Uber’s Tax Attributes Are Worth Billions

Uber notoriously raised and burned through tens of billions of dollars to get to where it is today. Its most recent balance sheet shows $41 billion of paid-in equity capital and a staggering $33 billion of accumulated losses. While statistics like those are most often bandied about by Uber’s skeptics, they do offer a silver lining for Uber’s investors. Losses create proportionately sized tax benefits. In other words, Uber’s superlatively large losses to date have left it with superlatively large tax benefits that have yet to be realized.

Wrapping one’s arms around the scale of Uber’s tax assets requires some digging. Due to its extensive history of losses, Uber is required to carry a valuation allowance against its net operating loss carryforwards and other deferred tax assets. Like many companies, Uber only discloses the details of its deferred tax assets and liabilities annually in its 10-K. At the end of 2022, Uber had deferred tax assets with a gross carrying value of $14.5 billion. A $13.9 billion valuation allowance reduced the net carrying value of those tax assets to just $570 million. Factoring in $431 million of deferred tax liabilities, Uber’s balance sheet reflected a net deferred tax asset of just $139 million, a figure so insignificant that it is buried in an “other” line item even in the footnotes. Accounting principles essentially force Uber to hide the value of its deferred tax assets from plain sight. Its deferred tax assets often go overlooked by analysts and investors as a result.

Four main types of deferred tax assets account for the lion’s share – roughly $12.8 billion – of Uber’s $14.5 billion of gross deferred tax assets. At December 31, 2022, Uber had $6.3 billion of deferred tax assets related to net operating loss carryforwards, $4.4 billion related to tax basis in fixed and intangible assets in excess of book value, $1.2 billion related to research & development credits and $858 million related to interest limitation carryforwards. Each of those types of deferred tax assets should be monetized to some extent over time. In contrast, most of the remaining $1.7 billion of Uber’s deferred tax assets seems likely to persist indefinitely as long as Uber’s growth doesn’t head into reverse.

Figure 1: Components of Uber’s Deferred Tax Assets & Liabilities (in millions)

Uber’s net operating loss carryforwards (“NOLs”) are the direct result of the losses the company has racked up over its existence. Uber has $14.0 billion of federal NOLs, $11.4 billion of U.S. state NOLs and $18.3 billion of foreign NOLs. Those NOLs can be used to reduce the taxable income Uber reports in the corresponding jurisdictions. The $6.3 billion gross carrying value of Uber’s deferred tax asset related to NOLs reflects the sum of each NOL amount multiplied by the corresponding jurisdictional tax rate.

Figure 2: Illustrative Breakdown of Uber’s NOLs ($ in thousands)

Uber’s second biggest type of deferred tax asset is its $4.4 billion deferred tax asset related to “fixed assets and intangible assets.” At the most fundamental level, this deferred tax asset simply indicates that the tax basis of Uber’s fixed and intangible assets is much higher than book value. The $4.4 billion deferred tax asset is the difference between tax basis and book value multiplied by the relevant jurisdictional tax rates.

It is unusual that Uber has such a large deferred tax asset related to fixed and intangible assets. Most companies carry a deferred tax liability related to fixed assets because they depreciate fixed assets using an accelerated method for tax purposes and a slower, straight-line method for financial reporting purposes. Uber’s substantial deferred tax asset clearly arose due to something else entirely.

In early 2019, Uber was both preparing for its IPO and facing a crackdown by OECD countries on the use of offshore tax havens by multinational companies, especially technology and pharmaceutical companies. The OECD’s new stance made it attractive for companies to shift intellectual property from no-tax havens in the Caribbean to low-tax countries, such Singapore, Ireland and the Netherlands. And that is exactly what Uber did. In March 2019, Uber pulled certain intellectual property out of a wholly owned shell company in Bermuda and put it into a Dutch entity that is a holding company for dozens of other Uber entities. Presumably through negotiations with the Dutch tax authorities and government, Uber was able to assign a lofty value to the transferred intellectual property such that the restructuring created a $6.4 billion deferred tax asset. Again, that $6.4 billion represents the difference between the value of the intellectual property in the eyes of Dutch tax authorities and the value of it on Uber’s books multiplied by the relevant Dutch tax rate. Uber subsequently transferred some of that intellectual property to another wholly owned subsidiary in the fourth quarter of 2022 resulting in a $1.7 billion reduction to the deferred tax asset balance.

