12. 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
	2018		As Adjusted*		As Adjusted*
Domestic	$	52,798	$	77,346	$	50,145
Foreign		13,366		11,516		11,870
Total	$	66,164	$	88,862	$	62,015

*See Note 3, Revenue for more information.

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
	2018		As Adjusted*		As Adjusted*
Current
Federal	$	1,730	$	3,568	$	8,002
Foreign		3,818		4,345		2,855
State and local		699		1,169		943
Total current expense		6,247		9,082		11,800
Deferred expense
Federal		8,829		47,073		2,992
Foreign		12		323		137
State and local		711		569		238
Total deferred expense		9,552		47,965		3,367
Provision for income taxes	$	15,799	$	57,047	$	15,167

*See Note 3, Revenue for more information.

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
	2018		As Adjusted*		As Adjusted*
U.S. statutory tax rate	21.0	%	35.0	%	35.0	%
Increase due to state and local taxes, net of federal benefit	3.1		2.6		2.6
Non-creditable foreign taxes	1.2		-		-
Foreign derived intangible income deduction	(1.3)		-		-
Income attributable to non-controlling interests	(7.3)		(12.5)		(14.1)
Other	(0.8)		(0.8)		1.0
Subtotal	15.9		24.3		24.5
Impact of TRA adjustment on NCI (a)	0.7		4.5		-
Effect of permanent difference - TRA adjustment (b)	(2.2)		(13.6)		-
Tax Reform Rate Change (c)	-		49.0		-
Valuation allowance recognized on tax basis step-ups	9.5		-
	23.9	%	64.2	%	24.5	%

*See Note 3, Revenue for more information.

(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%.

In December 2017, the Tax Cut and Jobs Act (the “TCJA”) was enacted, which included a significant reduction in the U.S. corporate income tax rate from 35% to 21% along with several changes to taxation of foreign derived income. In 2017, the Company recorded a $42.8 million charge to “Provision for income taxes” in the accompanying Consolidated Statements of Income for the reduction in the value of its deferred tax assets related to this tax rate change (reflected in the rate reconciliation table above as a 49.0% adjustment in 2017). Correspondingly, the TRA liabilities were reduced because of the rate change, resulting in a benefit to operating income of $32.7 million. The net effect of these two adjustments was a reduction to 2017 net income of $10.1 million. When the aforementioned adjustments were recorded in 2017, the Company was still evaluating several aspects of the TCJA, most notably around foreign derived income.

In 2018, the Company completed its evaluation of the impacts to its foreign derived income, particularly the tax credits received for foreign taxes and deductions allowed under the newly created foreign-derived intangible income deduction. The SEC staff issued Staff Accounting Bulletin 118, which provided all companies through December of 2018 to finalize provisional estimates of the impacts of the TCJA.

Starting with tax year 2018, the Company has foreign tax credit limitation due to the U.S. federal tax rate being lower than many foreign jurisdictions, particularly Canada. Certain of the tax basis step-ups, described in Note 4, Non-controlling interest, are related to intangible assets from the Company’s Western Canada operations. The deductions expected to be taken from these tax basis step-ups are no longer expected to be realized by the Company due to now being subject to a foreign tax credit limitation. As a result, the Company recognized a $6.3 million valuation allowance against the related deferred tax assets and an increase in “Provision for income taxes” in the accompanying Consolidated Statements of Income (reflected in the rate reconciliation table above as a 9.5% adjustment in 2018). The loss in value of the step-up, along with other less significant changes, also reduced the value of the TRA liabilities, resulting in a $6.1 benefit to operating income. The net impact of these items was insignificant to net income. In addition, the Company is now limited on the amount of foreign tax credit that can be claimed in its U.S. return.

The Company will continue to evaluate tax planning opportunities as well as monitor any changes that might be contained in the final regulations related to foreign derived income. Such final regulations are expected in 2019.

Income taxes receivable, net were $0.3 million and $0.9 million at December 31, 2018 and 2017, 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
	2018		As Adjusted*
Long-term deferred tax assets
Goodwill, other intangibles and other assets	$	48,427	$	52,385
Imputed interest deduction pursuant to tax receivable agreements		2,719		3,052
Rent liabilities		1,845		1,878
Compensation and benefits		2,131		526
Allowance for doubtful accounts		944		834
Motto contingent liability		748		929
Deferred revenue		3,939		3,914
Foreign tax credit carryforward		1,259		—
Other		1,281		663
Total long-term deferred tax assets		63,293		64,181
Valuation allowance (a)		(7,051)		—
Total long-term deferred tax assets, net of valuation allowance		56,242		64,181
Long-term deferred tax liabilities
Property and equipment and other long-lived assets		(2,944)		(1,491)
Total long-term deferred tax liabilities		(2,944)		(1,491)
Net long-term deferred tax assets		53,298		62,690
Total deferred tax assets and liabilities	$	53,298	$	62,690

*See Note 3, Revenue for more information.

(a)

Includes a valuation allowance on deferred tax assets for goodwill and intangibles in the Company’s Western Canada operations, as well as foreign tax credit carryforwards.

As of December 31, 2018, the Company generated $1.3 million in unutilized foreign tax credits. These credits may be carried back one year and carried forward for 10 years until utilized. This amount is included in the valuation allowance as of December 31, 2018.

Net deferred tax assets are 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 determines whether 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. If not expected to be realized, a valuation allowance is recognized to offset the deferred tax asset.

The Company does not believe it has any significant uncertain tax positions. Accordingly, the Company did not record any material adjustments or recognize interest expense for uncertain tax positions for the years ended December 31, 2018, 2017 and 2016. 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 2018 income tax returns by October 15, 2019. 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 2014 are subject to examination.