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, 2019

NOTE 15. 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 $4.1 million as of December 31, 2019 to offset $28.6 million of the deferred tax assets related to the federal net operating loss carryforwards and $8.9 million of the deferred tax assets related to the state net operating loss carryforwards of $16.7 million. For financial reporting purposes, we recorded a valuation allowance of $13.0 million as of December 31, 2019 to offset the deferred tax assets related to the federal and state net operating loss carryforwards.

The consolidated provision for income taxes is as follows:


	Year Ended December 31,
	2018			2019
	(Dollars in thousands)
Current:
Federal	$	—		$	—
State		282			471

		282			471
Deferred:
Federal		(658	)		(1,445	)
State		2,849			4,951

		2,191			3,506

Provision for income taxes	$	2,473		$	3,977

Consolidated deferred tax assets and liabilities consist of the following:


	As of December 31,
	2018			2019
	(Dollars in thousands)
Deferred tax assets:
Financial statement accruals not currently deductible	$	6,822		$	4,652
Net operating loss, AMT credit and other carryforwards		50,067			45,521
State taxes		124			70
Operating lease liabilities under ASC 842		—			16,618
Other		3,969			6,847

Total deferred tax assets		60,982			73,708
Valuation allowance for deferred tax assets		(5,371	)		(12,977	)

Net deferred tax assets	$	55,611		$	60,731

Deferred tax liabilities:
Excess of net book value of property and equipment and software for financial reporting purposes over tax basis	$	2,763		$	2,391
Excess of net book value of intangible assets for financial reporting purposes over tax basis		88,112			82,939
Operating lease right-of-use assets under ASC 842		—			14,179
Other		8			—

Total deferred tax liabilities		90,883			99,509

Net deferred tax liabilitie s	$	(35,272	)	$	(38,778	)

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


	As of December 31,
	2018			2019
	(Dollars in thousands)
Deferred income tax asset per balance sheet	$	—		$	—
Deferred income tax liability per balance sheet		(35,272	)		(38,778	)

	$	(35,272	)	$	(38,778	)

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


	Year Ended December 31,
	2018			2019
	(Dollars in thousands)
Statutory federal income tax (statutory tax rate)	$	(151	)	$	(5,045	)
Effect of state taxes, net of federal		2,284			3,714
Permanent items		318			329
State rate change		248			668
Valuation allowance		(147	)		4,105
Tax Cuts and Jobs Act of 2017		—			—
Other, net		(79	)		206

Provision for income taxes	$	2,473		$	3,977

At December 31, 2019, we had net operating loss carryforwards for federal income tax purposes of approximately $136.1 million that expire in

years

2021 through 2038 and for state income tax purposes of approximately $793.7 million that expire in years 2020 through 2039. 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.

s a result of our adjusted cumulative three-year

pre-tax

book loss as of December 31, 2019, 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. Based on this assessment, we concluded that additional deferred tax assets of $7.6 million are

not

likely to be realized. As such, an additional valuation allowance of $7.6 million which is comprised of an additional $4.1 million for federal tax purposes and $3.5 million for state tax purposes bringing the total valuation allowance from $5.4 million to $13.0 million, was recorded during the annual period ended December 31, 2019.

The Company has adopted ASC 842 using the modified retrospective basis and has reflected the ROU asset with corresponding lease liability in the balance sheet footnote of the deferred tax balances above. The entry resulted in primarily a full balance sheet reclass between the ROU asset, lease liability and deferred rent accounts. The result of the change resulted in an immaterial impact to the operations of the consolidated financial statements.

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.