Income Taxes

Income from continuing operations before income taxes included income from domestic operations of $8,894 million, $8,271 million, and $12,020 million for the years ended December 31, 2014, 2015, and 2016, and income from foreign operations of $8,365 million, $11,380 million, and $12,130 million for the years ended December 31, 2014, 2015, and 2016.

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



	Year Ended December 31,
	2014			2015			2016
Current:
Federal	$	2,716		$	3,235		$	3,520
State	157			(397		)	306
Foreign	774			723			966
Total	3,647			3,561			4,792
Deferred:
Federal	29			(198		)	(70		)
State	6			(43		)	0
Foreign	(43		)	(17		)	(50		)
Total	(8		)	(258		)	(120		)
Provision for income taxes	$	3,639		$	3,303		$	4,672

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



	Year Ended December 31,
	2014		2015		2016
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
Foreign rate differential	(12.2	)%	(13.4	)%	(11.0	)%
Federal research credit	(1.8	)%	(2.1	)%	(2.0	)%
Stock-based compensation expense	0.1	%	0.3	%	(3.4	)%
Other adjustments	0.0	%	(3.0	)%	0.7	%
Effective tax rate	21.1	%	16.8	%	19.3	%

We adopted ASU 2016-09 on January 1, 2016, which requires the excess tax benefits or deficiencies to be reflected in the Consolidated Statements of Income as a component of the provision for income taxes whereas they previously were recognized in equity. Total excess tax benefits recognized in 2016 was $1.0 billion.

Our effective tax rate is impacted by earnings realized in foreign jurisdictions with statutory tax rates lower than the federal statutory tax rate. Substantially all of the income from foreign operations was earned by an Irish subsidiary.

As of December 31, 2016, we have not recognized deferred U.S. income taxes and foreign withholding taxes on a cumulative total of $60.7 billion of undistributed earnings and other basis differences in our foreign subsidiaries. We intend to indefinitely reinvest those earnings and other basis differences in operations outside the U.S. If such earnings and other basis differences in our investment foreign subsidiaries were to be repatriated in the future, they would be subject to U.S. income taxes and applicable non-U.S. income and withholding taxes. Determining the unrecognized deferred tax liability related to such investments in foreign subsidiaries that are indefinitely reinvested is not practicable.

On July 27, 2015, the United States Tax Court, in an opinion in Altera Corp. v. Commissioner, invalidated the portion of the Treasury regulations issued under IRC Section 482 requiring related-party participants in a cost sharing arrangement to share stock-based compensation costs. The U.S. Tax Court issued the final decision on December 28, 2015. The IRS served a Notice of Appeal on February 22, 2016. At this time, the U.S. Treasury has not withdrawn the requirement to include stock-based compensation from its regulations. We have evaluated the opinion and continue to record a tax benefit in 2016 related to reimbursement of cost share payments for the previously shared stock-based compensation costs. In addition, we continue to record a tax liability for the U.S. tax cost of potential repatriation of the associated contingent foreign earnings because at this time we cannot reasonably conclude that the Company has the ability and the intent to indefinitely reinvest these contingent earnings. The net impact to our consolidated financial statements is not material. We will continue to monitor developments related to the case and the potential impact on our consolidated financial statements.

Deferred Income Taxes

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows (in millions):



	As of December 31,
	2015			2016
Deferred tax assets:
Stock-based compensation expense	$	534		$	574
Accrued employee benefits	832			939
Accruals and reserves not currently deductible	245			500
Tax credits	503			631
Basis difference in investment of Arris	1,357			1,327
Prepaid cost sharing	3,468			4,409
Other	931			926
Total deferred tax assets	7,870			9,306
Valuation allowance	(1,732		)	(2,076		)
Total deferred tax assets net of valuation allowance	6,138			7,230
Deferred tax liabilities:
Depreciation and amortization	(1,126		)	(877		)
Identified intangibles	(787		)	(844		)
Renewable energy investments	(529		)	(788		)
Foreign earnings	(3,468		)	(4,409		)
Other	(166		)	(155		)
Total deferred tax liabilities	(6,076		)	(7,073		)
Net deferred tax assets	$	62		$	157