Next on the list is Uber’s $1.2 billion tax asset related to research and development tax credits. The so-called Research Tax Credit (26 U.S. Code § 41) provides companies a federal tax benefit for “qualified research expenses.” Qualified research expenses are broadly defined as amounts spent on wages, supplies and payments to outside vendors related to the development, design or improvement of products, processes, formulas or software. Most states, including California, have also enacted a research tax credit similar to the federal Research Tax Credit. Every dollar that Uber spends on qualified research expenses in the U.S. likely generates approximately $0.10 of federal tax credits. Qualified research expenses incurred in California create an additional $0.075 or so of California state tax credits. Federal and U.S. state research tax credits reduce the corresponding tax liabilities on a dollar-for-dollar basis. Uber’s $1.2 billion of research tax credits reflects the fact that Uber has yet to generate sufficient federal and U.S. state income to utilize much of the research tax credits it has generated since its founding more than a decade ago. The breakdown of Uber’s backlog of research tax credits between federal and U.S. state likely roughly mirrors the ratio of the respective incentive rates. In other words, Uber’s $1.2 billion of research tax credits is probably composed of 60% federal tax credits and 40% U.S. state tax credits, primarily California tax credits. It is possible some foreign research tax credits are included in the $1.2 billion figure as well, but they should account for a relatively small portion of the total.

The final major type of tax asset that Uber has is $858 million of interest limitation carryforwards. The 2017 Tax Cuts and Jobs Act (“TCJA”) included a major change to 26 U.S. Code § 163(j), which covers the deductibility of business interest. Most significantly, the change limited the deductibility of business interest expense to approximately 30% of a business’s adjusted taxable income in any given year. Given that Uber has reported a substantial loss in the U.S. in every year since the TCJA went into effect, all its interest expense since then has presumably been disallowed by section 163(j). The $858 million tax asset simply reflects the accumulated carryforward related to the section 163(j) limitation.

Uber seems likely to monetize the vast majority of these four types of deferred tax assets over time. Most of Uber’s NOLs have unlimited carryforward periods. The amortization period for the intellectual property in the Netherlands might be as long as twenty years, and any deductions in excess of taxable income in the Netherlands would become Dutch NOLs, which have an unlimited carryforward period. Similarly, any interest expense disallowed by section 163(j) in a given year can also be carried forward indefinitely. While federal research tax credits do expire after twenty years, that should provide Uber with ample time to fully utilize those tax credits.

There are only two constraints on Uber’s utilization of these deferred tax assets that may prove binding. First, Uber’s U.S. state NOLs are already starting to expire. $9.4 billion, or 82.5%, of Uber’s $11.4 billion of U.S. state NOLs began to expire in 2022. Uber should nonetheless still be able to utilize most of its U.S. state NOLs. Moreover, Uber’s U.S. state NOLs probably only account for about 15% of the value of its deferred tax asset related to NOLs given how low U.S. state corporate tax rates are relative to federal and foreign ones. Second, although California research tax credits do not expire, Uber may not generate enough income California over time to utilize most of its backlog of California research credits. Multinational tech companies headquartered in Silicon Valley generally struggle to fully utilize California research and development tax credits. Those companies spend a huge portion of their research and development dollars in California, but only earn a small portion of their revenue and profit there. As a result, they seem to generate more California research and development tax credits than they can use over time. It is not obvious why Uber’s experience should be different. If Uber is unable to utilize half of its U.S. state NOLs and any of its backlog of California research tax credits, Uber would still realize $11.9 billion of cash tax benefits over time from these four types of tax attributes. That is only $900 million, or 7%, less than the $12.8 billion gross carrying value of those deferred tax assets.

Uber is only on the verge of turning profitable, so it will take the company time to realize the $12 billion or so of cash benefits from its tax attributes. As a result, the time value of money is an especially relevant consideration for thinking about the value of Uber’s tax attributes.

