Income Taxes

12 Months Ended

Dec. 31, 2016

Income Taxes

6.  Income Taxes

The significant components of the income tax provision (benefit) were (in millions):

	Year Ended December 31,
	2016		2015			2014
Current income tax provision (benefit):
Federal	$	—	$	—		$	(25	)
State and Local		12		20			9
Current income tax provision (benefit)		12		20			(16	)
Deferred income tax provision (benefit):
Federal		1,508		(2,884	)		345
State and Local		103		(130	)		1
Deferred income tax provision (benefit)		1,611		(3,014	)		346
Total income tax provision (benefit)	$	1,623	$	(2,994	)	$	330

The income tax provision (benefit) differed from amounts computed at the statutory federal income tax rate as follows (in millions):

	Year Ended December 31,
	2016		2015			2014
Statutory income tax provision	$	1,505	$	1,616		$	1,123
State income tax provision, net of federal tax effect		63		72			75
Book expenses (benefits) not deductible for tax purposes		34		57			(1	)
Bankruptcy administration expenses		1		3			95
Alternative minimum tax (AMT) credit refund		—		—			(24	)
Change in valuation allowance		7		(4,742	)		(1,323	)
Income tax provision resulting from OCI allocation		—		—			330
Other, net		13		—			55
Income tax provision (benefit)	$	1,623	$	(2,994	)	$	330

We provide a valuation allowance for our deferred tax assets, which include our NOLs, when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. We consider all available positive and negative evidence and make certain assumptions in evaluating the realizability of our deferred tax assets. Many factors are considered that impact our projections of future profitability, including risks associated with remaining Merger integration activities as well as other conditions which are beyond our control, such as the health of the economy, the level and volatility of fuel prices and travel demand.

In connection with the preparation of our financial statements at the end of 2015, we determined that after considering all positive and negative evidence, including the completion of certain critical Merger integration milestones as well as our financial performance, it was more likely than not that substantially all of our deferred income tax assets, which include our NOLs, would be realized. Accordingly, we reversed $3.0 billion of the valuation allowance, which resulted in a special non-cash tax benefit recorded in the consolidated statement of operations.

For the year ended December 31, 2014, we recorded a $330 million tax provision. During 2014, we sold our portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. In connection with this sale, we recorded a special non-cash tax provision of $330 million in the second quarter of 2014 that reversed the non-cash tax provision which was recorded in OCI, a subset of stockholders’ equity, principally in 2009. This provision represents the tax effect associated with gains recorded in OCI principally in 2009 due to a net increase in the fair value of our fuel hedging contracts. In accordance with GAAP, we retained the $330 million tax provision in OCI until the last contract was settled or terminated.

In addition to the changes in the valuation allowance from operations described in the table above, the valuation allowance was also impacted by the changes in the components of accumulated other comprehensive income (loss), described in Note 10. The total increase in the valuation allowance was $7 million in 2016. The total decrease in the valuation allowance was $4.8 billion and $197 million in 2015 and 2014, respectively.

The components of our deferred tax assets and liabilities were (in millions):

	December 31,
	2016			2015
Deferred tax assets:
Operating loss carryforwards	$	3,853		$	2,558
Pensions		2,610			2,436
Loyalty program liability		485			590
Alternative minimum tax credit carryforwards		344			346
Postretirement benefits other than pensions		291			340
Rent expense		256			134
Gains from lease transactions		213			262
Reorganization items		53			57
Other		972			1,200
Total deferred tax assets		9,077			7,923
Valuation allowance		(29	)		(22	)
Net deferred tax assets		9,048			7,901
Deferred tax liabilities:
Accelerated depreciation and amortization		(7,216	)		(5,158	)
Other		(345	)		(266	)
Total deferred tax liabilities		(7,561	)		(5,424	)
Net deferred tax asset	$	1,487		$	2,477

At December 31, 2016, we had approximately $10.5 billion of gross NOL Carryforwards to reduce future federal taxable income, substantially all of which are expected to be available for use in 2017. The federal NOL Carryforwards will expire beginning in 2022 if unused. We also had approximately $3.7 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2016, which will expire in years 2017 through 2036 if unused. Our ability to deduct our NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred. Substantially all of our remaining federal NOL Carryforwards (attributable to US Airways Group) are subject to limitation under Section 382; however, our ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation. We elected to be covered by certain special rules for federal income tax purposes that permitted approximately $9.0 billion (with $8.9 billion of unlimited NOL still remaining at December 31, 2016) of our federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382. Similar limitations may apply for state income tax purposes. Our ability to utilize any new NOL Carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another future ownership change occurs. Under the Section 382 limitation, cumulative stock ownership changes among material stockholders exceeding 50% during a rolling three-year period can potentially limit a company’s future use of NOLs and tax credits. See Part I, Item 1A. Risk Factors – “Our ability to utilize our NOL Carryforwards may be limited” for unaudited additional discussion of this risk.

At December 31, 2016, we had an AMT credit carryforward of approximately $339 million available for federal income tax purposes, which is available for an indefinite period.

In 2016, we recorded an income tax provision with an effective rate of approximately 38%, which was substantially non-cash as we utilized our NOLs described above. Substantially all of our income before income taxes is attributable to the United States.

We file our tax returns as prescribed by the tax laws of the jurisdictions in which we operate. Our 2013 through 2015 tax years are still subject to examination by the Internal Revenue Service. Various state and foreign jurisdiction tax years remain open to examination and we are under examination, in administrative appeals, or engaged in tax litigation in certain jurisdictions. We believe that the effect of any assessments will not be material to our consolidated financial statements.

The amount of, and changes to, our uncertain tax positions were not material in any of the years presented. We accrue interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively.

