8. Income Taxes

The geographical breakdown of income before provision for income taxes is as follows (in thousands):



	Year Ended December 31,
	2017		2016		2015
Domestic	$	373,221	$	196,202	$	129,240
Foreign	101,539		46,023		16,769
Income before provision for income taxes	$	474,760	$	242,225	$	146,009

The components of the provision for income taxes are as follows (in thousands):



	Year Ended December 31,
	2017			2016			2015
Current provision for income taxes:
Federal	$	36,862		$	67,253		$	43,706
State	3,645			10,529			5,500
Foreign	2,395			2,016			1,588
Total current	42,902			79,798			50,794
Deferred taxes:
Federal	12,795			(18,579		)	(23,896		)
State	(3,404		)	(3,564		)	(2,300		)
Foreign	(734		)	381			309
Total deferred	8,657			(21,762		)	(25,887		)
Total provision for income taxes	$	51,559		$	58,036		$	24,907

The reconciliation of the statutory federal income tax and our effective income tax is as follows:



	Year Ended December 31,
	2017		2016		2015
U.S. federal statutory income tax	35.00	%	35.00	%	35.00	%
State tax, net of federal benefit	(1.70	)	(0.03	)	(1.35	)
Foreign tax differential	(7.62	)	(3.24	)	(2.16	)
Tax credits	(3.84	)	(4.24	)	(6.72	)
Change in valuation allowance	1.95		1.71		2.84
Permanent items	(1.10	)	(1.02	)	(1.32	)
Uncertain tax positions and associated interest	0.77		(1.46	)	(3.95	)
Stock-based compensation	(23.74	)	(2.81	)	(5.29	)
Tax Cuts and Jobs Act	11.14		—		—
Other, net	—		0.05		0.01
Total provision for income taxes	10.86	%	23.96	%	17.06	%

We have operations and a taxable presence in numerous jurisdictions outside the U.S. In 2017, all of these countries have a lower tax rate than the U.S. The significant jurisdictions in which we have a presence include Cayman Islands, Ireland, and the United Kingdom.

The large increase in the stock-based compensation benefit in the current year is due to the recognition of excess tax benefits generated from stock awards as a component of the provision for income taxes attributable to the adoption of ASU 2016-09 in the first fiscal quarter of 2017. Prior to the adoption, these benefits were recorded as a component of shareholders’ equity.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; and (5) creating the base erosion anti-abuse tax (“BEAT”), a new minimum tax.

As of December 31, 2017, we had not yet completed our accounting for the tax effects of the enactment of the Tax Act. However, for the amounts that we were able to reasonably estimate, we recognized a provisional tax amount of $51.8 million, which consisted of the following:

•

$18.8 million for the transition tax liability. We have not yet completed the calculation of the total post-1986 foreign earnings and profit (“E&P”) and the income tax pools for all foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal and state governments and regulatory organizations, which may result in a change to the provisional tax liability.

•

$33.0 million to re-measure certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future. We are still analyzing certain aspects of the Tax Act and refining the estimate of the expected reversal of our deferred tax balances. This can potentially affect the measurement of these balances and potentially result in a change to the provisional amount.

The Tax Act also includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations. This income will effectively be taxed at a 10.5% tax rate in general. As a result, our deferred tax assets and liabilities are being evaluated to determine if they should be recognized for the basis differences expected to reverse as a result of GILTI provisions that are effective for us after the calendar year ending December 31, 2017, or whether the tax on GILTI provisions be recognized in the period the Tax Act was signed into law. Because of the complexity of the new provisions, we are continuing to evaluate how the provisions will be accounted for under the U.S. generally accepted accounting principles wherein companies are allowed to make an accounting policy election of either (i) account for GILTI as a component of tax expense in the period in which we are subject to the rules (the “period cost method”), or (ii) account for GILTI in our measurement of deferred taxes (the “deferred method”). Currently, we have not elected a method and will only do so after our completion of the analysis of the GILTI provisions and our election method will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in our taxable income related to GILTI and, if so, the impact that is expected.

