NOTE 11. INCOME TAXES

Tax Cuts and Jobs Act

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) that provides guidance on the financial statement implications of the TCJA. Pursuant to SAB 118 interpretive guidance, we prepared and recorded tax accounting for the year ended December 31, 2017 applying tax laws in effect prior to the application of the provisions of the TCJA; and we also recorded provisional estimates (as defined in SAB 118) for all the effects of the TCJA. Elections have been made on accounting policies and practices related to the TCJA, except as noted below. SAB 118 requires that we disclose the following:

•We have recorded provisional estimates in these financial statements to account for the impact of the TCJA on deferred tax balances (the “Deferred Tax Revaluation”) as described below, the transition tax on cumulative foreign earnings and profits (the “Transition Tax”), and the international aspects, including revised foreign tax credit computational requirements (the “International Impacts”). Provisional estimates have been presented in accordance with SAB 118 because the timeframe between passage of the TCJA and the filing deadlines was insufficient to complete the tax accounting adjustments for our over 300 legal entities. The tax accounting adjustments involve a highly complex analysis of the TCJA legislation and Conference Committee legislative history. The TCJA has wide-ranging international and domestic tax impacts.

•Further, the International Impacts and the corporate tax rate reduction net of base broadening provisions, is expected to increase our U.S. liquidity. We are evaluating the accounting treatment related to the new TCJA global intangible low-taxed income (“GILTI”) rules in our financial statements and have not yet made a policy decision regarding whether to record deferred taxes.

•The additional information needed to complete the accounting requirements under the TCJA includes interpretive guidance from the IRS for clarification of terminology, guidance for the numerous inconsistencies between the new statute, Conference Agreement, and prior law, as well as the interaction between numerous international tax law changes. After reasonable interpretative guidance has been developed, we expect to gather and interpret additional factual information specific to our businesses.

•SAB 118 provides for a one-year measurement period and we intend to complete the accounting for the TCJA impacts within that time frame. As of December 31, 2017, we have not recorded any measurement period adjustments.

•We have separately presented our provisional estimates in the tables below, including existing current and deferred tax amounts.

Earnings and Income Taxes

Earnings before income taxes for the years ended December 31 were as follows ($ in millions):



	2017		2016		2015
United States	$	816.7	$	812.9	$	913.8
International	467.5		384.1		355.9
Total	$	1,284.2	$	1,197.0	$	1,269.7

The provision for income taxes for the years ended December 31 were as follows ($ in millions):



	2017			2016			2015
Current:
Federal U.S.	$	215.9		$	227.4		$	310.8
Non-U.S.	88.7			74.6			54.3
State and local	13.3			32.7			32.8
Deferred:
Federal U.S.	(79.5		)	(4.6		)	(4.0		)
Non-U.S.	(2.2		)	(3.0		)	12.7
State and local	3.5			(2.4		)	(0.7		)
Income tax provision	$	239.7		$	324.7		$	405.9

The 2017 current federal provision for income taxes above includes provisional estimates related to one-time amount payable to the U.S. for the Transition Tax of $135 million. Under the provisions of the TCJA, a company is permitted to elect to pay this liability over an eight-year period without interest. We expect to make that election.

We recorded provisional estimates of the Deferred Tax Revaluation which was recorded to reflect the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent. In accordance with accounting guidance, we measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Our 2017 deferred federal and state income tax provisions include a provisionally estimated tax benefit of $205 million related to the Deferred Tax Revaluation. This amount also includes provisional estimates of deferred tax expense related to the acceleration of depreciation for certain assets placed into service after September 27, 2017.

Deferred Tax Assets and Liabilities

All deferred tax assets and liabilities have been classified as noncurrent deferred tax liabilities and are included in other assets and other long-term liabilities in the accompanying Consolidated Balance Sheets. Deferred income tax assets and liabilities as of December 31 were as follows ($ in millions):



	2017			2016
Deferred Tax Assets:
Allowance for doubtful accounts	$	22.0		$	28.5
Inventories	31.3			33.0
Pension benefits	41.2			49.1
Environmental and regulatory compliance	17.7			18.9
Other accruals and prepayments	35.2			44.2
Deferred service income	14.5			10.5
Warranty services	29.0			27.1
Stock compensation expense	36.4			31.7
Tax credit and loss carryforwards	61.4			74.0
Other	7.3			8.0
Valuation allowances	(27.7		)	(26.7		)
Total deferred tax assets	268.3			298.3
Deferred Tax Liabilities:
Property, plant and equipment	(79.9		)	(33.2		)
Insurance, including self-insurance	(138.7		)	(85.2		)
Goodwill and other intangibles	(607.6		)	(416.5		)
Other	(20.0		)	(10.0		)
Total deferred tax liabilities	(846.2		)	(544.9		)
Provisional estimate of the deferred tax asset revaluation	(54.5		)	—
Provisional estimate of the deferred tax liability revaluation	274.0			—
Net deferred tax liability	$	(358.4	)	$	(246.6	)

Our deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. We evaluate the realizability of deferred income tax assets for each of the jurisdictions in which we operate. If we experience cumulative pretax income in a particular jurisdiction in the three-year period including the current and prior two years, we normally conclude that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments would lead management to conclude otherwise. However, if we experience cumulative pretax losses in a particular jurisdiction in the three-year period including the current and prior two years, we then consider a series of factors in the determination of whether the deferred income tax assets can be realized. These factors include historical operating results, known or planned operating developments, the period of time over which certain temporary differences will reverse, consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in the particular country, and prudent and feasible tax planning strategies. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, we would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, we established a valuation allowance.

