Income Taxes

Income before income taxes includes the following components:



	Year Ended December 31,
(in thousands)	2017		2016		2015
Domestic	$	344,447	$	340,251	$	325,097
Foreign	51,247		40,064		31,668
Total	$	395,694	$	380,315	$	356,765

The provision for income taxes is composed of the following:



	Year Ended December 31,
(in thousands)	2017			2016			2015
Current:
Federal	$	112,414		$	99,783		$	93,853
State	7,879			8,338			7,733
Foreign	18,843			17,479			17,854
Deferred:
Federal	(7,387		)	(13,368		)	(14,472		)
State	(584		)	(1,036		)	(1,987		)
Foreign	5,278			3,483			1,263
Total	$	136,443		$	114,679		$	104,244

The reconciliation of the U.S. federal statutory tax rate to the consolidated effective tax rate is as follows:



	Year Ended December 31,
	2017		2016		2015
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
U.S. tax reform	4.5		—		—
State income taxes, net of federal benefit	1.1		1.6		1.1
Uncertain tax positions	0.3		(0.2	)	(0.4	)
Benefit from restructuring activities	—		(2.2	)	(2.7	)
Research and development credits	(1.4	)	(1.0	)	(1.1	)
Domestic production activity benefit	(2.6	)	(3.7	)	(3.1	)
Stock-based compensation	(3.1	)	0.2		—
Other	0.7		0.5		0.4
	34.5	%	30.2	%	29.2	%

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Reform). Tax Reform makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries (Transition Tax); (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) creating a new provision designed to tax global intangible low-taxed income (GILTI) which allows for the possibility of using foreign tax credits (FTCs) and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); (5) repealing the domestic production activity deduction; (6) creating the base erosion anti-abuse tax, a new minimum tax; (7) allowing for full expensing of qualified property through bonus depreciation; and (8) creating limitations on the deductibility of certain executive compensation.

The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for the tax effects of Tax Reform. SAB 118 provides a measurement period that should not extend beyond one year from enactment for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of Tax Reform for which the accounting under ASC 740 is complete in the financial statements. To the extent that a company’s accounting for certain income tax effects of Tax Reform is incomplete, but a reasonable estimate is able to be made, the company must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the tax laws that were in effect immediately before the enactment of Tax Reform.

In connection with the Company’s initial analysis of the impact of Tax Reform, a discrete net tax expense of $17.9 million was recorded in the period ending December 31, 2017, primarily consisting of $1.9 million for the revaluation of net deferred tax assets and $16.0 million for the Transition Tax. As further discussed below, the Company was able to complete final or provisional calculations for certain elements of Tax Reform and the amounts and estimates are included in the financial statements. For other elements, the Company was not able to make reasonable estimates and therefore those elements have not been recorded and are accounted for in accordance with ASC 740 on the basis of the tax laws in effect before Tax Reform.

The Company’s accounting for the impact of the reduction in the U.S. federal corporate tax rate on the Company's deferred tax assets and liabilities is complete. Tax Reform reduces the corporate tax rate to 21 percent, effective January 1, 2018. Consequently, the Company has recorded a net adjustment to deferred income tax expense of $1.9 million for the year ended December 31, 2017 to revalue the Company’s deferred tax assets and liabilities.

The Company’s accounting for the Transition Tax is incomplete. However, reasonable estimates of certain effects were able to be calculated and, therefore, a provisional adjustment was recorded. The Transition Tax is a tax on the deemed repatriation of previously untaxed accumulated current earnings and profits (E&P) of certain foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax expense of $16.0 million. However, the Company will continue to gather additional information to more precisely compute the final amount. The Company plans to elect to pay this liability over eight years and has recorded $14.5 million of the obligation in other long-term liabilities, with the balance recorded to accrued income taxes.

The Company’s accounting for the indefinite reinvestment assertion is incomplete. However, a reasonable estimate of book and tax basis was calculated, and the Company made a provisional assertion. In general, it is the practice and intention of the Company to repatriate previously taxed earnings and to reinvest all other earnings of its non-U.S. subsidiaries. As part of Tax Reform, the Company incurred U.S. tax on substantially all of the earnings of its non-U.S. subsidiaries as part of the Transition Tax. This tax increased the Company’s previously taxed earnings and will allow for the repatriation of the majority of its foreign earnings without any residual U.S. federal tax. The Company does not believe that there is an excess of the financial reporting basis over the tax basis of investments in foreign subsidiaries. Accordingly, any repatriation in excess of previously taxed earnings will be a non-taxable return of basis. This assertion is subject to change as additional information is gathered to precisely compute the book and tax basis of the Company’s non-U.S. subsidiaries.

