Income Taxes

12 Months Ended

Dec. 31, 2019

Income before provision for income taxes was as follows:



	Year Ended December 31,
	2019		2018		2017
	(in thousands)
United States	$	1,719,326	$	845,402	$	144,100
Foreign	342,905		381,056		341,221
Income before income taxes	$	2,062,231	$	1,226,458	$	485,321

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



	Year Ended December 31,
	2019			2018			2017
	(in thousands)
Current tax provision:
Federal	$	21,498		$	(22,176	)	$	54,245
State	45,228			(10,234		)	(7,601		)
Foreign	223,328			133,146			88,436
Total current	290,054			100,736			135,080
Deferred tax provision:
Federal	(28,003		)	(37,396		)	(153,963		)
State	(54,507		)	(52,391		)	(52,695		)
Foreign	(12,229		)	4,267			(2,030		)
Total deferred	(94,739		)	(85,520		)	(208,688		)
Provision for (benefit from) income taxes	$	195,315		$	15,216		$	(73,608	)

In connection with the Tax Cuts and Jobs Act of 2017 the Company simplified its global corporate structure, effective April 1, 2019. The tax impacts of such simplifications were not material to the financial statements as a whole. During the fourth quarter of 2019, the United States Treasury issued final regulations with respect to certain aspects related to the Tax Cuts and Jobs Act of 2017. Additional guidance provided in these regulations resulted in a tax adjustment in the fourth quarter of 2019. We paid U.S. Federal taxes for the full year inclusive of this fourth quarter adjustment.

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,
	2019			2018			2017
	(in thousands)
Expected tax expense at U.S. Federal statutory rates	$	433,059		$	257,556		$	169,860
State income taxes, net of Federal income tax effect	47,909			33,611			6,404
Foreign earnings at other than U.S. rates	56,969			63,519			(87,514		)
Federal and California R&D tax credits	(134,523		)	(140,749		)	(79,868		)
Excess tax benefits on stock-based compensation	(148,693		)	(191,323		)	(157,888		)
Impact of the Tax Cuts and Jobs Act of 2017
Rate Change / Transition Tax	—			(71,516		)	79,077
Tax effects of the Tax Cuts and Jobs Act	(127,534		)	43,099			—
Global corporate structure simplification	35,939			—			—
Nondeductible Officers Compensation	24,111			14,377			28
Other	8,078			6,642			(3,707		)
Provision for (benefit from) income taxes	$	195,315		$	15,216		$	(73,608	)
Effective Tax Rate	9		%	1		%	(15		)%

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



	As of December 31,
	2019			2018
	(in thousands)
Deferred tax assets:
Stock-based compensation	$	258,376		$	190,451
Federal and California tax R&D credits	408,715			369,023
Foreign tax credits	137,818			218,026
Accruals and reserves	42,450			36,396
Operating leases	349,208			—
Other	6,510			27,203
Gross deferred tax assets	1,203,077			841,099
Depreciation & amortization	(80,921		)	(151,678		)
Operating leases	(329,168		)	—
Gross deferred tax liabilities	(410,089		)	(151,678		)
Valuation allowance	(134,782		)	(124,996		)
Net deferred tax assets	$	658,206		$	564,425

All deferred tax assets are classified as “Other non-current assets” on the Consolidated Balance Sheets as of December 31, 2019 and December 31, 2018. 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, 2019, the valuation allowance of $135 million was primarily related to certain foreign tax credits that are not likely to be realized.

As of December 31, 2019, the Company's Federal R&D tax credit and state tax credit carryforwards for tax return purposes were $251 million, and $256 million, respectively. The Federal R&D tax credit carryforwards expire through 2039. State tax credit carryforwards can be carried forward indefinitely.

As of December 31, 2019, the Company's foreign tax credit carryforwards for U.S. and non-U.S. tax return purposes were $138 million of which a $135 million valuation allowance is placed against non-U.S. foreign tax credits and a $3 million carryforward on the U.S. tax return. The Federal foreign tax credit carryovers expire through 2029.

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, 2019, the total amount of gross unrecognized tax benefits was $67 million, of which $57 million, if recognized, would favorably impact the Company’s effective tax rate. 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. 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, 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
Increases related to tax positions taken during prior periods	925
Decreases related to tax positions taken during prior periods	(417		)
Increases related to tax positions taken during the current period	18,826
Decreases related to expiration of statute of limitations	(100		)
Balances as of December 31, 2019	$	66,768

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. The Company is currently under examination by the IRS for 2016, 2017, and 2018. The 2009 through 2018 state tax returns are subject to examination by state tax authorities. The Company is also currently under examination in the UK for 2018. The company has no other significant foreign jurisdiction audits underway. The years 2014 through 2018 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.