American Airlines, Inc. [Member]

Income Taxes

4.  Income Taxes

The significant components of the income tax provision (benefit) were (in millions):

	Year Ended December 31,
	2016		2015			2014
Current income tax provision (benefit):
Federal	$	—	$	—		$	(30	)
State and Local		10		15			6
Current income tax provision (benefit)		10		15			(24	)
Deferred income tax provision (benefit):
Federal		1,559		(3,407	)		342
State and Local		93		(60	)		2
Deferred income tax provision (benefit)		1,652		(3,467	)		344
Total income tax provision (benefit)	$	1,662	$	(3,452	)	$	320

The income tax provision (benefit) differed from amounts computed at the statutory federal income tax rate as follows (in millions):

	Year Ended December 31,
	2016			2015			2014
Statutory income tax provision	$	1,555		$	1,635		$	1,144
State income tax provision, net of federal tax effect		67			71			81
Book expenses not deductible for tax purposes		32			55			4
Bankruptcy administration expenses		1			3			86
Alternative minimum tax (AMT) credit refund		—			—			(29	)
Change in valuation allowance		(1	)		(5,216	)		(1,285	)
Income tax provision resulting from OCI allocation		—			—			328
Other, net		8			—			(9	)
Income tax provision (benefit)	$	1,662		$	(3,452	)	$	320

American provides a valuation allowance for its deferred tax assets, which include the NOLs, when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. American considers all available positive and negative evidence and makes certain assumptions in evaluating the realizability of its deferred tax assets. Many factors are considered that impact American’s projections of future profitability, including risks associated with remaining Merger integration activities as well as other conditions which are beyond its control, such as the health of the economy, the level and volatility of fuel prices and travel demand.

In connection with the preparation of American’s financial statements at the end of 2015, American determined that after considering all positive and negative evidence, including the completion of certain critical Merger integration milestones as well as its financial performance, it was more likely than not that substantially all of its deferred income tax assets, which include its NOLs, would be realized. Accordingly, American reversed $3.5 billion of the valuation allowance, which resulted in a special non-cash tax benefit recorded in the consolidated statement of operations.

For the year ended December 31, 2014, American recorded a $320 million tax provision. During 2014, American sold its portfolio of fuel hedging contracts that were scheduled to settle on or after June 30, 2014. In connection with this sale, American recorded a special non-cash tax provision of $328 million in the second quarter of 2014 that reversed the non-cash tax provision which was recorded in OCI, a subset of stockholder’s equity, principally in 2009. This provision represents the tax effect associated with gains recorded in OCI principally in 2009 due to a net increase in the fair value of American’s fuel hedging contracts. In accordance with GAAP, American retained the $328 million tax provision in OCI until the last contract was settled or terminated.

In addition to the changes in the valuation allowance from operations described in the table above, the valuation allowance was also impacted by the changes in the components of accumulated other comprehensive income (loss), described in Note 8. The total decrease in the valuation allowance was $1 million, $5.2 billion and $525 million in 2016, 2015 and 2014, respectively.

The components of American’s deferred tax assets and liabilities were (in millions):

	December 31,
	2016			2015
Deferred tax assets:
Operating loss carryforwards	$	4,087		$	2,818
Pensions		2,595			2,420
Loyalty program liability		485			590
Alternative minimum tax credit carryforwards		456			458
Postretirement benefits other than pensions		291			340
Rent expense		256			134
Gains from lease transactions		213			261
Reorganization items		53			57
Other		911			1,123
Total deferred tax assets		9,347			8,201
Valuation allowance		(13	)		(14	)
Net deferred tax assets		9,334			8,187
Deferred tax liabilities:
Accelerated depreciation and amortization		(7,101	)		(5,011	)
Other		(335	)		(244	)
Total deferred tax liabilities		(7,436	)		(5,255	)
Net deferred tax asset	$	1,898		$	2,932

At December 31, 2016, American had approximately $11.3 billion of gross NOL Carryforwards to reduce future federal taxable income, substantially all of which are expected to be available for use in 2017. American is a member of AAG’s consolidated federal and certain state income tax returns. The amount of federal NOL Carryforwards available in those returns is $10.5 billion, substantially all of which is expected to be available for use in 2017. The federal NOL Carryforwards will expire beginning in 2022 if unused. American also had approximately $3.4 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2016, which will expire in years 2017 through 2034 if unused. American’s ability to deduct its NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred. Substantially all of American’s remaining federal NOL Carryforwards (attributable to US Airways Group) are subject to limitation under Section 382; however, American’s ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation. American elected to be covered by certain special rules for federal income tax purposes that permitted approximately $9.5 billion (with $9.3 billion of unlimited NOL still remaining at December 31, 2016) of its federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382. Similar limitations may apply for state income tax purposes. American’s ability to utilize any new NOL Carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another future ownership change occurs. Under the Section 382 limitation, cumulative stock ownership changes among material stockholders exceeding 50% during a rolling three-year period can potentially limit a company’s future use of NOLs and tax credits. See Part I, Item 1A. Risk Factors – “Our ability to utilize our NOL Carryforwards may be limited” for unaudited additional discussion of this risk.

At December 31, 2016, American had an AMT credit carryforward of approximately $452 million available for federal income tax purposes, which is available for an indefinite period.

In 2016, American recorded an income tax provision with an effective rate of approximately 37%, which was substantially non-cash as American utilized the NOLs described above. Substantially all of American’s income before income taxes is attributable to the United States.

American files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. American’s 2013 through 2015 tax years are still subject to examination by the Internal Revenue Service. Various state and foreign jurisdiction tax years remain open to examination and American is under examination, in administrative appeals, or engaged in tax litigation in certain jurisdictions. American believes that the effect of any assessments will not be material to its consolidated financial statements.

The amount of, and changes to, American’s uncertain tax positions were not material in any of the years presented. American accrues interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively.