Question:
The following partial income statement and income tax note excerpts were taken from Sirius XM Inc.’s 2012 Form 10-K.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
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(Condensed from original)
For the Years Ended December 31,
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(in thousands, except per share data)
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2012
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2011
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2010
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Total revenue
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53.402.040
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43.014.524
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51816.992
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Total operating expenses
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2.530.015
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2.338.407
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2.351.578
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Income from operations
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872.025
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676.117
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465.414
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Total other expense
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(397.5571
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(234.922)
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1417,739)
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Income before income taxes
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474.468
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441.195
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47.675
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Income tax benefit (expense)
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2.998.234
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(14.234)
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(4.620)
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Net income
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53.472.702
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S 426.961
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5 43.055
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SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(16) Income Taxes (Excerpt)
The following table indicates the significant elements contributing to the difference between the federal tax (benefit) expense at the statutory rate and at our effective rate:
For the Years Ended December 31,
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2012
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2011
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2010
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Federal tax expense, at statutory rate
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S 166,064
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$ 154.418
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S 16,678
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State income tax expense, net of federal benefit
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16.606
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15.751
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1.620
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State income rate changes
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2,251
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3.851
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(2,252)
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Non-deductible expenses
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477
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457
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4,130
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Change in valuation allowance
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(3.195.651)
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(166.452)
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(21.749)
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Other, net
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12,019
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6,209
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6.193
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Income tax (benefit) expense
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S(2.998.234)
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S 14.234
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S 4.620
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During 2012, Sirius XM eliminated most of the valuation allowance it had built up, reducing it to $9.8 million at December 31, 2012. You are forecasting Sirius XM’s earnings for 2013. Your best estimate is that income before income taxes will be up 5% relative to 2012. You believe there will be no tax law changes in 2013. You also believe that in 2013 Sirius XM will eliminate the remainder of its valuation allowance and that its effective income tax rate will be unchanged except for the effects of the valuation allowance reversals in 2012 and 2013.
Required:
1. Forecast Sirius XM’s 2013 income before income taxes.
2. What was Sirius XM’s effective tax rate in 2012?
3. What would Sirius XM’s effective tax rate have been in 2012 if not for the valuation allowance reversal?
4. Assume you expect Sirius XM’s 2013 adjusted effective income tax rate to equal its 2012 adjusted effective tax rate where the adjusted effective income tax rate is the effective income tax rate excluding the impact of changes in the valuation allowance on the income tax provision. Forecast Sirius XM’s 2013 income tax expense, assuming it eliminates the remainder of its valuation allowance in that year.
5. Forecast Sirius XM’s 2013 net income.