Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted. The Act includes numerous changes in existing tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21%. The rate reduction takes effect on January 1, 2018. As a result of the reduction of the federal corporate income tax rate, the Partnership revalued its deferred tax assets and liabilities as of December 31, 2017 using the newly enacted rate. The revaluation resulted in the recognition of additional provision for income taxes of approximately $113.0 million. In addition, the Partnership's tax receivable agreement liability was reduced by approximately $71.5 million due to the reduction in expected future benefits owed to the limited partners of Carlyle Holdings resulting from the decrease in the federal corporate income tax rate. The reduction in the tax receivable agreement liability resulting from the Act is included in other non-operating income in the consolidated statements of operations. The SEC Staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) in December 2017, which allows for reporting provisional amounts during a measurement period until the evaluation is complete. The Partnership assessed the potential impact of the Act on its consolidated financial statements at December 31, 2017 and believes the material provisions have been properly considered. The Partnership will continue to evaluate the provisions of the Act and the impact of any future authoritative guidance.

The provision for income taxes consists of the following:



	Year Ended December 31,
	2017			2016			2015
	(Dollars in millions)
Current
Federal income tax	$	(6.2	)	$	0.4		$	0.7
State and local income tax	(0.2		)	(0.4		)	4.9
Foreign income tax	38.8			34.9			27.4
Subtotal	32.4			34.9			33.0
Deferred
Federal income tax	106.2			(9.8		)	(36.7		)
State and local income tax	(2.7		)	(1.3		)	(2.6		)
Foreign income tax	(11.0		)	6.2			8.4
Subtotal	92.5			(4.9		)	(30.9		)
Total provision for income taxes	$	124.9		$	30.0		$	2.1

Deferred income taxes reflect the net tax effects of temporary differences that may exist between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using enacted tax rates in effect for the year in which the differences are expected to reverse.

A summary of the tax effects of the temporary differences is as follows:



	As of December 31,
	2017			2016
	(Dollars in millions)
Deferred tax assets
Federal foreign tax credit	$	11.9		$	12.8
Federal net operating loss carry forward	22.8			12.1
State net operating loss carry forwards	11.8			4.3
Tax basis goodwill and intangibles	98.2			149.8
Depreciation and amortization	16.6			25.3
Deferred restricted common unit compensation	9.4			12.1
Accrued compensation	31.0			25.0
Basis difference in investments	24.4			34.0
Other	24.3			25.5
Deferred tax assets before valuation allowance	250.4			300.9
Valuation allowance	(27.3		)	(21.8		)
Total deferred tax assets	$	223.1		$	279.1
Deferred tax liabilities ⁽¹⁾
Intangible assets	$	4.8		$	5.5
Unrealized appreciation on investments	121.0			111.0
Other	2.5			4.8
Total deferred tax liabilities	$	128.3		$	121.3
Net deferred tax assets (liabilities)	$	94.8		$	157.8


(1)	As of December 31, 2017 and 2016, $52.7 million and $44.7 million, respectively, of deferred tax liabilities were offset and presented as a single deferred tax asset amount on the Partnership’s balance sheet as these deferred tax assets and liabilities relate to the same jurisdiction.

As of December 31, 2017, the Partnership has a federal net operating loss carry forward of approximately $108.6 million and cumulative net operating loss carry forwards of approximately $197.1 million for separate state tax jurisdictions, which will be available to offset future taxable income. If not used, a portion of the federal and state carry forwards will expire in 2035 and years forward and 2020 and years forward, respectively. As of December 31, 2017, the Partnership had a federal foreign tax credit (“FTC”) carryforward of $11.9 million. The FTCs are related to taxes paid in various foreign jurisdictions and if not utilized a portion will expire in 2023 and years forward.

The Partnership had $170.4 million and $234.4 million in deferred tax assets as of December 31, 2017 and 2016, respectively. These deferred tax assets resulted primarily from future amortization of tax basis intangible assets generated from exchanges covered by the Tax Receivable Agreement (see Note 2) and acquisitions by the Partnership and temporary differences between the financial statement and tax bases of depreciation on fixed assets and accrued compensation on lower-tier partnerships. The realization of the deferred tax assets is dependent on the Partnership’s future taxable income before deductions related to the establishment of its deferred tax assets. The deferred tax asset balance is comprised of a portion that would be realized in connection with future ordinary income and a portion that would be realized in connection with future capital gains.