Applying the above methodology, valuation allowances have been established for certain deferred income tax assets to the extent they are not expected to be realized within the particular tax carryforward period.

Deferred taxes associated with U.S. entities consist of net deferred tax liabilities of approximately $375 million and $293 million inclusive of valuation allowances of $12 million and $16 million as of December 31, 2017 and December 31, 2016, respectively. Deferred taxes associated with non-U.S. entities consist of net deferred tax assets of $17 million and $46 million inclusive of valuation allowances of $16 million and $11 million as of December 31, 2017 and December 31, 2016, respectively. During 2017, our valuation allowance increased by $1 million primarily due to valuation allowances related to foreign net operating losses.

As of December 31, 2017, our U.S. and non-U.S. net operating loss carryforwards totaled $226 million, of which $78 million is related to federal net operating loss carryforwards, $40 million is related to state net operating loss carryforwards, and $108 million is related to non-U.S. net operating loss carryforwards. Included in deferred tax assets as of December 31, 2017 are tax benefits for U.S. and non-U.S. net operating loss carryforwards totaling $44 million, before applicable valuation allowances of $16 million. Certain of these losses can be carried forward indefinitely and others can be carried forward to various dates from 2018 through 2037. Recognition of some of these loss carryforwards is subject to an annual limit, which may cause them to expire before they are used.

As of December 31, 2017, our U.S. and non-U.S. tax credit carryforwards totaled $17 million of which is primarily related to U.S. tax credit carryforwards. A valuation allowance was also established as of December 31, 2017 for $12 million of certain tax credit carryforwards from the Separation.

Effective Income Tax Rate

The effective income tax rate for the years ended December 31 varies from the U.S. statutory federal income tax rate as follows:



	Percentage of Pretax Earnings
	2017		2016		2015
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in tax rate resulting from:
State income taxes (net of federal income tax benefit)	0.7	%	1.7	%	1.8	%
Foreign income taxed at lower rate than U.S. statutory rate	(5.0	)%	(4.7	)%	(4.6	)%
Separation related adjustments for final resolution of uncertain tax positions	—	%	(1.9	)%	—	%
Research and experimentation credits and federal domestic production deduction	(2.9	)%	(2.5	)%	(2.1	)%
Other	(3.6	)%	(0.5	)%	1.9	%
Effective income tax rate prior to the impact of the TCJA	24.2	%	27.1	%	32.0	%

Deferred Tax Revaluation	(16.0	)%	—	%	—	%
Transition Tax	10.5	%	—	%	—	%
Total provisional estimates related to the TCJA	(5.5	)%	—	%	—	%

Estimated effective income tax rate including provisional estimates of the TCJA	18.7	%	27.1	%	32.0	%

Our estimated effective tax rate including provisional estimates of the TCJA for 2017 differs from the U.S. federal statutory rate of 35.0% due primarily to net favorable impacts associated with the TCJA, our earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate, the impact of credits and deductions provided by law, state tax impacts, and favorable adjustments related to differences between estimates included in the 2016 provision and amounts calculated on the 2016 U.S. income tax return filed in October 2017.

Our effective tax rates for 2016 and 2015 differ from the U.S. federal statutory rate of 35.0% due primarily to our earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate, and the impact of credits and deductions provided by law. The effective tax rate for 2016 includes benefits from the release of reserves resulting from expirations of statutes of limitations, primarily from periods prior to the Separation.

We conduct business globally, and, as part of our global business, we file numerous income tax returns in the U.S. federal, state and foreign jurisdictions. The countries in which we have a significant presence that have had lower statutory tax rates than the United States include China, Germany and the United Kingdom. Our ability to obtain a tax benefit from lower statutory tax rates outside of the United States is dependent on our levels of taxable income in these foreign countries and under current U.S. tax law. We believe that a change in the statutory tax rate of any individual foreign country would not have a material effect on our financial statements given the geographic dispersion of our taxable income.

We made income tax payments of $253 million and $149 million during the years ended December 31, 2017 and December 31, 2016, respectively.

