11. Income Taxes

“Income before provision for income taxes” as shown in the accompanying Consolidated Statements of Income is comprised of the following (in thousands):


	Year Ended December 31,
	2017		2016		2015
Domestic	$	78,812	$	51,194	$	51,552
Foreign		11,943		11,305		11,253
Total	$	90,755	$	62,499	$	62,805

Components of the “Provision for income taxes” in the accompanying Consolidated Statements of Income consist of the following (in thousands):


	Year Ended December 31,
	2017		2016		2015
Current
Federal	$	3,568	$	8,002	$	5,451
Foreign		4,345		2,855		3,019
State and local		1,169		943		1,029
Total current expense		9,082		11,800		9,499
Deferred expense
Federal		45,934		3,222		2,333
Foreign		(9)		13		25
State and local		569		238		173
Total deferred expense		46,494		3,473		2,531
Provision for income taxes	$	55,576	$	15,273	$	12,030

The provision for income taxes is comprised of a provision for income taxes attributable to RE/MAX Holdings and to entities other than RE/MAX Holdings. The provision for income taxes attributable to RE/MAX Holdings includes all U.S. federal and state income taxes on RE/MAX Holdings’ proportionate share of RMCO’s net income. The provision for income taxes attributable to entities other than RE/MAX Holdings represents taxes imposed directly on RMCO and its subsidiaries, primarily foreign taxes that are allocated to the non-controlling interest.

A reconciliation of the U.S. statutory income tax rate to the Company’s effective tax rate is as follows:


	Year Ended December 31,
	2017		2016		2015
U.S. statutory tax rate	35.0	%	35.0	%	35.0	%
Increase due to state and local taxes, net of federal benefit	2.6		2.6		2.6
Effect of permanent differences	(0.1)		(0.2)		1.2
Income attributable to non-controlling interests	(12.5)		(14.1)		(19.7)
Other	0.2		1.1		0.1
Subtotal	25.2		24.4		19.2
Impact of reduction in TRA liability on non-controlling interests(a)	4.5		-		-
Effect of permanent difference – reduction in TRA liability(b)	(13.6)		-		-
Tax Cuts and Jobs Act rate change(c)	45.1		-		-
	61.2	%	24.4	%	19.2	%

(a)

Reflects additional impact of non-controlling interest adjustment being on a larger base of income that includes the gain on reduction in TRA liability.

(b)

Reflects the impact of gain on TRA liability reduction, which is not taxable.

(c)

Reflects reduction in deferred tax assets and resulting increase in deferred tax expense due to U.S. Federal rate declining from 35% to 21%.

On December 22, 2017, the Tax Cuts and Jobs Act was enacted. The Tax Cuts and Jobs Act includes significant changes to the U.S. corporate tax system, including a federal corporate rate reduction from 35% to 21%. The Company’s effective tax rate includes a rate benefit attributable to the fact that the Company’s subsidiaries operate as a series of limited liability companies which are not themselves subject to federal income tax. Accordingly, the portion of the Company’s subsidiaries earnings attributable to the non-controlling interest are subject to tax when reported as a component of the non-controlling interests’ taxable income and are excluded from the Provision for Income Taxes. The reduction in the corporate tax rate from 35% to 21% resulted in substantial reductions to the Company’s deferred tax assets and the TRA liability. The deferred tax asset was reduced for the impact of the lower rate, resulting in a charge to “Provision for income taxes” in the accompanying Consolidated Statements of Income of $40.9 million. Correspondingly, the TRA liability was also reduced for the rate change, resulting in a benefit to operating income of $32.7 million. The net effect on net income was $8.2 million.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118, which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act for which the accounting under ASC 740, Income Taxes (“ASC 740”) is incomplete. To the extent that a company's accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before enactment of the Tax Cuts and Jobs Act.

As of December 31, 2017, we have completed the majority of our accounting for the tax effects of the Tax Cuts and Jobs Act. However, our analysis around the new foreign-derived intangible income (“FDII”) deduction is incomplete. As such, we have not estimated or included a provisional adjustment for deferred tax assets related to the FDII deduction. Also, there is uncertainty around the depreciable life of qualified property as well as eligibility for accelerated depreciation after September 27, 2017. Therefore we have not estimated a provisional amount for deferred tax assets related to qualified property depreciation expense. In addition, we also re-measured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse. However, we are still analyzing certain aspects of the Tax Cuts and Jobs Act and are refining our calculations, which could potentially affect the measurement of these balances.

Income taxes receivable (payable) were $0.7 million and $(0.4) million at December 31, 2017 and 2016, respectively.

Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the accompanying Consolidated Balance Sheets.

These temporary differences result in taxable or deductible amounts in future years. Details of the Company’s deferred tax assets and liabilities are summarized as follows (in thousands):


	As of December 31,
	2017		2016
Long-term deferred tax assets
Goodwill, other intangibles and other assets	$	52,385	$	90,686
Imputed interest deduction pursuant to tax receivable agreements		3,052		8,483
Rent liabilities		1,878		2,037
Compensation and benefits		526		1,606
Allowance for doubtful accounts		687		979
Motto contingent liability		929		1,405
Deferred Revenue		171		—
Other		393		855
Total long-term deferred tax assets		60,021		106,051
Long-term deferred tax liabilities
Property and equipment and other long lived assets		(1,021)		(414)
Total long-term deferred tax liabilities		(1,021)		(414)
Net long-term deferred tax assets		59,000		105,637
Total deferred tax assets and liabilities	$	59,000	$	105,637

Net deferred tax assets are also recorded related to differences between the financial reporting basis and the tax basis of RE/MAX Holdings’ proportionate share of the net assets of RMCO. Based on the Company’s historical taxable income and its expected future earnings, management evaluates the uncertainty associated with booking tax benefits and determined that the deferred tax assets are more likely than not to be realized, including evaluation of deferred tax liabilities and the expectation of future taxable income.

The Company does not believe it has any significant uncertain tax positions. Accordingly, the Company did not record any adjustments or recognize interest expense for uncertain tax positions for the years ended December 31, 2017, 2016 and 2015. In the future, if uncertain tax positions arise, interest and penalties will be accrued and included in the “Provision for income taxes” in the accompanying Consolidated Statements of Income.

The Company and its subsidiaries file, or will file, income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. RE/MAX Holdings will file its 2017 income tax return by October 15, 2018. RMCO is not subject to domestic federal income taxes as it is a flow-through entity; however, RMCO is still required to file an annual U.S. Return of Partnership Income. With respect to state and local jurisdictions and countries outside of the U.S., the Company and its subsidiaries are typically subject to examination for three to four years after the income tax returns have been filed. As such, income tax returns filed since 2013 are subject to examination.