The Company’s accounting for GILTI is incomplete, and reasonable estimates of the effects are not able to be made. Therefore, no provisional adjustments were recorded. Tax Reform creates a new requirement that GILTI earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income.

Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of Tax Reform and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing global income to determine whether future U.S. inclusions in taxable income related to GILTI are expected and, if so, the expected impact. Whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends not only on the current structure and estimated future results of global operations, but also on the Company’s intent and ability to modify the structure and/or the business. The Company is not yet able to reasonably estimate the effect of this provision of Tax Reform and therefore has not made any adjustments related to potential GILTI tax in the financial statements. In addition, the Company has not made the accounting policy decision regarding whether to record deferred taxes on GILTI or expense taxes as incurred on GILTI.

The components of deferred tax assets and liabilities are as follows:



	December 31,
(in thousands)	2017			2016
Deferred tax assets:
Net operating loss carryforwards	$	21,391		$	32,969
Stock-based compensation	17,825			23,652
Uncertain tax positions	15,424			11,562
Employee benefits	8,603			17,187
Deferred revenue	5,134			6,382
Research and development credits	3,699			3,889
Allowance for doubtful accounts	1,462			2,078
Other	2,003			3,114
Valuation allowance	(1,906		)	(1,625		)
	73,635			99,208
Deferred tax liabilities:
Other intangible assets	(29,924		)	(56,195		)
Property and equipment	(1,557		)	(2,994		)
Unremitted foreign earnings	(1,504		)	49
	(32,985		)	(59,140		)
Net deferred tax assets	$	40,650		$	40,068

At December 31, 2017 and 2016, respectively, the Company excluded from the above table deferred tax assets associated with foreign net operating loss carryforwards of $25.2 million and $13.2 million and corresponding valuation allowances of $25.2 million and $13.2 million in a jurisdiction where the Company determined utilization is remote.

The net increase in the valuation allowance was primarily due to a change in circumstances related to the ability to utilize a net operating loss in a foreign jurisdiction. As of each reporting date, management considers new evidence, both positive and negative, that could affect the future realization of deferred tax assets. If management determines it is more likely than not that an asset, or a portion of an asset, will not be realized, a valuation allowance is recorded.

As of December 31, 2017, the Company had federal net operating loss carryforwards of $16.7 million. These losses expire between 2024 - 2034, and are subject to limitations on their utilization. Deferred tax assets of $0.6 million have been recorded for state operating loss carryforwards. These losses expire between 2025 - 2035, and are subject to limitations on their utilization. The Company had total foreign net operating loss carryforwards of $66.4 million, of which $29.6 million are not currently subject to expiration dates. The remainder, $36.8 million, expires between 2019 - 2034. The Company had tax credit carryforwards of $4.6 million, of which $2.3 million are subject to limitations on their utilization. Approximately $0.6 million of these tax credit carryforwards are not currently subject to expiration dates. The remainder, $4.0 million, expires in various years between 2019 - 2037.

The following is a reconciliation of the total amounts of unrecognized tax benefits:



	Year Ended December 31,
(in thousands)	2017			2016			2015
Unrecognized tax benefit as of January 1	$	15,209		$	16,067		$	16,342
Gross increases—tax positions in prior period	905			983			64
Gross decreases—tax positions in prior period	(765		)	(2,502		)	(850		)
Gross increases—tax positions in current period	3,757			2,725			4,064
Reductions due to a lapse of the applicable statute of limitations	(847		)	(927		)	(2,808		)
Changes due to currency fluctuation	1,414			(348		)	(653		)
Settlements	(16		)	(789		)	(92		)
Unrecognized tax benefit as of December 31	$	19,657		$	15,209		$	16,067

The Company believes that it is reasonably possible that approximately $0.8 million of uncertain tax positions may be resolved within the next twelve months as a result of settlement with a taxing authority or a lapse of the statute of limitations. Of the total unrecognized tax benefit as of December 31, 2017, $11.7 million would affect the effective tax rate, if recognized.

The Company recognizes interest and penalties related to income taxes as income tax expense. During the years ended December 31, 2017, 2016 and 2015, the Company recorded penalty expense of $1.1 million, $0.8 million and $0.3 million, respectively. The Company recorded interest expense of $0.4 million and $0.1 million during the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017, the Company accrued a liability for penalties of $3.9 million and interest of $3.6 million. As of December 31, 2016, the Company accrued a liability for penalties of $2.7 million and interest of $2.8 million.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. In the U.S., the Company's only major tax jurisdiction, the 2014 - 2017 tax years are open to examination by the Internal Revenue Service.