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, 2018

INCOME TAXES

Components of income (loss) before income taxes and non-controlling interest on our Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016 are as follows (in millions):



	Year Ended December 31,
	2018		2017		2016
U.S.	$	997	$	30	$	(611	)
International	230		536		(52		)
Total income (loss) before income taxes and non-controlling interest	$	1,227	$	566	$	(663	)

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



	Year Ended December 31,
	2018			2017			2016
Current:
Federal	$	—		$	—		$	—
State	2			—			—
Foreign	30			6			—
Total current	32			6			—

Deferred:
Federal	—			—			—
State	—			—			—
Foreign	(5		)	(3		)	2
Total deferred	(5		)	(3		)	2
Total income tax provision	$	27		$	3		$	2

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



	Year Ended December 31,
	2018		2017		2016
U.S. federal statutory tax rate	21.0	%	35.0	%	35.0	%
Non-controlling interest	(11.4	)%	2.9	%	(2.1	)%
State tax rate	(0.4	)%	(0.2	)%	1.8	%
U.S. tax reform rate change	—	%	71.4	%	—	%
Share-based compensation	(0.5	)%	(6.2	)%	—	%
Nondeductible interest expense	2.6	%	8.5	%	(6.6	)%
Foreign earnings taxed in the U.S.	1.4	%	—	%	—	%
Foreign rate differential	(1.1	)%	(0.7	)%	(1.2	)%
Other	0.4	%	(0.5	)%	0.3	%
Valuation allowance	(9.8	)%	(109.7	)%	(27.5	)%
Effective tax rate	2.2	%	0.5	%	(0.3	)%

Significant components of our deferred tax assets and liabilities at December 31, 2018 and 2017 are as follows (millions):



	December 31,
	2018			2017
Deferred tax assets
Net operating loss carryforwards and credits
Federal	$	848		$	936
Foreign	7			6
State	189			184
Federal and state tax credits	28			22
Disallowed business interest expense carryforward	19			—
Deferred gain	46			46
Other	50			77
Less: valuation allowance	(686		)	(806		)
Total deferred tax assets	501			465

Deferred tax liabilities
Investment in limited partnership	(375		)	(391		)
Convertible debt	(59		)	(65		)
Property, plant and equipment	(48		)	(6		)
Other	(11		)	—
Total deferred tax liabilities	(493		)	(462		)

Net deferred tax assets	$	8		$	3

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, 2018, we had federal and state net operating loss (“NOL”) carryforwards of approximately $4.3 billion and $2.4 billion, respectively. These NOL carryforwards will expire between 2021 and 2038. At December 31, 2018, we had federal and state tax credit carryforwards of $25 million and $3 million, respectively. The federal tax credit carryforwards include investment tax credit carryforwards of $14 million related to capital equipment placed in service by Cheniere Partners. We account for our federal investment tax credits under the flow-through method. The federal and state tax credit carryforwards will expire between 2027 and 2037.

Under the Tax Cuts and Jobs Act, for taxable years beginning after December 31, 2017, our deduction for business interest is limited to the sum of our business interest income plus 30% of our adjusted taxable income. For the purposes of this limitation, adjusted taxable income is computed without regard to any business interest expense or business interest income, and in the case of taxable years beginning before January 1, 2022, any deduction allowable for depreciation, amortization, or depletion. However, recently issued proposed Treasury Regulations provide that depreciation, amortization, or depletion expense that is capitalized to inventory, is not treated as depreciation, amortization, or depletion deduction for purposes of computing adjusted taxable income. Although the regulations are not final, we have elected to adopt the proposed Treasury Regulations for the tax year ended December 31, 2018. As a result, at December 31, 2018, we had disallowed business interest expense of $92 million that can be carried forward indefinitely.

Due to historical losses and other available evidence related to our ability to generate taxable income, we have maintained a valuation allowance against our net federal and state deferred tax assets as of December 31, 2018 and 2017. We will continue to evaluate the realizability of our deferred tax assets in the future. Release of the U.K. NOL valuation allowance resulted in a $5 million deferred tax benefit for the tax year ended December 31, 2018. The decrease in the valuation allowance was $120 million for the year ended December 31, 2018.

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



	Year Ended December 31,
	2018			2017
Balance at beginning of the year	$	62		$	103
Additions based on tax positions related to current year	—			—
Additions for tax positions of prior years	—			—
Reductions for tax positions of prior years	(1		)	(1		)
Settlements	—			—
U.S. tax reform rate change	—			(40		)
Balance at end of the year	$	61		$	62

Any settlement of uncertain tax positions would result in an adjustment to our NOL carryforward which, if utilized, will reduce taxable income in a future year. As a result, the tabular rollforward reflects the unrecognized tax benefits at the reduced corporate income tax rate of 21%.

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 because any settlement of uncertain tax positions would result in an adjustment to our NOL carryforward. 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 U.S. 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 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 did not have any open income tax audits as of December 31, 2018. Federal and state tax returns for the years after 2014 remain open for examination. Tax authorities may have the ability to review and adjust carryover attributes that were generated prior to these periods if utilized in an open tax year.