Apple 2006 Annual Report Download - page 101

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7—Income Taxes (Continued)
As of September 30, 2006, the Company has state and foreign tax loss and state credit carryforwards, the tax effect of which is $55 million.
Certain of those carryforwards, the tax effect of which is $12 million, expire between 2016 a nd 2019. A portion of these carryforwards was
acquired from the Company’s previous acquisitions, the utilization of which is subject to certain limitations imposed by the Internal Revenue
Code. The remaining benefits from tax losses and credits do not expire. As of September 30, 2006 and September 24, 2005, a valuation
allowance of $5 million was recorded against the deferred tax asset for the benefits of state operating losses that may not be realized.
Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax
planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax
assets.
A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (35% in 2006,
2005, and 2004) to income before provision for income taxes, is as follows (in millions):
(1)
See Note 2, “Restatement of Consolidated Financial Statements.”
The Company’
s income taxes payable has been reduced by the tax benefits from employee stock options. The Company receives an income tax
benefit calculated as the difference between the fair market value of the stock issued at the time of the exercise and the option price, tax
effected. The net tax benefits from employee stock option transactions were $419 million, $428 million (as restated(1)), and $83 million (as
restated(1)) in 2006, 2005, and 2004, respectively, and were reflected as an increase to common stock in the consolidated statements of
shareholders’ equity.
100
2006
2005
2004
As Restated (1)
As Restated (1)
Computed expected tax
$
987
$
633
$
129
State taxes, net of federal effect
86
(19
)
(5
)
Indefinitely invested earnings of foreign subsidiaries
(224
)
(98
)
(31
)
Nondeductible executive compensation
11
14
12
Research and development credit, net
(12
)
(26
)
(5
)
Other items
(19
)
(24
)
4
Provision for income taxes
$
829
$
480
$
104
Effective tax rate
29
%
27
%
28
%