The most technically correct way to value Uber’s tax attributes would be to perform a discounted cash flow analysis. You would forecast Uber’s pre-tax income for the next two decades or so, estimate how that pre-tax income would be allocated among tax jurisdictions, and then estimate the utilization of each type of tax attribute in each jurisdiction over time. Needless to say, that is a tough analysis for an outside observer to do with any meaningful degree of confidence or precision. Next, you would estimate an appropriate risk adjusted rate for discounting the cash flows. For a variety of reasons, most people view a company’s cost of debt as the appropriate rate for discounting tax-related cash flows. The weighted average rate Uber pays on its interest-bearing debt is around 7%. Other methods of estimating Uber’s cost of debt result in figures in the same ballpark. Finally, you would discount the forecasted cash flows to present values and sum them to arrive at an estimate for the value of Uber’s tax attributes.

Hinde Group did that analysis and arrived at an estimated present value for Uber’s tax attributes of about $7.5 billion, or more than $3 per share.

The other way to value Uber’s tax attributes would be to use a rule of thumb approach. Generally, valuing tax attributes at one-half of the gross carrying value of the realizable portion will provide a conservative estimate of their value. One-half of $12 billion is $6 billion, so the rule-of-thumb approach yields a conservative estimate not too far off the result from the more rigorous – but imprecise and low confidence – discounted cash flow method.

With a value of just under 10% of the current market price of UBER, Uber’s tax attributes are material enough that investors should be taking them into account, but not so significant that they will change anyone’s mind about the stock. Two factors make Uber’s tax attributes relatively more interesting at the moment than they otherwise might be though. First, few investors seem to be aware of Uber’s tax attributes in any detail or to consider them in how they value the stock. That mainly comes down to the fact that Uber is required by accounting principles to obscure the value of its tax assets with a significant valuation allowance. Also, many market participants are only beginning to come to terms with the idea of Uber as a profitable enterprise. Second, it seems likely that Uber will lift the veil obscuring its substantial deferred tax assets at some point before the end of next year.

Sustained profitability is the key milestone Uber must achieve to reverse the valuation allowance it currently carries against its deferred tax assets. While accounting principles dictate that all available evidence should be considered in determining whether a valuation allowance against deferred tax assets is needed, those principles place special emphasis on “a cumulative loss in recent years” as “a significant piece of negative evidence that is difficult to overcome.” Accounting standards do not precisely define what “a cumulative loss in recent years” means. It is generally interpreted as the sum of pre-tax income for the preceding two years and projected pre-tax income for the current year. Based on that interpretation, it is no surprise that Uber holds a full valuation allowance against its deferred tax assets. Uber has yet to report a profit since its founding more than a decade ago.

That is poised to change though. While the onset of the pandemic was a huge setback for Uber’s mobility business, Uber ultimately regained its footing and has been making steady progress toward sustained profitability ever since. The company expects to deliver at least one quarter of GAAP operating income profitability in 2023 and to scale its profitability “significantly” in the years beyond. Net income should turn profitable soon after operating income does. Uber’s $5.0 billion target for Adjusted EBITDA in 2024 seems to imply significantly positive GAAP net income for next year. Beyond 2024, Uber’s net income should grow rapidly due to the combination of continued double digit gross bookings growth and margin expansion. Uber’s target for incremental Adjusted EBITDA margin is more than four times the pre-tax income-to-GB ratio implied by its target for 2024 Adjusted EBITDA. Net income growth should be a multiple of double-digit gross bookings growth for many years.

Figure 3: Quarterly Trend in Uber’s Adjusted EBITDA ($ in millions)

There is a good chance that Uber’s “cumulative income in recent years” will flip from a loss to a gain at some point in 2024 in the context of an increasingly bright picture for profitability in the future. If that is indeed the way things turn out, Uber could reverse most of the valuation allowance against its substantial deferred tax assets at some point next year.

Reversing the valuation allowance could result in Uber reporting almost $6.00 per share in GAAP earnings in a quarter, likely either the fourth quarter of 2023 or the fourth quarter of 2024. While investors clearly should not – and almost certainly will not – assign a multiple to that one-time GAAP earnings benefit, it does represent a real, one-off source of value for Uber and should draw attention to the substantial value of Uber’s tax attributes.


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