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,
	2018		2017		2016
Domestic	$	128,861	$	426,873	$	88,016
Foreign	2,943		2,308		1,892
Total income before the provision for income taxes	131,804		429,181		89,908

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



	Year Ended December 31,
	2018		2017			2016
Current:
Federal	$	178	$	(2,600	)	$	1,206
State	3,586		2,941			1,428
Foreign	945		817			421
Total current tax expense	4,709		1,158			3,055
Deferred:
Federal	22,757		365,470			11,633
State	946		6,857			3,755
Foreign	230		95			218
Total deferred tax expense	23,933		372,422			15,606
Provision for income taxes	$	28,642	$	373,580		$	18,661

The Company is 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, 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. The Company is also subject to taxes in certain foreign jurisdictions.

On December 22, 2017, the 2017 Tax Act was enacted, making significant changes to the Internal Revenue Code. Changes included, but were not limited to, a corporate tax rate decrease from 35% to 21% beginning on January 1, 2018, the transition of U.S international taxation from a worldwide tax system to a modified territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company recognized $334,619 of income tax expense in our income tax provision in the fourth quarter of 2017 as a result of the enactment of the 2017 Tax Act, of which $334,022 related to the remeasurement of certain deferred tax assets and liabilities, and $597 related to mandatory repatriation. The 2017 Tax Act also caused a remeasurement of our tax benefit arrangements, as discussed in more detail below.

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



	Year Ended December 31,
	2018		2017		2016
U.S. statutory tax rate	21.0	%	35.0	%	35.0	%
State and local taxes, net of federal benefit	5.9	%	1.0	%	4.9	%
State rate change impact on deferred taxes	(3.4	)%	0.8	%	(1.4	)%
Federal rate change impact on deferred taxes	—	%	77.8	%	—	%
Tax benefit arrangement liability adjustment	0.8	%	(25.8	)%	—	%
Foreign tax rate differential	0.2	%	—	%	(0.3	)%
Withholding taxes and other	(0.3	)%	0.1	%	—	%
Reserve for uncertain tax position	(0.2	)%	0.1	%	3.1	%
Income attributable to non-controlling interests	(2.3	)%	(1.9	)%	(20.5	)%
Effective tax rate	21.7	%	87.1	%	20.8	%

The Company’s effective tax rate was 21.7% in 2018, in comparison to the U.S. statutory tax rate in 2018 of 21%. The comparison of our effective tax rate to U.S. statutory tax rate is influenced by the fact that we are subject to taxation in various state and local jurisdictions resulting in an increase in our effective tax rate, offset mainly by income tax benefit recorded in 2018 to remeasure deferred tax assets. This remeasurement was a result of various state tax legislation enacted in the year as well as acquisitions which resulted in an increase in the amount of income apportioned to various states in future periods and accordingly resulted in recognition of a deferred tax benefit in 2018, and a decrease to our effective income tax rate in 2018.

The Company’s effective tax rate is 21.7% for the year ended December 31, 2018, compared to 87.1% in the prior year. The decrease in our effective income tax rate is primarily due to the recognition of an income tax expense in connection with remeasurement of our deferred taxes in 2017 as a result of the Tax Act, as well as a decrease in the U.S. statutory tax rate in 2018. These factors are partially offset by the income tax benefit recognized in 2017 in connection with the remeasurement of our TRA liability as a result of the Tax Act.

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,
	2018			2017
Deferred tax assets:
Accrued expense and reserves	$	37		$	1,422
Deferred revenue	4,619			1,900
Goodwill and intangible assets	409,740			404,547
Net operating loss	—			603
Other	4,901			3,619
Deferred tax assets	$	419,297		$	412,091
Deferred tax liabilities:
Prepaid expenses	(922		)	(773		)
Property and equipment	(5,837		)	(5,165		)
Total deferred tax liabilities	$	(6,759	)	$	(5,938	)
Total deferred tax assets and liabilities	$	412,538		$	406,153
Reported as:
Deferred income taxes - non-current assets	$	414,841		$	407,782
Deferred income taxes - non-current liabilities	(2,303		)	(1,629		)
Total deferred tax assets and liabilities	$	412,538		$	406,153

As of December 31, 2018, the Company does not have any material net operating loss carryforwards.

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



	Year Ended December 31,
	2018			2017
Balance at beginning of year	$	2,608		$	2,608
Decrease related to prior year tax positions	(2,308		)	—
Balance at end of year	$	300		$	2,608

As of December 31, 2018 and 2017, the total liability related to uncertain tax positions was $300 and 2,608, respectively, and is included within other liabilities on our consolidated balance sheets. The table above presents a reconciliation of the beginning and ending balances of the liability for unrecognized tax benefits, excluding interest and penalties, for the years ended December 31, 2018 and 2017. The decrease in the liability for uncertain tax position is due to a settlement of a tax examination during 2018. During 2018, the Company settled a tax examination for $2,625 which was fully indemnified. At the date of settlement the Company had recorded on its balance sheet an unrecognized tax benefit and related indemnification asset of $2,967, reflecting principal and interest, and released $342 as an offset to provision for income taxes and also released an indemnification asset of $342 through other expense. The Company recognized interest and penalties related to uncertain tax positions as a component of income tax expense.

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 2015 through 2018 remain open to examination by the tax authorities in these jurisdictions.

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 11), 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 $4,765, other income of $317,350 and other expense of $72 and in the years ended December 31, 2018, 2017 and 2016, respectively, reflecting a change in the tax benefit obligation attributable to a change in the expected tax benefits. In 2018, the remeasurement was primarily due to various state tax legislation changes enacted in the year as well as acquisitions which resulted in an increase in the amount of income apportioned to various states in future periods and accordingly resulted in a decrease to the tax benefit arrangement liability. Included in this amount in 2017, was a gain of $316,813 related to the remeasurement of our tax benefit arrangements in connection with changes in the tax rate due to the 2017 Tax Act. This remeasurement gain, which is not subject to federal or state income tax, favorably impacted our effective federal and state income tax rates in 2017.

In connection with the exchanges that occurred in the secondary offerings and other exchanges during 2018 and 2017, 1,736,020 and 25,842,004 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, we recorded a decrease to our net deferred tax assets of $721 and $24,371, during the years ended December 31, 2018 and 2017, respectively. As a result of these exchanges, during the years ended December 31, 2018 and 2017 we also recognized deferred tax assets in the amount of $27,565 and $394,108, respectively, and corresponding tax benefit arrangement liabilities of $23,526 and $341,089, respectively, representing approximately 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 stockholders’ equity.

The tax benefit obligation was $429,233 and $431,360 as of December 31, 2018 and 2017, respectively.

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



	Amount
2019	$	24,765
2020	24,996
2021	25,450
2022	25,975
2023	26,482
Thereafter	301,565
Total	$	429,233