Salem Media Group, 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, 2020

NOTE 14. INCOME TAXES

We recognize deferred tax assets and liabilities for future tax consequences attributable to differences between our consolidated financial statement carrying amount of assets and liabilities and their respective tax bases. We measure these deferred tax assets and liabilities using enacted tax rates expected to apply in the years in which these temporary differences are expected to reverse. We recognize the effect on deferred tax assets and liabilities resulting from a change in tax rates in income in the period that includes the date of the change.

For financial reporting purposes, we recorded a valuation allowance of $28.4 million as of December 31, 2020 to offset $28.4 million of the deferred tax assets related to the federal net operating loss carryforwards, and $19.7 million of the deferred tax assets related to state net operating loss carryforwards of $15.7

million and other financial statement accrual assets of $4.0 million, for a total valuation allowance of

$48.1

million for the year ended December 31, 2020. This balance represents an increase of $35.1 million during the year, from $13.0 million valuation allowance as of December 31, 2019.

The consolidated provision for income taxes is as follows:


	Year Ended December 31,
	2019			2020
	(Dollars in thousands)
Current:
Federal	$	—		$	—
State		471			169

		471			169
Deferred:
Federal		(1,445	)		17 , 283
State		4,951			12,822

		3,506			30,105

Provision for income taxes	$	3,977		$	30,274

Consolidated deferred tax assets and liabilities consist of the following:


	As of December 31,
	2019			2020
	(Dollars in thousands)
Deferred tax assets:
Financial statement accruals not currently deductible	$	4,652		$	6,580
Net operating loss, AMT credit and other carryforwards		45,521			44,154
State taxes		70			35
Operating lease liabilities under ASC 842		16,618			14,909
Other		6,847			11,222

Total deferred tax assets		73,708			76,900
Valuation allowance for deferred tax assets		(12,977	)		(48,073	)

Net deferred tax assets	$	60,731		$	28,827

Deferred tax liabilities:
Excess of net book value of property and equipment and software for financial reporting purposes over tax basis	$	2,391		$	1,065
Excess of net book value of intangible assets for financial reporting purposes over tax basis		82,939			84,163
Operating lease right-of-use assets under ASC 842		14,179			12,482
Other		—			—

Total deferred tax liabilities		99,509			97,710

Net deferred tax liabilities	$	(38,778	)	$	(68,883	)

The following table reconciles the above net deferred tax liabilities to the financial statements:


	As of December 31,
	2019			2020
	(Dollars in thousands)
Deferred income tax asset per balance sheet	$	—		$	—
Deferred income tax liability per balance sheet		(38,778	)		(68,883	)

	$	(38,778	)	$	(68,883	)

A reconciliation of the statutory federal income tax rate to the provision for income tax is as follows:


	Year Ended December 31,
	2019			2020
	(Dollars in thousands)
Statutory federal income tax (statutory tax rate)	$	(5,045	)	$	(4,995	)
Effect of state taxes, net of federal		3,714			10,468
Permanent items		329			379
State rate change		668			63
Valuation allowance		4,105			24,302
Tax Cuts and Jobs Act of 2017		—
Other, net		206			57

Provision for income taxes	$	3,977		$	30,274

At December 31, 2020, we had net operating loss carryforwards for federal income tax purposes of approximately $135.3 million that expire in years 2021 through 2038 and for state income tax purposes of approximately $610.8 million that expire in years 2021 through 2040. For financial reporting purposes at December 31, 2019, we had a valuation allowance of $8.9 million, net of federal benefit, to offset the deferred tax assets related to the state net operating loss carryforwards along with a valuation allowance of $4.1 million to offset the deferred tax assets related to the federal net operating loss carryforwards. As a result of our adjusted cumulative three-year

pre-tax

book loss as of December 31, 2020, we performed an assessment of positive and negative evidence with respect to the realization of our net deferred tax assets. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, the availability of carryforwards and estimates of projected future taxable income. The economic uncertainty from the

COVID-19

pandemic provided additional negative evidence that outweighed positive evidence resulting in our conclusion that additional deferred tax assets of $35.1 million related to federal and state net operating loss carryforwards are more likely than not to be not realized. As such, an additional valuation allowance of $35.1 million was recorded, for a total valuation allowance of $48.1 million as of the year ended December 31, 2020.

The amortization of our indefinite-lived intangible assets for tax purposes, but not for book purposes, creates deferred tax liabilities. A reversal of deferred tax liabilities may occur when indefinite-lived intangibles: (1) become impaired; or (2) are sold, which would typically only occur in connection with the sale of the assets of a station or groups of stations or the entire company in a taxable transaction. Due to the amortization for tax purposes and not book purposes of our indefinite-lived intangible assets, we expect to continue to generate deferred tax liabilities in future periods exclusive of any impairment losses in future periods. These deferred tax liabilities and net operating loss carryforwards result in differences between our provision for income tax and cash paid for taxes.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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