Income Taxes

Income before provision for income taxes was as follows:



	Year Ended December 31,
	2018		2017		2016
	(in thousands)
United States	$	845,402	$	144,100	$	188,078
Foreign	381,056		341,221		72,429
Income before income taxes	$	1,226,458	$	485,321	$	260,507

The components of provision for (benefit from) income taxes for all periods presented were as follows:



	Year Ended December 31,
	2018			2017			2016
	(in thousands)
Current tax provision:
Federal	$	(22,176	)	$	54,245		$	54,315
State	(10,234		)	(7,601		)	5,790
Foreign	133,146			88,436			60,571
Total current	100,736			135,080			120,676
Deferred tax provision:
Federal	(37,396		)	(153,963		)	(24,383		)
State	(52,391		)	(52,695		)	(14,080		)
Foreign	4,267			(2,030		)	(8,384		)
Total deferred	(85,520		)	(208,688		)	(46,847		)
Provision for (benefit from) income taxes	$	15,216		$	(73,608	)	$	73,829

On December 22, 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. In accordance with the Act, the Company recorded $79 million as additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The total expense included $32 million related to the transition tax and $47 million related to the remeasurement of certain deferred tax assets and liabilities. Additionally, 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. December 22, 2018 marked the end of the measurement period for purposes of SAB 118. As such, the Company has completed the analysis based on legislative updates relating to the Act currently available which resulted in an additional SAB 118 tax benefit of $34 million in the fourth quarter of 2018 and a total tax benefit of $72 million for the year ended December 31, 2018. The total tax provision benefit included $45 million related to adjustments to the transition tax and a $27 million benefit related to the remeasurement of certain deferred tax assets and liabilities.

A reconciliation of the provision for income taxes, with the amount computed by applying the statutory Federal income tax rate to income before income taxes is as follows:



	Year Ended December 31,
	2018			2017			2016
	(in thousands)
Expected tax expense at U.S. Federal statutory rates	$	257,556		$	169,860		$	91,179
State income taxes, net of Federal income tax effect	33,611			6,404			7,261
Foreign earnings at other than U.S. rates	63,519			(87,514		)	14,639
Federal and California R&D tax credits	(140,749		)	(79,868		)	(41,144		)
Excess tax benefits on stock-based compensation	(191,323		)	(157,888		)	—
Impact of the Tax Cuts and Jobs Act of 2017
Rate Change / Transition Tax	(71,516		)	79,077			—
U.S. Minimum Tax on Foreign Entities	43,099			—			—
Nondeductible Officers Compensation	14,377			28			28
Other	6,642			(3,707		)	1,866
Provision for (benefit from) income taxes	$	15,216		$	(73,608	)	$	73,829
Effective Tax Rate	1		%	(15		)%	28		%

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



	As of December 31,
	2018			2017
	(in thousands)
Deferred tax assets:
Stock-based compensation	$	190,451		$	149,367
Depreciation and amortization	(151,678		)	(70,382		)
Federal and California tax R&D credits	369,023			260,686
Foreign tax credits	218,026			102,242
Accruals and reserves	36,396			34,170
Other	27,203			51,614
Gross deferred tax assets	689,421			527,697
Valuation allowance	(124,996		)	(49,431		)
Net deferred tax assets	$	564,425		$	478,266

All deferred tax assets are classified as “Other non-current assets” on the Consolidated Balance Sheets as of December 31, 2018 and December 31, 2017. 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. As of December 31, 2018, the valuation allowance of $125 million was primarily related to certain foreign tax credits that are not likely to be realized.

As of December 31, 2018, the Company's Federal R&D tax credit and state tax credit carryforwards for tax return purposes were $248 million, and $193 million, respectively. The Federal R&D tax credit carryforwards expire through 2038. State tax credit carryforwards can be carried forward indefinitely.

As of December 31, 2018, the Company's foreign tax credit carryforwards for tax return purposes were $99 million. The Federal foreign tax credit carryovers expire through 2028.

The unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year are classified as “Other non-current liabilities” and a reduction of deferred tax assets which is classified as "Other non-current assets" in the Consolidated Balance Sheets. As of December 31, 2018, the total amount of gross unrecognized tax benefits was $48 million, of which $44 million, if recognized, would favorably impact the Company’s effective tax rate. As of December 31, 2017, the total amount of gross unrecognized tax benefits was $43 million, of which $38 million, if recognized, would favorably impact the Company’s effective tax rate. The aggregate changes in the Company’s total gross amount of unrecognized tax benefits are summarized as follows (in thousands):



Balances as of December 31, 2016	$	19,739
Decreases related to tax positions taken during prior periods	(3,226		)
Increases related to tax positions taken during the current period	26,389
Balances as of December 31, 2017	42,902
Increases related to tax positions taken during prior periods	4,486
Decreases related to tax positions taken during prior periods	(17,922		)
Increases related to tax positions taken during the current period	18,068
Balances as of December 31, 2018	$	47,534

The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes and in “Other non-current liabilities” in the Consolidated Balance Sheets. Interest and penalties included in the Company's provision for income taxes were not material in all the periods presented.

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 & 2015 and recorded a discrete tax benefit of $7 million in the third quarter of 2018. The Company is currently under examination by the IRS for the years 2016 and 2017 and the state of California for the years 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 and 2016. 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. However, an estimate of the range of reasonably possible adjustments cannot be made at this time.