Income Taxes

Reconciliations of the statutory U.S. federal income tax rates to our effective tax rate for continuing operations follow:



	Years Ended December 31,
	2018		2017		2016
Statutory rate	21.0	%	35.0	%	35.0	%
Tax reform	(0.3	)	3.1		—
State tax, net of federal benefit	3.8		2.6		3.1
Reverse federal impact of indemnification adjustments	3.5		2.5		(0.7	)
Unrecognized tax benefits, U.S. federal and state, net of federal benefit	(15.9	)	(2.0	)	1.6
Excess tax benefits/deficiencies for employee stock-based compensation, federal and state, net of federal benefit	(0.6	)	(1.7	)	—
Impact of state rate change on net deferred tax liabilities, net of federal benefit	(0.4	)	0.6		(0.5	)
State, valuation allowance adjustments on net operating losses	0.4		0.2		1.0
Other, net	1.4		0.9		0.1
Effective tax rate	12.9	%	41.2	%	39.6	%

The effective tax rate varies from the statutory U.S. federal rate of 21 percent primarily due to the reduction in uncertain tax positions related to statutes of limitations expirations and the impact of state taxes, net of federal benefit, for the year ended December 31, 2018; the impact of tax reform and state taxes, net of federal benefit, for the year ended December 31, 2017; and the impact of state taxes, net of federal benefit, for the year ended December 31, 2016.

Income tax expense consists of:



	December 31,
	2018			2017			2016
Current provision:
Federal	$	102,516		$	248,191		$	228,505
State	32,638			13,092			24,336
Total current provision	135,154			261,283			252,841
Deferred (benefit)/provision:
Federal	(57,076		)	(58,124		)	(89,518		)
State	(6,225		)	(628		)	786
Total deferred benefit	(63,301		)	(58,752		)	(88,732		)
Provision for income tax expense	$	71,853		$	202,531		$	164,109

The tax effect of temporary differences that give rise to deferred tax assets and liabilities is summarized below.



	December 31,
	2018		2017
Deferred tax assets:
Loan reserves	$	85,100	$	62,603
Stock-based compensation plans	9,312		10,216
Deferred revenue	1,081		782
Operating loss carryovers	—		4,186
Accrued expenses not currently deductible	12,896		5,356
Unrecorded tax benefits	5,106		3,781
Market value adjustments on student loans, investments and derivatives	1,460		1,974
Other	953		436
Total deferred tax assets	115,908		89,334
Deferred tax liabilities:
Gains on repurchased debt	—		40,175
Fixed assets	7,150		5,303
Acquired intangible assets	5,179		4,595
Unrealized gains	3,436		1,104
Federal deferred for state receivable	2,083		3,584
Student loan premiums and discounts, net	1,971		1,051
Other	285		298
Total deferred tax liabilities	20,104		56,110
Net deferred tax assets	$	95,804	$	33,224

Included in operating loss carryovers is a valuation allowance of $19.1 million and $68.6 million as of December 31, 2018 and 2017, respectively, against our state net operating loss carryovers that management believes is more likely than not to expire prior to being realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income of the appropriate character (i.e., capital or ordinary) during the period in which the temporary differences become deductible. Management considers, among other things, the scheduled reversals of deferred tax liabilities and the history of positive taxable income in evaluating the realizability of the deferred tax assets. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize our deferred tax assets (other than state net operating loss carryovers as outlined above).

As of December 31, 2018, the state net operating loss carryforwards will begin to expire in 2029.

Accounting for Uncertainty in Income Taxes

The following table summarizes changes in unrecognized tax benefits:



	December 31,
	2018			2017			2016
Unrecognized tax benefits at beginning of year	$	131,608		$	152,581		$	47,109
Increases resulting from tax positions taken during a prior period	4,121			7,482			110,894
Decreases resulting from tax positions taken during a prior period	—			(7,025		)	(3,285		)
Increases resulting from tax positions taken during the current period	3,169			1,656			817
Decreases related to settlements with taxing authorities	(601		)	(3,594		)	(123		)
Reductions related to the lapse of statute of limitations	(86,138		)	(19,492		)	(2,831		)
Unrecognized tax benefits at end of year	$	52,159		$	131,608		$	152,581

As of December 31, 2018, the gross unrecognized tax benefits are $52.2 million. Included in the $52.2 million are $47.2 million of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate. As a part of the Spin-Off, the Company recorded a liability related to uncertain tax positions for which it is indemnified by Navient. See Note 2, “Significant Accounting Policies — Income Taxes,” for additional details.

Tax related interest and penalty expense is reported as a component of income tax expense. As of December 31, 2018, 2017 and 2016, the total amount of income tax-related accrued interest and penalties, net of related benefit, recognized in the consolidated balance sheets was $13.6 million, $21.2 million and $20.2 million, respectively.

For the years ended December 31, 2018, 2017 and 2016, the total amount of income tax-related accrued interest, net of related tax benefit, recognized in the consolidated statements of income was $(7.3) million, $2.7 million and $5.1 million, respectively.

The Company or one of its subsidiaries files income tax returns at the U.S. federal level and in most U.S. states. U.S. federal income tax returns filed for years 2014 and prior are no longer subject to examination. Various combinations of subsidiaries, tax years, and jurisdictions remain open for review, subject to statute of limitations periods (typically 3 to 4 prior years). We do not expect the resolution of open audits to have a material impact on our unrecognized tax benefits.

It is reasonably possible that the uncertain tax position reserve may decrease by as much as $6.2 million during the next 12 months due to the expiration of statutes of limitations primarily related to indemnified tax liabilities. The reduction in the uncertain tax position reserve would be reflected as a tax benefit. We recorded a tax indemnification receivable from Navient for the indemnified tax liabilities which are included in the uncertain tax position reserve. A portion of the tax benefit will be offset by an expense related to the write-down of the indemnification receivable.