Cheniere Energy, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2016

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

Income tax benefit (provision) included in our reported net loss consisted of the following (in thousands):



	Year Ended December 31,
	2016			2015			2014
Current:
Federal	$	—		$	—		$	—
State	—			—			—
Foreign	(54		)	(1,970		)	(4,143		)
Total current	(54		)	(1,970		)	(4,143		)

Deferred:
Federal	—			—			—
State	—			—			—
Foreign	(1,854		)	2,066			—
Total deferred	(1,854		)	2,066			—
Total income tax benefit (provision)	$	(1,908	)	$	96		$	(4,143	)

The reconciliation of the federal statutory income tax rate to our effective income tax rate is as follows:



	Year Ended December 31,
	2016		2015		2014
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
Non-controlling interest	(2.1	)%	(2.3	)%	(4.8	)%
State tax rate	1.8	%	1.9	%	4.3	%
Uncertain tax position	—	%	—	%	(12.5	)%
Net impact of non-U.S. taxes	(1.2	)%	(1.3	)%	(2.0	)%
Valuation allowance	(27.5	)%	(30.1	)%	(19.8	)%
Nondeductible interest expense	(6.6	)%	(2.6	)%	—	%
Other	0.3	%	(0.5	)%	(0.6	)%
Effective tax rate as reported	(0.3	)%	0.1	%	(0.4	)%

Significant components of our deferred tax assets and liabilities at December 31, 2016 and 2015 are as follows (in thousands):



	December 31,
	2016			2015
Deferred tax assets
Net operating loss carryforwards and credits
Federal and foreign	$	1,060,026		$	862,218
State	183,153			166,321
Book deferred gain	77,182			77,182
Share-based compensation expense	52,727			71,693
Property, plant and equipment	—			12,957
Derivative instruments	46,754			54,052
Long-term debt	17,676			8,725
Other	13,511			5,641
Less: valuation allowance	(1,251,959		)	(1,070,309		)
Total deferred tax assets	199,070			188,480

Deferred tax liabilities
Investment in limited partnership	(76,265		)	(57,466		)
Convertible debt	(118,341		)	(128,948		)
Property, plant and equipment	(4,464		)	—
Total deferred tax liabilities	(199,070		)	(186,414		)

Net deferred tax assets	$	—		$	2,066

The federal deferred tax assets presented above do not include the state tax benefits as our net deferred state tax assets are offset with a full valuation allowance.

At December 31, 2016, we had federal and state net operating loss (“NOL”) carryforwards of approximately $3.8 billion and $2.3 billion, respectively. These NOL carryforwards will expire between 2025 and 2036.

Due to our history of NOLs, current year NOLs and significant risk factors related to our ability to generate taxable income, we have established a valuation allowance to offset our deferred tax assets as of December 31, 2016 and 2015. We will continue to evaluate our ability to release the valuation allowance in the future. The increase in the valuation allowance was $181.7 million for the year ended December 31, 2016. Deferred tax assets and deferred tax liabilities are classified as non-current in our Consolidated Balance Sheets.

Changes in the balance of unrecognized tax benefits are as follows (in thousands):



	Year Ended December 31,
	2016			2015
Balance at beginning of the year	$	103,640		$	104,491
Additions based on tax positions related to current year	—			—
Additions for tax positions of prior years	—			—
Reductions for tax positions of prior years	(728		)	(851		)
Settlements	—			—
Balance at end of the year	$	102,912		$	103,640

Our effective tax rate will not be affected if the unrecognized federal income tax benefits provided above were recognized. Currently, we do not recognize any accrued liabilities, interest and penalties associated with the unrecognized tax benefits provided above in our Consolidated Statements of Operations or our Consolidated Balance Sheets. We recognize interest and penalties related to income tax matters as part of income tax expense.

We experienced an ownership change within the provisions of Internal Revenue Code (“IRC”) Section 382 in 2008, 2010 and 2012. An analysis of the annual limitation on the utilization of our NOLs was performed in accordance with IRC Section 382. It was determined that IRC Section 382 will not limit the use of our NOLs in full over the carryover period. We will continue to monitor trading activity in our shares which may cause an additional ownership change which could ultimately affect our ability to fully utilize our existing NOL carryforwards.

We are subject to tax in the U.S. and various state and foreign jurisdictions. We remain subject to periodic audits and reviews by taxing authorities; however, we do not expect these audits will have a material effect on our tax provision. The federal tax returns for the years after 2012 remain open for examination. Tax authorities may have the ability to review and adjust net operating loss or tax credit carryforwards that were generated prior to these periods if utilized in an open tax year.

Accounting for share-based compensation provides that when settlement of a share based award contributes to an NOL carryforward, neither the associated excess tax benefit nor the credit to additional paid-in capital (“APIC”) should be recorded until the share-based award deduction reduces income tax payable. Upon utilization of the loss in future periods, a benefit of $177.3 million will be reflected in APIC, or as income tax expense upon adoption of ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.