Yahoo 2005 Annual Report Download - page 50

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income, net may fluctuate in future periods due to realized gains and losses on investments, impairments
of investments, changes in our average investment balances, and changes in interest and foreign exchange
rates.
Income Taxes. The provision for income taxes for 2005, 2004, and 2003 differs from the amount
computed by applying the federal statutory income tax rate due to state taxes and foreign losses for which
no tax benefit was provided. Additionally, in 2005, the provision for income taxes reflects a tax benefit
related to a subsidiary restructuring transaction. In 2004, the provision for income taxes reflects utilization
of previously unbenefited capital losses.
The following table summarizes the differences between our provision for income taxes and the amount
computed by applying the federal statutory income tax rate to income before income taxes (dollars in
thousands):
Years Ended December 31,
2003
(1) 2004 (1) 2005 (1)
Income tax at the United States federal
statutory rate of 35 percent $ 120,112 35% $ 414,758 35 % $ 890,254 35%
State income taxes, net of federal benefit 15,184 4% 49,920 4 % 113,685 4%
Change in valuation allowance 8,516 3% (40,612) (3 %) 16,342 1%
Capital loss on subsidiary restructuring
transaction — — — — (248,284) (10%)
Other 3,212 1% 13,900 1 % (4,181) —
Provision for income taxes $ 147,024 43% $ 437,966 37 % $ 767,816 30%
(1) Percent of income before income taxes, earnings in equity interests and minority interests.
Our effective tax rate for the year ended December 31, 2005 was 30 percent compared to 37 percent in the
prior year. The decreased rate was mainly attributable to the tax benefit related to a subsidiary
restructuring transaction. During 2005, as part of our ongoing efforts to streamline our operational
structure, we completed a taxable liquidation of a subsidiary we acquired several years ago. This
transaction gave rise to a capital loss for tax purposes, which offset a substantial portion of the gains from
sales of equity investments during the year. The resulting tax benefit was approximately $248 million. Our
effective tax rate for the year ended December 31, 2004 was 37 percent compared to 43 percent in 2003.
The decreased rate resulted primarily from a reduction of $41 million to the valuation allowance for 2004
compared to an increase of $9 million for 2003. The change in valuation allowance from 2003 to 2004 was
driven primarily by our ability to utilize previously realized capital losses against the capital gain realized
on the sale of an investment during 2004.
We currently expect our effective tax rate to increase in 2006 compared to 2005.
Earnings in Equity Interests. Earnings in equity interests were approximately $128 million for the year
ended December 31, 2005 compared to $95 million in 2004 and $48 million in 2003, as a result of our
investment in Yahoo! Japan. On October 23, 2005, we acquired approximately 46 percent of the
outstanding common stock of Alibaba, or approximately 40 percent on a fully diluted basis. We account
for this investment using the equity method of accounting. Following the acquisition date, we will record
our share of the results of Alibaba, and any related amortization expense relating to the acquired
intangible assets, one quarter in arrears within earnings in equity interests. See Note 4 — “Investments in
Equity Interests” in the consolidated financial statements for additional information.
Minority Interests in Operations of Consolidated Subsidiaries. Minority interests in operations of
consolidated subsidiaries represents the minority holders’ percentage share of income or losses from such
subsidiaries in which we hold a majority ownership interest, but less than 100 percent, and consolidate the