The Partnership evaluated various sources of evidence in determining the ultimate realizability of its deferred tax assets including the character and timing of projected future taxable income. During 2017 and 2016, a Partnership entity subject to entity level income tax in certain states incurred a significant tax loss. Management evaluated specific factors associated with the realizability of its net operating losses and the entity’s deferred tax assets and determined that it is more likely than not that the Partnership will not realize these tax assets. Additionally, the Partnership determined that a portion of the US federal FTC carryforward earned in 2013 and forward will not ultimately be realized due to federal limitations on FTC utilization. As of December 31, 2017 and 2016, the Partnership has established a valuation allowance of $27.3 million and $21.8 million, respectively, for these items. For all other deferred tax assets, the Partnership has concluded it is more likely than not that they will be realized and that a valuation allowance is not needed at December 31, 2017.

The Partnership had deferred tax liabilities of $75.6 million and $76.6 million at December 31, 2017 and 2016, respectively, which primarily relate to unrealized appreciation on the Partnership’s investments in the U.S. and in the Netherlands. Deferred tax liabilities related to unrealized appreciation were also recorded for outside tax basis differences as a result of the Partnership’s investment in Carlyle Holdings (see Note 1). The deferred tax liabilities related to intangible assets were recorded as part of the Partnership’s business acquisitions.

The Partnership’s income tax expense was $124.9 million, $30.0 million and $2.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. The following table reconciles the provision for income taxes to the U.S. Federal statutory tax rate:



	Year Ended December 31,
	2017		2016		2015
Statutory U.S. federal income tax rate	35.00	%	35.00	%	35.00	%
Income passed through to common unitholders and non-controlling interest holders⁽¹⁾	(31.55	)%	(40.00	)%	(40.64	)%
Reduction in U.S. corporate tax rate	7.77	%	—	%	—	%
Unvested Carlyle Holdings partnership units and other compensation	1.45	%	36.74	%	1.87	%
Foreign income taxes	0.12	%	28.75	%	1.61	%
State and local income taxes	(0.19	)%	(6.70	)%	4.13	%
Valuation allowance impacting provision for income taxes	0.07	%	16.84	%	(3.88	)%
Other adjustments	(1.64	)%	(4.40	)%	2.43	%
Effective income tax rate⁽²⁾	11.03	%	66.23	%	0.52	%


(1)	The Partnership is organized as a series of pass through entities pursuant to the United States Internal Revenue Code. As such, the Partnership is not responsible for the tax liability due on certain income earned during the year. Such income is taxed at the unitholder and non-controlling interest holder level, and any income tax is the responsibility of the unitholders and is paid at that level.


(2)	The effective income tax rate is calculated on income before provision for income taxes. The effective tax rate is impacted by a variety of factors, including, but not limited to, changes in the sources of income or loss during the period and whether such income or loss is attributable to the Partnership's taxable subsidiaries.

Under U.S. GAAP for income taxes, the amount of tax benefit to be recognized is the amount of benefit that is “more likely than not” to be sustained upon examination. The Partnership has recorded a liability for uncertain tax positions of $12.3 million and $19.0 million as of December 31, 2017 and 2016, respectively, which is reflected in accounts payable, accrued expenses and other liabilities in the accompanying consolidated balance sheets. These balances include $3.4 million and $6.0 million as of December 31, 2017 and 2016, related to interest and penalties associated with uncertain tax positions. If recognized, $12.3 million of uncertain tax positions would be recorded as a reduction in the provision for income taxes. A reconciliation of the beginning and ending amount of unrecognized tax benefits, exclusive of penalties and interest, is as follows:



	As of December 31,
	2017			2016			2015
	(Dollars in millions)
Balance at January 1	$	13.0		$	13.1		$	13.8
Additions for tax positions of prior years	1.6			1.3			(0.7		)
Reductions due to lapse of statute of limitations	(5.7		)	(1.4		)	—
Balance at December 31	$	8.9		$	13.0		$	13.1

In the normal course of business, the Partnership is subject to examination by federal and certain state, local and foreign tax regulators. With a few exceptions, as of December 31, 2017, the Partnership’s U.S. federal income tax returns for the years 2014 through 2016 are open under the normal three years statute of limitations and therefore subject to examination. State and local tax returns are generally subject to audit from 2013 to 2016. Foreign tax returns are generally subject to audit from 2010 to 2016. Certain of the Partnership’s affiliates are currently under audit by federal, state and foreign tax authorities. Currently. the Internal Revenue Service is examining the tax returns of certain subsidiaries for the 2013, 2014, and 2015 years.

The Partnership does not believe that the outcome of these audits will require it to record reserves for uncertain tax positions or that the outcome will have a material impact on the consolidated financial statements. The Partnership does not believe that it has any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.