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



	December 31,
	2017			2016
Deferred tax assets:
Property and equipment	$	1,942		$	473
Stock-based compensation	22,050			23,071
Reserves and accruals not currently deductible	41,024			49,436
Net operating losses	2,432			1,140
Tax credits	30,831			15,015
Other	2,115			194
Gross deferred tax assets	100,394			89,329
Valuation allowance	(35,132		)	(16,894		)
Total deferred tax assets	65,262			72,435
Deferred tax liabilities:
Property and equipment	—			(198		)
Accrued liabilities	(2,006		)	(2,555		)
Other	(9		)	(3		)
Total deferred tax liabilities	(2,015		)	(2,756		)
Net deferred tax assets	$	63,247		$	69,679

The following table presents the breakdown between non-current deferred tax assets and liabilities (in thousands):



	December 31,
	2017			2016
Deferred tax assets, non-current	$	65,125		$	70,960
Deferred tax liabilities, non-current	(1,878		)	(1,281		)
Total net deferred tax assets	$	63,247			$69,679

Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. We believe that all of the deferred tax assets were realizable with the exception of California and Canada deferred tax assets. Therefore, a valuation allowance of $35.1 million and $16.9 million was recorded as of December 31, 2017 and 2016, respectively, against the California and Canadian deferred tax assets as it was not more likely than not that these assets will be recognized. The net valuation allowance increased by $18.2 million and $4.2 million as of December 31, 2017 and 2016, respectively.

As of December 31, 2017, we had no net operating loss carryforwards for federal and state income tax purposes. For foreign jurisdictions, we had combined foreign net operating loss carryforwards of $12.8 million which do not expire.

As of December 31, 2017, we had U.S. federal credit carryforwards of $0.2 million, which begin to expire in 2038. We had state credit carryforwards of $59.5 million, which can be carried over indefinitely. For foreign jurisdictions, we had $1.2 million of Canadian scientific research and experimental development tax credit carry-forwards, which begin to expire in 2034.

Utilization of the net operating losses and tax credit carryforwards may be subject to limitations due to ownership changes limitations provided in the Internal Revenue code and similar state or foreign provisions. In all years up to December 31, 2017, such limitations had no impact to our deferred tax assets.

Our policy with respect to our undistributed foreign subsidiaries earnings is to consider those earnings to be indefinitely reinvested. As discussed above the Tax Act required a one-time transition tax on previously untaxed accumulated and current E&P. Correspondingly, all undistributed earnings were deemed to be taxed in the current year and distribution of the unremitted earnings will not have any significant U.S. federal and state income tax impact. We are still in process of assessing our cash needs and the associated state and foreign income tax effects of ultimate cash repatriation. As of December 31, 2017, 2016 and 2015, the undistributed earnings approximated $82.3 million, $36.4 million and $16.4 million, respectively. The determination of the future tax consequences of the remittance of these earnings is not practicable.

Uncertain Tax Positions

We recognize uncertain tax positions only to the extent that management believes that it is more likely than not the position will be sustained. The reconciliation of the beginning and ending amount of gross unrecognized tax benefits as of December 31, 2017, 2016 and 2015 was as follows (in thousands):



	Year Ended December 31,
	2017			2016			2015
Gross unrecognized tax benefits—beginning balance	$	26,915		$	22,239		$	21,322
Increases related to tax positions taken in a prior year	1,243			46			346
Increases related to tax positions taken during current year	22,202			11,359			7,385
Decreases related to tax positions taken in a prior year	(21		)	(426		)	(228		)
Decreases related to settlements with taxing authorities	—			(432		)	—
Decreases related to lapse of statute of limitations	(1,504		)	(5,871		)	(6,586		)
Gross unrecognized tax benefits—ending balance	$	48,835		$	26,915		$	22,239

As of December 31, 2017, 2016 and 2015, the total amount of gross unrecognized tax benefits was $48.8 million, $26.9 million and $22.2 million of which $23.5 million, $13.9 million and $13.0 million would affect our effective tax rate if recognized, respectively.

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We have recorded a net expense for interest and penalties of $0.4 million and a net benefit of $0.5 million in the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016, we recognized a liability for interest and penalties of $1.0 million and $0.6 million, respectively.

We have been selected for examination by the Internal Revenue Service ("IRS") for our 2014 tax year. It is difficult to determine when the examinations will be settled or their final outcomes in the foreseeable future. We believe that we have adequately provided reserves for any reasonably foreseeable adjustment to our tax returns.

The statute of limitations for Federal remains open for 2014 and forward. Because of the net operating loss and tax credit carryforwards, all tax years remain open to state tax examination. The majority of our foreign tax returns are open to audit under the statute of limitations of the respective foreign countries, in which the subsidiaries are located. It is possible that the amount of existing unrecognized tax benefits may decrease within the next 12 months as a result of statute of limitation lapses in some of the jurisdictions and the settlement of the aforementioned IRS examination, however, an estimate of the range cannot be made.