(15) Income taxes

Income before the provision for income taxes as shown in the accompanying consolidated statements of operations is as follows:

	Year Ended December 31,
	2016		2015			2014
Domestic	$	88,016	$	48,716		$	39,534
Foreign		1,892		(1,438	)		(1,056	)
Total income before the provision for income taxes		89,908		47,278			38,478

The provision (benefit) for income taxes consists of the following:

	Year Ended December 31,
	2016		2015			2014
Current:
Federal	$	1,206	$	686		$	—
State		1,428		2,188			1,078
Foreign		421		139			168
Total current tax expense		3,055		3,013			1,246
Deferred:
Federal		11,633		5,636			—
State		3,755		935			217
Foreign		218		(436	)		(280	)
Total deferred tax expense (benefit)		15,606		6,135			(63	)
Provision for income taxes	$	18,661	$	9,148		$	1,183

As a result of the recapitalization transactions, the Company became the sole managing member of Pla-Fit Holdings, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Pla-Fit Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Pla-Fit Holdings is passed through to and included in the taxable income or loss of its members, including the Company following the recapitalization transactions, on a pro rata basis. Planet Fitness, Inc. is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income of Pla-Fit Holdings following the recapitalization transactions. The Company is also subject to taxes in foreign jurisdictions.

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

	Year Ended December 31,
	2016			2015
U.S. statutory tax rate		35.0	%		35.0	%
State and local taxes, net of federal benefit		4.9	%		6.2	%
Rate change impact on deferred taxes		(1.4	)%		6.9	%
Tax benefit arrangement liability adjustment		—	%		(2.1	)%
Foreign tax rate differential		(0.3	)%		0.3	%
Withholding taxes and other		—	%		0.2	%
Reserve for uncertain tax position		3.1	%		—	%
Income attributable to non-controlling interests		(20.5	)%		(27.1	)%
Effective tax rate		20.8	%		19.4	%

The Company incurs U.S. federal and state income taxes on its pro rata share of income flowed through from Pla-Fit Holdings. Our effective tax rate on such income was approximately 39.5% and 39.4% for the years ended December 31, 2016 and 2015, respectively. The provision for income taxes also reflects an effective state tax rate of 2.0% and 2.5% for the years ended December 31, 2016 and 2015, respectively, applied to non-controlling interests, representing the remaining percentage of income before taxes, excluding income from variable interest entities, related to Pla-Fit Holdings. Undistributed earnings of foreign operations are not material for the years ended December 31, 2016 and 2015, 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:

	Year Ended December 31,
	2016			2015
Deferred tax assets:
Accrued expense and reserves	$	865		$	353
Deferred revenue		2,029			1,276
Goodwill and intangible assets		406,447			113,460
Net operating loss		22			716
Other		4,218			2,841
Deferred tax assets	$	413,581		$	118,646

Deferred tax liabilities:
Prepaid expenses		(781	)		(674	)
Property and equipment		(3,631	)		(614	)
Total deferred tax liabilities	$	(4,412	)	$	(1,288	)
Total deferred tax assets and liabilities	$	409,169		$	117,358

Reported as:
Deferred income taxes - non-current assets	$	410,407		$	117,358
Deferred income taxes - non-current liabilities		(1,238	)		—
Total deferred tax assets and liabilities	$	409,169		$	117,358

The Company has net operating loss carryforwards related to its Canada operations of approximately $82, which begin to expire in 2034. The Company believes as of December 31, 2016 it is more likely than not that the results of future operations will generate sufficient taxable income to realize all deferred tax assets, and as such no valuation allowance has been recorded.

A summary of the changes in the Company’s unrecognized tax positions is as follows:

	Year Ended December 31,
	2016		2015
Balance at beginning of year	$	300	$	300
Increases related to prior year tax positions		2,308		-
Balance at end of year	$	2,608	$	300

During the year ended December 31, 2016, the Company recognized $2,773 within current tax expense related to the establishment of a reserve for an uncertain tax position, including interest of $465. This amount relates to a potential liability associated with a 2012 state filing position currently under audit by the taxing authorities. While the Company believes it is more likely than not that its position will be sustained, the amount recorded after assessing the likelihood of various potential outcomes is based upon the facts and circumstances known as of December 31, 2016. In connection with the 2012 Acquisition of Pla-Fit Holdings on November 8, 2012 by TSG, the sellers are obligated to indemnify the Company for certain pre-acquisition tax liabilities. The Company has therefore recorded an asset and corresponding other income of $2,773 in connection with the indemnification in the year ended December 31, 2016.

