Income Taxes

Income tax expense (benefit) consists of the following (in millions):



	Year ended December 31,
	2018			2017			2016
Current:
Federal	$	35.0		$	10.4		$	15.3
State	9.4			5.3			6.0
Foreign	0.8			0.9			1.0
Total current	45.2			16.6			22.3

Deferred:
Federal	(2.3		)	(87.5		)	5.0
State	(5.2		)	9.1			(1.1		)
Foreign	—			—			(0.4		)
Total deferred	(7.5		)	(78.4		)	3.5
Total income tax expense (benefit)	$	37.7		$	(61.8	)	$	25.8

On December 22, 2017, the Tax Reform Act was signed into law. Among other provisions, the Tax Reform Act reduced the federal statutory corporate income tax rate from 35% to 21%. During the fourth quarter of 2017, we recorded a one-time, non-cash net tax benefit of $110.9 million related to the revaluation of our deferred income tax assets and liabilities as a result of the Tax Reform Act.

A reconciliation of our federal statutory income tax rate to our effective income tax rate is as follows:



	Year ended December 31,
	2018		2017		2016
Federal statutory rate	21.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	5.0		2.9		2.0
Noncontrolling interests	—		(13.7	)	(19.2	)
Tax credits	(1.8	)	(0.6	)	(0.6	)
Transaction costs	—		1.4		—
Domestic production activities deduction	—		(0.5	)	(1.1	)
Effect of Tax Reform Act	—		(57.6	)	—
Restricted share vesting	(1.0	)	(0.5	)	—
Effect of deferred revaluation related to lower blended state tax rate	(2.0	)	—		—
Prior year return to provision adjustments	(2.8	)	—		—
Other	(0.1	)	1.5		0.1
Effective tax rate	18.3	%	(32.1	)%	16.2	%

Prior to the Distribution and THL Interest Exchange, BKFS was treated as a corporation and our net deferred tax liability was primarily related to our investment in BKFS LLC. Following the Distribution, we no longer have any noncontrolling interests, and indirectly own 100% of BKFS LLC. To reflect the 100% indirect ownership, we recorded a non-cash transaction resulting in an increase of $292.5 million to Deferred income taxes with an offset to Additional paid-in capital on the Consolidated Balance Sheets to reflect the difference in the tax and financial reporting basis of our assets and liabilities. Deferred tax assets and liabilities are recognized for temporary differences between the financial reporting basis and the tax basis of the corporate subsidiaries' assets and liabilities and expected benefits of utilizing net operating loss carryforwards.

As of December 31, 2018 and 2017, the components of deferred tax assets primarily relate to deferred revenues, equity-based compensation, employee benefits accruals and deferred compensation. As of December 31, 2018 and 2017, the components of deferred tax liabilities primarily relate to depreciation and amortization of intangible assets, property and equipment and deferred contract costs.

The significant components of deferred tax assets and liabilities consist of the following (in millions):



	December 31,
	2018			2017
Deferred tax assets:
Deferred revenues	$	14.8		$	26.7
Net operating loss carryovers	0.7			1.3
Equity-based compensation	9.2			3.9
Other	10.7			8.9
Total deferred tax assets	35.4			40.8
Deferred tax liabilities:
Goodwill and other intangibles	(178.9		)	(193.8		)
Deferred contract costs	(41.9		)	(36.2		)
Property, equipment and computer software	(28.0		)	(26.1		)
Other	(7.5		)	(9.3		)
Total deferred tax liabilities	(256.3		)	(265.4		)
Net deferred tax liability	$	(220.9	)	$	(224.6	)

As a result of the Distribution, we have a remaining net operating loss carryover of $0.7 million from BKHI. Although the loss is limited under IRC Section 382, we expect it to be fully utilized before it expires in 2033.

ASC Topic 740-10, Accounting for Uncertain Tax Positions, requires that a tax position be recognized or derecognized based on a more likely than not threshold. This applies to positions taken or expected to be taken on a tax return. In 2017, as a result of the Distribution, we recorded an $8.3 million contingent tax liability for an uncertain tax position that was previously recorded at BKHI. As part of the Distribution, we entered into a tax matters agreement with FNF (the "Tax Matters Agreement"). The agreement outlines requirements for items such as the filing of pre and post-spin tax returns, payment of tax liabilities, entitlements of refunds and certain other tax matters. Under the Tax Matters Agreement with FNF, we had an indemnification receivable for the full amount of the contingent tax liability included in Receivables from related parties on the Consolidated Balance Sheets as of December 31, 2017. In 2018, we received notification from the state of Florida that resulted in no change to our income tax liabilities. As a result, the $8.3 million contingent tax liability was resolved, and we no longer have a related indemnification receivable as of December 31, 2018.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	December 31,
	2018			2017
Balance, January 1	$	8.3		$	—
Additions based on tax positions of prior years	0.4			8.3
Decreases based on tax positions of prior years	(8.3		)	—
Balance, December 31	$	0.4		$	8.3

We are currently under audit by the Internal Revenue Service ("IRS") for the 2014 and 2015 tax years. Our open tax years also include 2016, 2017 and 2018. We are currently under audit with the state of Florida for the 2015, 2016 and 2017 tax years. Other than the previously mentioned audits, we are not currently under audit for any other state jurisdiction or for India as of year end. We record interest and penalties related to income taxes, if any, as a component of Income tax (benefit) expense on the Consolidated Statements of Earnings and Comprehensive Earnings.

Tax Matters Agreement

Pursuant to the Tax Matters Agreement with FNF, we are obligated to indemnify FNF for (i) any action by Black Knight, or the failure to take any action within our control that negates the tax-free status of the transactions; or (ii) direct or indirect changes in ownership of Black Knight equity interests that cause the Distribution to be a taxable event to FNF as a result of the application of Section 355(e) of the Internal Revenue Code (“IRC”) or to be a taxable event as a result of a failure to satisfy the “continuity of interest” or “device” requirements for tax-free treatment under Section 355 of the IRC. No such events have occurred.

Tax Distributions

Prior to the Distribution, the taxable income of BKFS LLC was allocated to its members, including BKFS, and the members were required to reflect on their own income tax returns the items of income, gain, deduction and loss and other tax items of BKFS LLC that were allocated to them. BKFS LLC made tax distributions to its members for their allocable share of BKFS LLC's taxable income. Tax distributions are calculated based on allocations of income to a member for a particular taxable year without taking into account any losses allocated to the member in a prior taxable year. This practice is consistent with IRS regulations. Subject to certain reductions, tax distributions are generally made based on an assumed tax rate equal to the highest combined marginal federal, state and local income tax rate applicable to a U.S. corporation. BKFS LLC made tax distributions of $75.3 million and $48.6 million during the years ended December 31, 2017 and 2016, respectively. The 2017 tax distributions were for the 2016 tax year and 2017 tax year relating to the period before the Distribution. During 2018, the 2017 tax distribution amount was finalized, and we received a refund of $1.8 million from a former member of BKFS LLC.