Yahoo 2009 Annual Report Download - page 51

Income Taxes. The provision for income taxes for the year ended December 31, 2009 differs from the amount
computed by applying the federal statutory income tax rate primarily due to the effect of non-U.S. operations,
non-deductible stock-based compensation expense, benefits due to state taxes resulting from California state tax
law changes, and the net impact of tax restructuring.
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 provision for income taxes and
earnings in equity interests (dollars in thousands):
Years Ended December 31,
2007(2) (1) 2008(2) (1) 2009 (1)
Income tax at the U.S. federal statutory rate of 35
percent ....................................... $284,963 35% $ 30,349 35% $200,976 35%
State income taxes, net of federal benefit .............. 30,881 4% (8,925) (10)% (4,549) (1)%
Change in valuation allowance ...................... 9,806 1% 25,674 30% 13,521 2%
Stock-based compensation expense .................. 34,011 4% 44,938 52% 28,322 5%
Research tax credits .............................. (8,618) (1)% (13,954) (16)% (11,046) (2)%
Effect of non-U.S. operations ....................... (37,238) (4)% 18,403 21% 20,126 4%
Meals and entertainment ........................... 2,770 0% 2,816 3% 1,386 0%
Settlement with tax authorities ...................... — — (5,245) (6)% — —
Goodwill impairment charge ....................... — — 170,644 197% — —
Tax restructuring, net of reserve ..................... — — — — (25,583) (4)%
Other .......................................... 6,293 1% (5,694) (7)% (3,832) (1)%
Provision for income taxes ......................... $322,868 40% $259,006 299% $219,321 38%
(1) Percent of income before provision for income taxes and earnings in equity interests.
(2) Certain reclassifications have been made to prior year amounts in order to conform to the current year
presentation.
The effective tax rate for the year ended December 31, 2009 was 38 percent, compared to 299 percent in 2008.
The primary reasons for the lower effective tax rate in 2009 compared to 2008 were due to the fact that 2008
pre-tax income included a $488 million goodwill impairment charge, the majority of which was non-deductible
for tax purposes, and that benefits resulting from tax restructuring activities were implemented in 2009. The 2008
effective tax rate included the cumulative tax benefit of a favorable state tax ruling granted in 2008 and
retroactive to 2007. The 2007 provision for income taxes reflects a tax benefit related to the release of deferred
tax liabilities in connection with changes to our worldwide entity structure in 2007.
Our U.S. federal and California income tax returns for the years ended December 31, 2005 and 2006 are
currently under examination by the Internal Revenue Service (“IRS”) and the California Franchise Tax Board.
Additionally, we are seeking early resolution of a 2009 U.S. federal income tax position by means of a pre-filing
agreement with the IRS. The issues relate to capital losses available for carry forward, intercompany transactions
and research and development tax credits. The IRS is expected to notify us of their conclusions during 2010. We
believe adequate reserves have been provided for all issues; however, it is reasonably possible that our
unrecognized tax benefits could increase once the results are known. An estimate of the range of possible
outcomes cannot be made at this time. The U.S. Federal Research and Development tax credit expires on
December 31, 2009. It is uncertain whether this credit will be available in 2010, as it has not yet been signed into
law. As a result, we expect our effective tax rate may increase in 2010 compared to 2009.
Earnings in Equity Interests. Earnings in equity interests for the year ended December 31, 2009 was
approximately $250 million. Earnings in equity interests for the year ended December 31, 2008 was
approximately $597 million, including a $401 million non-cash gain related to Alibaba Group’s IPO of
Alibaba.com, net of tax. In connection with the IPO, we made a direct investment of 1 percent in Alibaba.com,
which we sold during the third quarter of 2009 for net proceeds of $145 million. In 2008, we also recorded an
impairment charge of $30 million, net of tax, within earnings in equity interests to reduce the carrying value of
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