The Company recognizes interest and penalties, if applicable, related to uncertain tax positions as a component of income tax expense. Interest and penalties recorded for the year ended December 31, 2016 was $465. Interest and penalties for the year ended December 31, 2015 and 2014 were not material.

As of December 31, 2016 and 2015, the total liability related to uncertain tax positions was $2,608 and $300, respectively. The amount of unrecognized tax benefits as of December 31, 2016 that, if recognized, would reduce income tax expense is $2,608. As of December 31, 2016, the Company anticipates that the liability for unrecognized tax benefits could decrease by up to $2,608 within the next twelve months due to the expiration of certain statutes of limitation or the settlement of examinations or issues with tax authorities.

The Company and its subsidiaries file U.S. federal income tax returns, as well as tax returns in various state and foreign jurisdictions. Generally, the tax years 2013 through 2016 remain open to examination by the tax authorities in these jurisdictions. The Company is currently under audit in its primary state jurisdiction, New Hampshire, for 2012 and 2013.

Tax benefit arrangements

The Company’s acquisition of Holdings Units in connection with the IPO and future and certain past exchanges of Holdings Units for shares of the Company’s Class A common stock (or cash at the option of the Company) are expected to produce and have produced favorable tax attributes. In connection with the IPO, the Company entered into two tax receivable agreements. Under the first of those agreements, the Company generally is required to pay to the TRA Holders 85% of the applicable tax savings, if any, in U.S. federal and state income tax that the Company is deemed to realize as a result of certain tax attributes of their Holdings Units sold to the Company (or exchanged in a taxable sale) and that are created as a result of (i) the sales of their Holdings Units for shares of Class A common stock and (ii) tax benefits attributable to payments made under the tax receivable agreement (including imputed interest). Under the second tax receivable agreement, the Company generally is required to pay to the Direct TSG Investors 85% of the amount of tax savings, if any, that the Company is deemed to realize as a result of the tax attributes of the Holdings Units held in respect of the Direct TSG Investors’ interest in the Company, which resulted from the Direct TSG Investors’ purchase of interests in Pla-Fit Holdings in 2012, and certain other tax benefits. Under both agreements, the Company generally retains the benefit of the remaining 15% of the applicable tax savings. Also, pursuant to the exchange agreement (see Note 12), to the extent an exchange results in Pla-Fit Holdings, LLC incurring a current tax liability relating to the New Hampshire business profits tax, the TRA Holders have agreed that they will contribute to Pla-Fit Holdings, LLC an amount sufficient to pay such liability (up to 3.5% of the value receive upon exchange). If and when the Company subsequently realizes a related tax benefit, Pla-Fit Holdings, LLC will distribute the amount of any such tax benefit to the relevant TRA LLC Owner in respect of its contribution. Due to changes in New Hampshire tax law during 2016, the Company no longer expects to incur any such liability under the New Hampshire business profits tax. The Company recorded other expense of $72 and other income of $2,549 in the years ended December 31, 2016 and 2015, respectively, reflecting a change in the tax benefit obligation attributable to a change in the expected tax benefits.

In connection with the exchanges that occurred in the secondary offerings and other exchanges during 2016 and in the IPO during 2015, 24,704,610 and 10,491,055 Holdings Units, respectively, were redeemed by the Continuing LLC Owners for newly-issued shares of Class A common stock, resulting in an increase in the tax basis of the net assets of Pla-Fit Holdings subject to the provisions of the tax receivable agreements. As a result of the change in Planet Fitness, Inc.’s ownership percentage of Pla-Fit Holdings that occurred in conjunction with the exchanges and, in 2015, the recapitalization transactions and IPO, we recorded a decrease to our net deferred tax assets of $25,046 and $35,661, during the years ended December 31, 2016 and 2015, respectively. As a result of these exchanges, during the years ended December 31 2016 and 2015 we also recognized deferred tax assets in the amount of $332,471 and $154,335, respectively, and corresponding tax benefit arrangement liabilities of $285,730 and $136,950, respectively, representing 85% of the tax benefits due to the TRA Holders. The offset to the entries recorded in connection with exchanges in each year was to equity.

The tax benefit obligation was $419,071 and $140,191 as of December 31, 2016 and 2015, respectively.

Projected future payments under the tax benefit arrangements are as follows:

	Amount
2017	$	11,296
2018		20,253
2019		20,438
2020		20,927
2021		21,491
Thereafter		324,666
Total	$	419,071