Income Taxes



	Three Months Ended						Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
	(in thousands, except percentages)
Provision for (benefit from) income taxes	$	(24,025	)	$	(13,353	)	$	29,754		$	(19,421	)
Effective tax rate	(6		)%	(11		)%	3		%	(5		)%

The effective tax rates for the three and nine months ended September 30, 2018 differed from the Federal statutory rate primarily due to the recognition of excess tax benefits of stock-based compensation, Federal and California research and development credits (“R&D”), and updated provisional amounts related to US tax reform as a result of the US federal tax return filing, partially offset by state taxes, foreign taxes, and non-deductible expenses. The effective tax rate for the three and nine months ended September 30, 2017 differed from the Federal statutory rate primarily due to the recognition of excess tax benefits of stock-based compensation and Federal and California R&D credits, partially offset by state taxes, foreign taxes, and non-deductible expenses.

The increase in effective tax rates for the three and nine months ended September 30, 2018 as compared to the same periods in 2017 was due primarily to lower benefit on a percentage basis from the recognition of excess tax benefits of stock-based compensation as well as additional expense related to foreign taxes, and non-deductible expenses. For the three and nine months ended September 30, 2018, the Company recognized a discrete tax benefit related to the excess tax benefits from stock-based compensation of $40.1 million and $157.5 million, respectively, compared to the three and nine months ended September 30, 2017 of $41.7 million and $110.5 million, respectively.

In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. During the third quarter of 2018, we recorded a total provisional benefit of $37.6 million. This provisional benefit included $16.5 million related to adjustments to the transition tax and a $21.1 million benefit related to the remeasurement of certain deferred tax assets and liabilities as a result of the US federal tax return filing. While we do not anticipate any remaining adjustments related to the Act, the measurement period under SAB 118 remains open as there is still anticipated guidance clarifying certain aspects of the Act. Any subsequent adjustment to these amounts will be recorded to current tax expense in the fourth quarter of 2018 when the full analysis is complete.

Gross unrecognized tax benefits were $50.7 million and $42.9 million as of September 30, 2018 and December 31, 2017, respectively. The gross unrecognized tax benefits, if recognized by the Company, will result in a reduction of approximately $47.6 million to the provision for income taxes thereby favorably impacting the Company’s effective tax rate. As of September 30, 2018, gross unrecognized tax benefits of $19.0 million was classified as “Other non-current liabilities” and $31.7 million as a reduction to deferred tax assets which was classified as "Other non-current assets" in the Consolidated Balance Sheets. The Company includes interest and penalties related to unrecognized tax benefits within the "Provision for (benefit from) income taxes" on the Consolidated Statements of Operations and “Other non-current liabilities” in the Consolidated Balance Sheets. Interest and penalties included in the Company’s “Provision for (benefit from) income taxes” were not material in any of the periods presented.

Deferred tax assets of $549.3 million and $478.3 million were classified as “Other non-current assets” on the Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, respectively. In evaluating its ability to realize the net deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. The Company has a valuation allowance of $132.4 million and $49.4 million as of September 30, 2018 and December 31, 2017, respectively. The valuation allowance is primarily related to certain foreign tax credit carryovers that are not likely to be recognized.

The Company files U.S. Federal, state and foreign tax returns. In August 2018, the Company reached a favorable settlement with the IRS for tax years 2014 and 2015 and recorded a discrete tax benefit of $7.4 million in the third quarter of 2018. The 2016 and 2017 Federal tax returns currently remain subject to examination by the IRS. The Company is currently under examination by the state of California for 2014 and 2015. The 2009 through 2017 state tax returns are subject to examination by state tax authorities. The Company is also currently under examination in the UK for 2015. The Company has no other significant foreign jurisdiction audits underway. The years 2013 through 2017 remain subject to examination by foreign tax authorities.

Given the potential outcome of the current examinations as well as the impact of the current examinations on the potential expiration of the statute of limitations, it is reasonably possible that the balance of unrecognized tax benefits could significantly change within the next twelve months. At this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.