INCOME TAXES

Income Tax Provision

The components of the income tax expense (benefit) are as follows (in thousands):



	Year Ended December 31,
	2017			2016		2015
Current income tax expense:
Federal	$	10,055		$	11,519	$	5,847
State	2,606			2,480		1,149
Current income tax expense	12,661			13,999		6,996
Deferred income tax (benefit) provision:
Federal	(3,805		)	3,703		(19,676		)
State	(2,565		)	2,664		(10,293		)
Deferred income tax (benefit) provision	(6,370		)	6,367		(29,969		)
Income tax expense (benefit)	$	6,291		$	20,366	$	(22,973	)

A reconciliation of the income tax expense (benefit) to the amounts computed by applying the statutory federal income tax rate to income (loss) from continuing operations before income taxes is shown as follows (in thousands):



	Year Ended December 31,
	2017			2016			2015
Income tax expense at the federal statutory rate of 35%	$	8,998		$	18,051		$	9,920
State income taxes, net of effect of federal tax benefit	(268		)	4,038			1,480
Impact of Tax Cuts and Jobs Act	9,062			—			—
Excess Tax Deductions on Non-Cash Compensation	(11,134		)	—			—
Change in (release of) valuation allowance	593			(416		)	(34,409		)
Research and experimentation tax credit	(1,318		)	(2,574		)	—
Other, net	358			1,267			36
Income tax expense (benefit)	$	6,291		$	20,366		$	(22,973	)

During the fourth quarter of 2017, LendingTree recorded a net tax expense of $9.1 million related to the enactment of the TCJA. The expense is primarily related to the remeasurement of LendingTree’s deferred tax assets and liabilities considering the TCJA’s newly enacted tax rates and certain other impacts. The determination of valuation of the deferred tax assets and liabilities related to the TCJA is provisional and is subject to adjustment during a measurement period of up to one year following the December 2017 enactment of the TCJA, as provided by recent SEC guidance.

Deferred Income Taxes

The tax effects of cumulative temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):



	December 31,
	2017			2016
Deferred tax assets:
Provision for accrued expenses	$	4,368		$	8,056
Net operating loss carryforwards ^(a)	6,296			8,548
Non-cash compensation expense	8,929			5,699
Goodwill	—			1,825
Contingent liabilities	6,666			—
Other	2,138			139
Total gross deferred tax assets	28,397			24,267
Less: valuation allowance ^(b)	(2,694		)	(2,101		)
Total deferred tax assets, net of the valuation allowance	25,703			22,166
Deferred tax liabilities:
Intangible and other assets	(1,960		)	(2,704		)
Other	(1,160		)	(1,071		)
Total gross deferred tax liabilities	(3,120		)	(3,775		)
Net deferred taxes	$	22,583		$	18,391

(a)

At December 31, 2017, the Company had pre-tax consolidated federal net operating losses ("NOLs") of $5.8 million. The federal NOLs will expire in 2030. The Company's NOLs will be available to offset taxable income (until such NOLs are either used or expire) subject to the Internal Revenue Code Section 382 annual limitation. In addition, the Company has state NOLs of approximately $190.4 million at December 31, 2017 that will expire at various times between 2018 and 2038.


(b)	The valuation allowance is related to items for which it is "more likely than not" that the tax benefit will not be realized.

Deferred income taxes are presented in the accompanying consolidated balance sheets as follows (in thousands):



	December 31,
	2017		2016
Deferred income tax assets	$	20,156	$	14,610
Non-current assets of discontinued operations	2,427		3,781
Net deferred taxes	$	22,583	$	18,391

Valuation Allowance

A valuation allowance is provided on deferred tax assets if it is determined that it is "more likely than not" that the deferred tax asset will not be realized. As of each reporting date, management considers both positive and negative evidence regarding the likelihood of future realization of the deferred tax assets.

In the fourth quarter of 2015 the Company concluded, based upon all available evidence, it was more likely than not it would have sufficient future taxable income to realize the majority of its net deferred tax assets. As a result, the Company released the majority of the valuation allowance in 2015. The Company significantly improved its operating performance in 2015, emerged from cumulative losses in previous years due to a cumulative profit position and projects taxable income in future years. While the Company believes the assumptions included in its projections of future taxable income are reasonable, if the actual results vary from expected results due to unforeseen changes in the economy or mortgage industry, or other factors, the Company may need to make future adjustments to the valuation allowance for all, or a portion, of the net deferred tax assets. At December 31, 2017 and 2016, the Company recorded a partial valuation allowance of $2.7 million and $2.1 million, respectively, primarily related to state net operating losses, which the Company does not expect to be able to utilize prior to expiration.

A reconciliation of the beginning and ending balances of the deferred tax valuation allowance is as follows (in thousands):



	Year Ended December 31,
	2017		2016			2015
Balance, beginning of the period	$	2,101	$	2,341		$	40,121
Charges to earnings ^(a)	593		(240		)	(37,780		)
Balance, end of the period	$	2,694	$	2,101		$	2,341

(a) During 2015, the amount is primarily related to the Company's release of the valuation allowance, current year utilization of net operating loss carryforwards, the write-off of certain state net operating losses that expire in 2015 and state net operating losses not expected to be utilized in future years due to changes in ownership limitations.

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is as follows (in thousands):



	Year Ended December 31,
	2017		2016
Balance, beginning of the period	$	550	$	19
Additions based on tax positions of the current year	198		550
Lapse of statute of limitations	—		(19		)
Balance, end of the period	$	748	$	550

Interest and, if applicable, penalties are recognized related to unrecognized tax benefits in income tax expense. For the year ended December 31, 2015, the Company incurred interest and penalties on unrecognized tax benefits of $0.1 million which was included in income tax expense. Interest and penalties on unrecognized tax benefits included in income tax expense for each of the years ended December 31, 2017 and 2016 was immaterial.

As of December 31, 2017, the accrual for unrecognized tax benefits, including interest, was $0.7 million, which would benefit the effective tax rate if recognized. As of December 31, 2016, the accrual for unrecognized tax benefits, including interest, was $0.6 million, which would benefit the effective tax rate if recognized.

Tax Audits

LendingTree is subject to audits by federal, state and local authorities in the area of income tax. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient to pay assessments that may result from examination of prior year returns; however, any amounts paid upon resolution of issues raised may differ from the amount provided. Differences between the reserves for tax contingencies and the amounts owed by the Company are recorded in the period they become known. As of December 31, 2017, the Company is subject to a federal income tax examination for the tax years 2013 through 2016. In addition, the Company is subject to state and local tax examinations for the tax years 2013 through 2016.