Income Taxes

12 Months Ended

Dec. 31, 2019

We are subject to federal and state income taxes in the United States and federal and provincial income taxes in Canada.

We recorded an income tax benefit of $4.3 million for the year ended December 31, 2019. The majority of the income tax benefit is a result of federal and state interest expense limitation carryforwards that are indefinite-lived deferred tax assets that can be offset against our indefinite-lived deferred tax liabilities. In addition, net operating losses generated after December 31, 2017 also can be offset against the indefinite-lived deferred tax liabilities. These items contributed to a release of the valuation allowance and the recognition of an income tax benefit for the year ended December 31, 2019.

We recorded an income tax benefit of $31.1 million for the year ended December 31, 2018. Approximately $15.4 million of the income tax benefit resulted from the $69.0 million non-cash impairment we recorded during the year ended December 31, 2018 related to the indefinite-lived Trulia trade names and trademarks intangible asset. For additional information about the non-cash impairment, see Note 11 to our consolidated financial statements. The remaining portion of our income tax benefit was primarily the result of net operating losses generated after December 31, 2017 with an indefinite carryforward period due to the Tax Act. Thus, net operating losses for the year ended December 31, 2018 could be offset against our indefinite-lived deferred tax liabilities, which resulted in the release of our valuation allowance and the recognition of an income tax benefit for the year ended December 31, 2018.

During the year ended December 31, 2018, we completed our accounting for the income tax effects of deduction limitations on compensation under the Tax Act. The Internal Revenue Service provided further guidance regarding the written binding contracts requirement under the Tax Act, and we determined that certain of our executives’ compensation previously eligible to be deducted for tax purposes under Section 162(m) of the Internal Revenue Code were considered grandfathered. Therefore, we continued to deduct this compensation during the year ended December 31, 2018. Based on the clarification of these rules, we recorded a $5.9 million income tax benefit for the year ended December 31, 2018.

We recorded an income tax benefit of $89.6 million for the year ended December 31, 2017. Approximately $66.0 million of the income tax benefit related to a $174.0 million non-cash impairment we recorded during the year ended December 31, 2017 related to the indefinite-lived Trulia trade names and trademarks intangible asset. For additional information about the non-cash impairment, see Note 11 to our consolidated financial statements. The remaining $23.6 million of the income tax benefit primarily relates to our initial analysis of the impact of the rate decrease included in the Tax Act for the impact of the reduction in our net deferred tax liability related to our indefinite-lived intangible asset.

The following table summarizes the components of our income tax benefit for the periods presented (in thousands):


	Year Ended December 31,
	2019		2018		2017
Current income tax expense:
State	$	304	$	—	$	—
Foreign	99		161		—
Total current income tax expense	403		161		—
Deferred income tax benefit:
Federal	(1,631)		(28,502)		(84,238)
State	(2,856)		(2,441)		(5,348)
Foreign	(174)		(320)		—
Total deferred income tax benefit	(4,661)		(31,263)		(89,586)
Total income tax benefit	$	(4,258)	$	(31,102)	$	(89,586)

The following table presents a reconciliation of the federal statutory rate and our effective tax rate for the periods presented:


	Year Ended December 31,
	2019		2018		2017
Tax expense at federal statutory rate	(21.0)	%	(21.0)	%	(35.0)	%
State income taxes, net of federal tax benefit	(3.0)		(5.9)		(4.4)
Nondeductible expenses	—		—		0.8
Share-based compensation	(0.9)		(16.5)		(20.6)
Section 162(m) of Internal Revenue Code	1.1		1.0		—
Research and development credits	(7.2)		(8.4)		(6.3)
Meals and entertainment	1.1		1.8		—
Return to provision adjustments	0.5		(4.2)		—
Enactment of Tax Act	—		(1.9)		(13.1)
Other	(0.6)		0.4		2.2
Valuation allowance	28.6		34.0		27.7
Effective tax rate	(1.4)	%	(20.7)	%	(48.7)	%

Deferred federal, state and foreign income taxes reflect the net tax impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. The following table presents the significant components of our deferred tax assets and liabilities as of the dates presented (in thousands):


	December 31,
	2019		2018
Deferred tax assets:
Federal and state net operating loss carryforwards	$	273,171	$	259,629
Share-based compensation	75,704		55,280
Research and development credits	70,970		48,805
Lease liabilities	58,899		—
Other tax credits	910		910
Accruals and reserves	3,891		3,000
Inventory	17,819		3,574
Depreciation and amortization	2,032		—
Deferred rent	—		4,842
Other deferred tax assets	55,851		10,792
Total deferred tax assets	559,247		386,832
Deferred tax liabilities:
Website and software development costs	(20,681)		(14,685)
Goodwill	(1,951)		(598)
Intangible assets	(38,032)		(45,035)
Right of use assets	(52,486)		—
Discount on 2021 Notes, 2023 Notes, 2024 Notes and 2026 Notes not deductible for tax	(108,114)		(31,450)
Depreciation and amortization	—		(888)
Total deferred tax liabilities	(221,264)		(92,656)
Net deferred tax assets before valuation allowance	337,983		294,176
Less: valuation allowance	(346,877)		(307,599)
Net deferred tax liabilities	$	(8,894)	$	(13,423)

Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. We have provided a full valuation allowance against the net deferred tax assets as of December 31, 2019 and 2018 because, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized. The valuation allowance increased by $39.3 million and $32.8 million, respectively, during the years ended December 31, 2019 and 2018.

We have accumulated federal tax losses of approximately $1,137.6 million and $1,081.7 million, respectively, as of December 31, 2019 and 2018, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $34.3 million and $32.5 million (tax effected), respectively, as of December 31, 2019 and 2018. Additionally, we have net research and development credit carryforwards of $71.0 million and $48.8 million, respectively, as of December 31, 2019 and 2018, which are available to reduce future tax liabilities. The tax loss and research and development credit carryforwards begin to expire in 2025. Under Sections 382 and 383 of the Internal Revenue Code, if a corporation undergoes an ownership change, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income or income tax liability may be limited. In connection with our August 2013 public offering of our Class A Common stock, we experienced an ownership change that triggered Sections 382 and 383, which may limit our ability to utilize net operating loss and tax credit carryforwards. In connection with our February 2015 acquisition of Trulia, Trulia experienced an ownership change that triggered Section 382 and 383, which may limit Zillow Group’s ability to utilize Trulia’s net operating loss and tax credit carryforwards.

We are currently not under audit in any tax jurisdiction. Tax years from 2016 through 2019 are currently open for audit by federal and state taxing authorities.

Changes for unrecognized tax benefits for the periods presented are as follows (in thousands):


Balance at January 1, 2017	$	15,395
Gross increases—prior and current period tax positions	5,216
Gross increases—prior period tax positions	1,002
Balance at December 31, 2017	$	21,613
Gross increases—current period tax positions	6,421
Gross increases—prior period tax positions	591
Balance at December 31, 2018	$	28,625
Gross increases—current period tax positions	9,021
Gross increases—prior period tax positions	1,786
Balance at December 31, 2019	$	39,432

At December 31, 2019, the total amount of unrecognized tax benefits of $39.4 million is recorded as a reduction to our deferred tax asset. We do not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. Accrued interest and penalties related to unrecognized tax benefits are recorded as income tax expense and are zero.