Income Taxes Income Taxes (Tables)

12 Months Ended

Dec. 31, 2018

Dec. 31, 2017

Schedule of Deferred Tax Assets and Liabilities [Table Text Block]



	December 31,
	2018		2017
	(in thousands)
Deferred tax assets:
Investment in partnership	$	22,601	$	—
Net operating loss carryforwards	5,949		981
	28,550		981
Less: valuation allowance	—		—
	$	28,550	$	981

Deferred tax liabilities:
Other	$	—	$	—
	$	—	$	—
Net deferred tax assets	$	28,550	$	981

Income Taxes

Income (loss) before income taxes for domestic and foreign operations is as follows:



	Years Ended December 31,
	2018			2017
	(in thousands)
Domestic	$	31,379		$	(8,386	)
Foreign	(118		)	(1,175		)
Total income (loss) before income taxes	$	31,261		$	(9,561	)

Components of income tax expense (benefit) consist of the following:



	Years Ended December 31,
	2018		2017
	(in thousands)
Current
Federal	$	—	$	—
State and local	—		—
Total current income tax expense (benefit)	$	—	$	—

Deferred
Federal	$	1,939	$	(978	)
State and local	4		(3		)
Total deferred income tax expense (benefit)	$	1,943	$	(981	)
Total income tax expense (benefit)	$	1,943	$	(981	)

Switch’s operations are primarily conducted in the state of Nevada, which does not have a corporate level income tax. A reconciliation of the U.S. statutory tax rate to the effective income tax rate is presented below:



	Years Ended December 31,
	2018		2017
U.S statutory tax rate	21.0	%	35.0	%
Rate effect from pass-through entity	(17.0	)	(34.8	)
Partnership outside basis difference	—		26.2
Rate change impact due to tax reform	—		(7.0	)
Other	2.2		(9.2	)
Effective income tax rate	6.2	%	10.2	%

During the year ended December 31, 2018, Switch, Inc.’s effective income tax rate was impacted primarily by the recognition of the deferred tax asset associated with the outside basis difference on Switch, Inc.’s investment in Switch, Ltd. In addition, the TCJA enacted in December 2017 reduced the U.S. federal corporate rate from a top marginal rate of 35% to a flat rate of 21%, limited the NOL carryforward deduction to 80% of current year taxable income, and eliminated NOL carrybacks, among other provisions. The Company calculated its best estimate of the impact of the TCJA based on current interpretations and understanding of the TCJA and recorded a provisional tax benefit of $0.7 million for the year ended December 31, 2017 in accordance with SAB 118. During the fourth quarter of 2018, the Company finalized its calculations related to the impacts of the TCJA with no adjustment to the Company’s previously recorded provisional tax benefit.

As Switch, Inc.’s IPO closed on October 11, 2017, and Switch, Inc. had no business transactions or activities prior to the IPO, with the exception of the issuance of one share at par value of $0.001 per share, which was canceled as of the closing date of the IPO, no amounts related to the provision for income taxes were incurred for the period from January 1, 2017 to October 10, 2017 and the year ended December 31, 2016.

Significant components of Switch, Inc.’s deferred tax assets and liabilities were as follows as of:



	December 31,
	2018		2017
	(in thousands)
Deferred tax assets:
Investment in partnership	$	22,601	$	—
Net operating loss carryforwards	5,949		981
	28,550		981
Less: valuation allowance	—		—
	$	28,550	$	981

Deferred tax liabilities:
Other	$	—	$	—
	$	—	$	—
Net deferred tax assets	$	28,550	$	981

As of December 31, 2018, Switch had a U.S. federal income tax net operating loss (“NOL”) carryforward of $28.3 million available to offset future taxable income, of which $1.9 million will expire in 2037 and $26.4 million will be carried forward indefinitely under the TCJA. Switch also has state and local NOL carryforwards of $1.1 million, of which $0.1 million will expire in 2028, $0.2 million in 2037, and $0.8 million in 2038. Management believes on a more likely than not basis that Switch will be able to realize the tax benefit of its NOL carryforwards.

As a result of the increase in Switch, Inc.’s ownership of Switch, Ltd. following the exchanges of noncontrolling interest for Class A common stock during the year ended December 31, 2018 described in Note 13 “Noncontrolling Interest,” the Company recorded a deferred tax asset related to the increase in the tax basis of Switch, Inc.’s ownership interest in Switch, Ltd. of $22.6 million as of December 31, 2018.

As of December 31, 2018, the Company concluded, based on the weight of all available positive and negative evidence, that all of its deferred tax assets are more likely than not to be realized.

The Company did not record any penalties or interest related to income taxes or uncertain tax positions, as management has concluded that no such positions exist, on the consolidated balance sheets as of December 31, 2018 and 2017. In addition, the Company did not record any penalties or interest related to income taxes on the consolidated statements of operations and comprehensive income (loss) during the years ended December 31, 2018, 2017, and 2016.

The Company is subject to examination for tax years beginning with the year ended December 31, 2017. The Company is not currently subject to income tax audits in any U.S. or state jurisdictions for any tax year.

Tax Receivable Agreement

Pursuant to the Company’s election under Section 754 of the Code, the Company expects to obtain an increase in the tax basis of its ownership interest in the net assets of Switch, Ltd. following the redemption or exchange of noncontrolling interest for Class A common stock and other qualifying transactions. The Company intends to treat any redemptions and exchanges of noncontrolling interest as direct purchases of noncontrolling interest for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that the Company would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

As of December 31, 2018, the Company has recorded a liability of $52.5 million under the TRA, which provides for the payment of 85% of the amount of the tax benefits, if any, that Switch, Inc. is deemed to realize as a result of increases in the tax basis of its ownership in Switch, Ltd. related to exchanges of noncontrolling interest for Class A common stock. See Note 13 “Noncontrolling Interest” for additional information.

Schedule of Income before Income Tax, Domestic and Foreign [Table Text Block]



	Years Ended December 31,
	2018			2017
	(in thousands)
Domestic	$	31,379		$	(8,386	)
Foreign	(118		)	(1,175		)
Total income (loss) before income taxes	$	31,261		$	(9,561	)

-9561000

Schedule of Components of Income Tax Expense (Benefit) [Table Text Block]



	Years Ended December 31,
	2018		2017
	(in thousands)
Current
Federal	$	—	$	—
State and local	—		—
Total current income tax expense (benefit)	$	—	$	—

Deferred
Federal	$	1,939	$	(978	)
State and local	4		(3		)
Total deferred income tax expense (benefit)	$	1,943	$	(981	)
Total income tax expense (benefit)	$	1,943	$	(981	)

Schedule of Effective Income Tax Rate Reconciliation [Table Text Block]



	Years Ended December 31,
	2018		2017
U.S statutory tax rate	21.0	%	35.0	%
Rate effect from pass-through entity	(17.0	)	(34.8	)
Partnership outside basis difference	—		26.2
Rate change impact due to tax reform	—		(7.0	)
Other	2.2		(9.2	)
Effective income tax rate	6.2	%	10.2	%