 and March 2020, respectively, and included significant corporate income tax and payroll tax provisions intended to provide economic relief to address the impact of the COVID-19 Pandemic.
During 2020, the Company recognized favorable cash flow impacts related to the accelerated refund of previously generated alternative minimum tax credits, as well as from the deferral of remittance of certain 2020 payroll taxes, of which 50% of the deferred amount was paid during the fourth quarter of 2021, and the remainder is due by the end of 2022. The Company also recognized a benefit from an increase in the interest expense limitation from 30% to 50% for tax years 2019 and 2020.