Income Taxes

IAA has historically been included in the consolidated income tax returns of KAR. IAA’s income taxes for the periods prior to the Separation are computed and reported herein under the “separate return method” as if IAA were a separate taxpayer. Use of the separate return method requires significant judgment and may result in differences when the sum of the amounts presented in standalone tax provisions are compared with amounts presented in consolidated financial statements. In that event, the related current and deferred tax assets and liabilities could be significantly different from those presented herein. Taxes as computed under this separate taxpayer approach may not be indicative of the income tax expense or income tax to be paid had IAA operated as a standalone company.

The components of income before income taxes and the provision for income taxes are as follows (in millions):



	Fiscal Years Ended
	December 29, 2019			December 30, 2018			December 31, 2017
Income before income taxes:
Domestic	$	229.1		$	218.0		$	175.2
Foreign	33.1			28.2			21.8
Total	$	262.2		$	246.2		$	197.0
Income tax expense (benefit):
Current:
Federal	$	46.4		$	45.2		$	43.3
Foreign	10.1			8.3			6.6
State	11.9			11.9			6.9
Total current provision	68.4			65.4			56.8
Deferred:
Federal	1.5			(1.3		)	(22.9		)
Foreign	(0.8		)	(0.5		)	(0.8		)
State	(0.1		)	(1.1		)	2.5
Total deferred provision	0.6			(2.9		)	(21.2		)
Income tax expense	$	69.0		$	62.5		$	35.6

The provision for income taxes was different from the U.S. federal statutory rate applied to income before taxes, and is reconciled as follows:



	Fiscal Years Ended
	December 29, 2019		December 30, 2018		December 31, 2017
Statutory rate	21.0	%	21.0	%	35.0	%
State and local income taxes, net	3.3	%	3.3	%	2.7	%
Reserves for tax exposures	0.2	%	0.3	%	0.4	%
International operations	1.1	%	0.9	%	(1.8	)%
Stock-based compensation	(0.2	)%	(0.2	)%	(1.0	)%
Impact of law and rate change	0.1	%	—	%	(17.7	)%
Other, net	0.8	%	0.1	%	0.5	%
Effective rate	26.3	%	25.4	%	18.1	%

On December 22, 2017, U.S. tax reform known as the Tax Cuts and Jobs Act of 2017 was enacted. The law includes significant changes to the U.S. corporate income tax system, including a Federal corporate income tax rate reduction from 35 percent to 21 percent effective for tax years beginning after December 31, 2017. As a result, for the year ended December 30, 2017, the Company recorded a deferred income tax benefit of $37.0 million related to the remeasurement of its deferred tax assets and liabilities. In addition, the law imposed a one-time deemed repatriation transition tax on the accumulated unrepatriated and untaxed earnings of the Company's foreign subsidiaries. This resulted in the Company recording a current tax expense of $2.2 million for the year ended December 31, 2017.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.

The Company offsets all deferred tax assets and liabilities by jurisdiction, as well as any related valuation allowance, and present them as a single non-current deferred income tax liability. Deferred tax assets and deferred tax liabilities are comprised of the following: (in millions):



	December 29, 2019			December 30, 2018
Gross deferred tax assets:
Right-of-use liabilities	$	197.6		$	—
Allowances for accounts receivable	0.9			0.6
Accruals and liabilities	2.3			50.1
Employee benefits and compensation	2.8			4.1
Other	1.8			1.8
Total deferred tax assets	205.4			56.6
Deferred tax asset valuation allowance	—			—
Total	205.4			56.6
Gross deferred tax liabilities:
Right-of-use assets	(185.8		)	—
Property and equipment	(8.8		)	(43.4		)
Goodwill and intangible assets	(62.9		)	(64.8		)
Other	(11.6		)	(11.5		)
Total	(269.1		)	(119.7		)
Net deferred tax liabilities	$	(63.7	)	$	(63.1	)

Permanently reinvested undistributed earnings of the Company's foreign subsidiaries were approximately $88.7 million at December 29, 2019. Because these amounts have been or will be permanently reinvested in properties and working capital, the Company has not recorded the deferred taxes associated with these earnings. If the undistributed earnings of foreign subsidiaries were to be remitted, state and local income tax expense and withholding tax expense would need to be recognized, net of any applicable foreign tax credits. It is not practical for the Company to determine the additional tax that would be incurred upon remittance of these earnings.

Tax payments made by KAR, related to IAA, for fiscal years ended December 29, 2019, December 30, 2018, and December 31, 2017, were $71.8 million , $65.4 million, and $56.8 million respectively.

The Company applies the provisions of ASC 740, Income Taxes. ASC 740 clarifies the accounting and reporting for uncertainty in income taxes recognized in an enterprise's financial statements. These provisions prescribe a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken on income tax returns.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):



	December 29, 2019			December 30, 2018
Balance at beginning of period	$	3.0		$	2.0
Increase in current year tax positions	1.1			1.0
Lapse in statute of limitations	(0.6		)	—
Balance at end of period	$	3.5		$	3.0

The total amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate was $3.0 million and $2.5 million at December 29, 2019 and December 30, 2018.

The Company records interest and penalties associated with the uncertain tax positions within the Company's provision for income taxes on the income statement. The Company had reserves totaling $0.2 million and $0.1 million at December 29, 2019 and December 30, 2018, respectively, associated with interest and penalties, net of tax.

The provision for income taxes involves management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which the Company operates. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by us. In addition, U.S. and non-U.S. tax authorities periodically review income tax returns filed by us and can raise issues regarding the Company's filing positions, timing and amount of income or deductions and the allocation of income among the jurisdictions in which the Company operates. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. In the normal course of business, the Company is subject to examination by taxing authorities in the U.S., Canada and the United Kingdom. In general, the examination of our material tax returns is completed for the years prior to 2016.

Based on the potential outcome of the Company's tax examinations and the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the currently remaining unrecognized tax benefits will change within the next 12 months. The associated net tax impact on the reserve balance is estimated to be in the range of a $0.5 million to $1.0 million decrease.