Unrecognized Tax Benefits

As of December 31, 2017, gross unrecognized tax benefits totaled $59 million ($69 million, net of the impact of $4 million of indirect tax benefits offset by $14 million associated with interest and penalties). As of December 31, 2016, gross unrecognized tax benefits totaled $29 million ($35 million, net of the impact of $7 million of indirect tax benefits offset by $13 million associated with interest and penalties). We recognized approximately $2 million in potential interest and penalties associated with uncertain tax positions during 2017, and this amount was not significant during 2016. We recognized $8 million in potential interest and penalties associated with uncertain tax positions during 2015. To the extent taxes are not assessed with respect to uncertain tax positions, substantially all amounts accrued (including interest and penalties and net of indirect offsets) will be reduced and reflected as a reduction of the overall income tax provision. Unrecognized tax benefits and associated accrued interest and penalties are included in our income tax provision.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding amounts accrued for potential interest and penalties, is as follows ($ in millions):



	2017			2016			2015
Unrecognized tax benefits, beginning of year	$	28.6		$	169.9		$	167.2
Additions based on tax positions related to the current year	25.3			6.0			18.4
Additions for tax positions of prior years	7.8			0.4			9.7
Reductions for tax positions of prior years	(1.9		)	(1.2		)	(13.4		)
Lapse of statute of limitations	(3.3		)	(1.3		)	(5.5		)
Settlements	(0.6		)	(0.6		)	(1.5		)
Effect of foreign currency translation	1.9			(0.4		)	(5.0		)
Separation related adjustments ^(a)	1.2			(144.2		)	—
Unrecognized tax benefits, end of year	$	59.0		$	28.6		$	169.9

^(a) Unrecognized tax benefits were reduced by $144 million in 2016 related to positions taken prior to the Separation for which Danaher, as the Former Parent, is the primary obligor and is responsible for settlement and payment of the tax expenses.

We are routinely examined by various domestic and international taxing authorities. In connection with the Separation, we entered into the Agreements with Danaher, including a tax matters agreement. The tax matters agreement distinguishes between the treatment of tax matters for “Joint” filings compared to “Separate” filings prior to the Separation. “Joint” filings involve legal entities, such as those in the United States, that include operations from both Danaher and the Company. By contrast, “Separate” filings involve certain entities (primarily outside of the United States), that exclusively include either Danaher’s or the Company’s operations, respectively. In accordance with the tax matters agreement, Danaher is liable for and has indemnified Fortive against all income tax liabilities involving “Joint” filings for periods prior to the Separation. The Company remains liable for certain pre-Separation income tax liabilities including those related to the Company’s “Separate” filings.

Pursuant to U.S. tax law, the Company’s initial U.S. federal income tax return was filed during October 2017 for the short taxable year July 2, 2016 through December 31, 2016. We expect to file our first full year U.S. federal income tax return for 2017 with the Internal Revenue Service (“IRS”) during 2018. The IRS has not yet begun an examination of the Company. Our operations in certain foreign jurisdictions remain subject to routine examination for tax years 2008 to 2017.

Repatriation and Unremitted Earnings

The TCJA eliminated the U.S. tax cost for qualified repatriation beginning in 2018. Pre-2018 foreign cumulative earnings remain subject to foreign remittance taxes. As a result of the TCJA, we expect to repatriate an estimated $275 million subject to an estimated $6 million in foreign remittance taxes. This excludes foreign earnings: 1) required as working capital for local operating needs, 2) subject to local law restrictions, 3) subject to high foreign remittance tax costs, 4) previously invested in physical assets or acquisitions, or 5) intended for future acquisitions/growth. For most of our foreign operations, we make an assertion regarding the amount of earnings in excess of intended repatriation that are expected to be held for indefinite reinvestment. No provisions for foreign remittance taxes have been made with respect to earnings that are planned to be reinvested indefinitely. The amount of foreign remittance taxes that may be applicable to such earnings is not readily determinable given local law restrictions that may apply to a portion of such earnings, unknown changes in foreign tax law that may occur during the restriction period, and the various tax planning alternatives we could employ if we repatriated these earnings. As of December 31, 2017, the basis difference based upon earnings that we plan to reinvest indefinitely outside of the United States for which foreign deferred taxes have not been provided was estimated at $1,225 million.

The TCJA imposed a final U.S. tax on cumulative earnings from our foreign operations that we have previously made an assertion regarding the amount of such earnings intended for indefinite reinvestment. Therefore, as of December 31, 2017, the basis difference for which U.S. deferred taxes have not been provided is $0. Beginning in 2018, the basis difference will begin to grow again to the extent we make the assertion. However, the TCJA expansion of the U.S. worldwide tax system is expected to significantly reduce future annual increases to the assertion.

Separation from Danaher

Prior to the Separation, our operating results were included in Danaher’s various consolidated U.S. federal and certain state income tax returns, as well as certain non-U.S. returns. For periods prior to the Separation, our combined financial statements reflect income tax expense and deferred tax balances as if we had filed tax returns on a standalone basis separate from Danaher. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if we were a separate taxpayer and a standalone enterprise for the first half of 2016 and for prior periods. For periods prior to the Separation, our pretax operating results exclude any intercompany financing arrangements between entities and include any transactions with Danaher as if it were an unrelated party.