Income Taxes

Income before provision for income taxes was as follows:



	Year Ended December 31,
	2017		2016		2015
	(in thousands)
United States	$	144,100	$	188,078	$	95,644
Foreign	341,221		72,429		46,241
Income before income taxes	$	485,321	$	260,507	$	141,885

The components of provision for income taxes for all periods presented were as follows:



	Year Ended December 31,
	2017			2016			2015
	(in thousands)
Current tax provision:
Federal	$	54,245		$	54,315		$	52,557
State	(7,601		)	5,790			(1,576		)
Foreign	88,436			60,571			26,918
Total current	135,080			120,676			77,899
Deferred tax provision:
Federal	(153,963		)	(24,383		)	(37,669		)
State	(52,695		)	(14,080		)	(17,635		)
Foreign	(2,030		)	(8,384		)	(3,351		)
Total deferred	(208,688		)	(46,847		)	(58,655		)
Provision for income taxes	$	(73,608	)	$	73,829		$	19,244

At the beginning of 2017, the Company underwent a corporate restructuring that better aligns its corporate structure with how its business operates. As a result of this restructuring and the Company's increasing international income, there is now significantly more income being taxed at rates lower than the U.S. tax rate.

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. The Company has calculated its best estimate of the impact of the Act in its year end income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing and as a result has recorded $79.1 million as an additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $46.9 million. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $32.2 million based on cumulative foreign earnings of $484.9 million.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US 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. In accordance with SAB 118, the Company has determined that the $46.9 million of the deferred tax expense recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $32.2 million of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at December 31, 2017. Additional work is necessary to do a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.

The Company recorded a $66.5 million benefit related to foreign taxes expensed in prior years that may now be claimed as a Foreign Tax Credit. The Company has determined there is sufficient foreign source income projected to utilize these credits.

Due to the adoption of ASU 2016-09 in 2017, all excess tax benefits and deficiencies are recognized as income tax expense in the Company’s Consolidated Statement of Operations. This will result in increased volatility in the Company’s effective tax rate.

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,
	2017			2016			2015
	(in thousands)
Expected tax expense at U.S. Federal statutory rate of 35%	$	169,860		$	91,179		$	49,658
State income taxes, net of Federal income tax effect	6,404			7,261			4,783
Foreign earnings at other than U.S. rates	(87,514		)	14,639			5,310
Federal and California R&D tax credits	(79,868		)	(41,144		)	(29,363		)
Excess tax benefits on stock-based compensation	(157,888		)	—			—
Tax Cuts and Jobs Act of 2017	79,077			—			—
Release of tax reserves on previously unrecognized tax benefits	—			—			(13,438		)
Other	(3,679		)	1,894			2,294
Provision for income taxes	$	(73,608	)	$	73,829		$	19,244
Effective Tax Rate	(15		)%	28		%	14		%

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



	As of December 31,
	2017			2016
	(in thousands)
Deferred tax assets:
Stock-based compensation	$	149,367		$	188,458
Accruals and reserves	34,170			29,231
Depreciation and amortization	(70,382		)	(93,760		)
Federal and California tax R&D credits	260,686			107,283
Federal foreign tax credits	102,242			—
Other	51,614			(2,363		)
Gross deferred tax assets	527,697			228,849
Valuation allowance	(49,431		)	(1,601		)
Net deferred tax assets	$	478,266		$	227,248

All deferred tax assets are classified as “Other non-current assets” on the Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016. 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, 2017, the valuation allowance of $49.4 million related to certain foreign tax credits that are not likely to be realized. The Company remeasured these non-current assets and liabilities at the applicable tax rate of 21% in accordance with the Tax Cuts and Jobs Act of 2017. The remeasurement resulted in a total decrease in these assets of $46.9 million.

As of December 31, 2017, the Company's Federal R&D tax credit and state tax credit carryforwards for tax return purposes were $133.4 million, and $119.2 million, respectively. The Federal R&D tax credit carryforwards expire through 2037. State tax credit carryforwards can be carried forward indefinitely.

As of December 31, 2017, the Company's Federal foreign tax credit carryforwards for tax return purposes were $102.2 million. The Federal foreign tax credit carryovers expire through 2026.

As of December 31, 2017, the Company’s net operating loss carryforwards for state tax return purposes was $80.9 million which expire in 2035. As a result of the adoption of ASU 2016-09 in fiscal 2017, the Company recorded a cumulative effect adjustment to increase retained earnings by $43.6 million with a corresponding increase to deferred tax assets from stock-based compensation which had not been previously recognized.

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, 2017, the total amount of gross unrecognized tax benefits was $42.9 million, of which $37.9 million, if recognized, would favorably impact the Company’s effective tax rate. As of December 31, 2016, the total amount of gross unrecognized tax benefits was $19.7 million, of which $17.0 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, 2015	$	17,117
Increases related to tax positions taken during prior periods	1,047
Decreases related to tax positions taken during prior periods	(7,105		)
Increases related to tax positions taken during the current period	8,713
Decreases related to settlements with taxing authorities	(33		)
Balances as of December 31, 2016	19,739
Increases related to tax positions taken during prior periods	—
Decreases related to tax positions taken during prior periods	(3,226		)
Increases related to tax positions taken during the current period	26,389
Decreases related to expiration of statute of limitations	—
Balances as of December 31, 2017	$	42,902

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 and the state of California for the years 2014 and 2015. The 2016 Federal tax return remains subject to examination by the IRS. The years 2010 through 2013 and 2016 remain subject to examination by the state of California. The Company has no significant foreign jurisdiction audits underway. The years 2012 through 2016 remain subject to examination by foreign jurisdictions.

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.