As of December 31, 2016, our federal and state net operating loss carryforwards for income tax purposes were approximately $592 million and $681 million. If not utilized, the federal net operating loss carryforwards will begin to expire in 2021 and the state net operating loss carryforwards will begin to expire in 2017. It is more likely than not that our state net operating loss carryforwards will not be realized; therefore, we have recorded a valuation allowance against them. The net operating loss carryforwards are subject to various annual limitations under the tax laws of the different jurisdictions. Our foreign net operating loss carryforwards for income tax purposes were $304 million that will begin to expire in 2022.

As of December 31, 2016, our California research and development credit carryforwards for income tax purposes were approximately $1,515 million that can be carried over indefinitely. We believe the state tax credit is not likely to be realized. Our foreign tax credit carryforwards for income tax purposes were approximately $166 million that will start to expire in 2025. We believe it is more likely than not that all of the foreign tax credit will be realized.

As of December 31, 2016, we maintained a valuation allowance with respect to certain of our deferred tax assets relating primarily to investment losses that are capital in nature, California deferred tax assets, and certain foreign net operating losses that we believe are not likely to be realized. We established a deferred tax asset for the book-to-tax basis difference in our investments in Arris shares received from the sale of the Motorola Home business to Arris in 2013. Since any future losses to be recognized upon the sale of Arris shares will be capital losses, a valuation allowance has been recorded against this deferred tax asset to the extent such deferred tax asset is not likely to be covered by capital gains generated as of 2016. We reassess the valuation allowance quarterly and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly.

As a result of the Altera opinion, we have recognized a deferred tax asset of $4.4 billion and a deferred tax liability of $4.4 billion. Refer to above for more details on the Altera case.

Uncertain Tax Positions

The following table summarizes the activity related to our gross unrecognized tax benefits from January 1, 2014 to December 31, 2016 (in millions):



	2014			2015			2016
Beginning gross unrecognized tax benefits	$	2,502		$	3,294		$	4,167
Increases related to prior year tax positions	66			224			899
Decreases related to prior year tax positions	(44		)	(176		)	(157		)
Decreases related to settlement with tax authorities	(1		)	(27		)	(196		)
Increases related to current year tax positions	771			852			680
Ending gross unrecognized tax benefits	$	3,294		$	4,167		$	5,393

The total amount of gross unrecognized tax benefits was $3,294 million, $4,167 million, and $5,393 million as of December 31, 2014, 2015, and 2016, respectively, of which, $2,909 million, $3,614 million, and $4,258 million if recognized, would affect our effective tax rate.

As of December 31, 2015 and 2016, we had accrued $348 million and $493 million in interest and penalties in provision for income taxes.

We file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions, our two major tax jurisdictions are the U.S. federal and Ireland. We are subject to the continuous examination of our income tax returns by the IRS and other tax authorities. The IRS completed its examination through our 2006 tax years; all issues have been concluded except for one which is currently under review in Tax Court. The IRS is currently examining our 2007 through 2012 tax returns. We have also received tax assessments in multiple foreign jurisdictions asserting transfer pricing adjustments or permanent establishment. We continue to defend any and all such claims as presented.

Our 2013, 2014, 2015, and 2016 tax years remain subject to examination by the IRS for U.S. federal tax purposes, and our 2011 through 2015 tax years remain subject to examination by the appropriate governmental agencies for Irish tax purposes. There are other ongoing audits in various other jurisdictions that are not material to our financial statements.

We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. We continue to monitor the progress of ongoing discussions with tax authorities and the impact, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions.

We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with management's expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs. Although the timing of resolution, settlement, closure of audits is not certain, it is reasonably possible that certain U.S. federal and non-U.S. tax audits may be concluded within the next 12 months, which could significantly increase or decrease the balance of our gross unrecognized tax benefits.

We estimate that our unrecognized tax benefits as of December 31, 2016 could possibly decrease by approximately $200 million to $700 million in the next 12 months. Positions that may be resolved include various U.S. and non-U.S. matters.