12. Income Taxes

Income taxes have been based on the following components of Earnings before provision for income taxes and discontinued operations in the Consolidated Statements of Earnings:



	Years Ended December 31,
	2017		2016		2015
Domestic	$	620,908	$	420,546	$	530,268
Foreign	352,935		268,786		270,342
Total	$	973,843	$	689,332	$	800,610

Income tax expense (benefit) relating to continuing operations for the years ended December 31, 2017, 2016 and 2015 is comprised of the following:



	Years Ended December 31,
	2017			2016			2015
Current:
U.S. federal	$	277,979		$	139,117		$	115,130
State and local	24,444			21,213			11,706
Foreign	47,152			85,273			79,982
Total current	349,575			245,603			206,818
Deferred:
U.S. federal	(187,365		)	(14,438		)	19,238
State and local	(3,514		)	(1,232		)	(3,433		)
Foreign	3,482			(49,493		)	(17,894		)
Total deferred	(187,397		)	(65,163		)	(2,089		)
Total expense	$	162,178		$	180,440		$	204,729

Differences between the effective income tax rate and the U.S. federal income statutory tax rate are as follows:



	Years Ended December 31,
	2017		2016		2015
U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of federal income tax benefit	1.3		1.9		1.6
Foreign operations tax effect	(6.5	)	(7.1	)	(4.3	)
Domestic manufacturing deduction	(2.0	)	(2.2	)	(3.0	)
Foreign tax credits	—		(0.1	)	(2.4	)
Changes in tax law	(5.6	)	(1.4	)	—
Disposition of businesses	(3.8	)	(0.6	)	—
Other ⁽¹⁾	(1.7	)	0.7		(1.3	)
Effective tax rate from continuing operations	16.7	%	26.2	%	25.6	%


(1)	Research and experimentation tax credits and branch income differences have been collapsed into Other for all periods presented.

The tax effects of temporary differences that give rise to future deferred tax assets and liabilities are as follows:



	December 31, 2017			December 31, 2016
Deferred Tax Assets:
Accrued compensation, principally postretirement and other employee benefits	$	69,428		$	121,909
Accrued expenses, principally for state income taxes, interest and warranty	21,251			40,256
Net operating loss and other carryforwards	269,892			325,721
Inventories, principally due to reserves for financial reporting purposes and capitalization for tax purposes	11,640			15,730
Accounts receivable, principally due to allowance for doubtful accounts	6,747			8,337
Accrued insurance	1,264			6,483
Long-term liabilities, principally warranty, environmental and exit costs	7,107			5,273
Other assets	(23,396		)	(18,872		)
Total gross deferred tax assets	363,933			504,837
Valuation allowance	(238,668		)	(289,642		)
Total deferred tax assets, net of valuation allowances	125,265			215,195
Deferred Tax Liabilities:
Intangible assets, principally due to different tax and financial reporting bases and amortization lives	(488,012		)	(814,242		)
Property, plant and equipment, principally due to differences in depreciation	(47,549		)	(74,713		)
Accounts receivable	(4,654		)	(10,086		)
Total gross deferred tax liabilities	(540,215		)	(899,041		)
Net deferred tax liability	$	(414,950	)	$	(683,846	)

Classified as follows in the Consolidated Balance Sheets:
Other assets and deferred charges	$	23,891		$	26,327
Deferred income taxes	(438,841		)	(710,173		)
	$	(414,950	)	$	(683,846	)

As of December 31, 2017, the Company had non-U.S loss carryforwards of $963.6 million primarily resulting from restructuring undertaken to effect the Knowles spin-off and non-operating activities. The entire balance of the non-U.S. losses as of December 31, 2017 is available to be carried forward, with $129.2 million of these losses beginning to expire during the years 2018 through 2037. The remaining $834.4 million of such losses can be carried forward indefinitely.

The Company has $82.4 million and $84.2 million of state tax loss carryforwards as of December 31, 2017 and 2016, respectively that are available for use by the Company between 2018 and 2037.

The Company maintains valuation allowances by jurisdiction against the deferred tax assets related to certain of these carryforwards as utilization of these tax benefits is not assured for certain jurisdictions.

On December 22, 2017, the Tax Reform Act was enacted which permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the reduction in the U.S. corporate income tax rate, the Company revalued its ending net deferred tax liabilities as of December 31, 2017 and recognized a provisional tax benefit of $172.0 million. The Tax Reform Act also imposed a tax for a one-time deemed repatriation of post-1986 unremitted foreign E&P through the year ended December 31, 2017. The Company recorded provisional tax expense related to the deemed repatriation of $115.0 million payable over eight years. The Company plans to make cash distributions to the U.S from non-U.S. subsidiaries of up to an estimated $450.0 million, and consequently has recorded $11.0 million of anticipated local withholding tax expense associated with these planned distributions. The GILTI provisions of the Tax Reform Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company expects that it will be subject to incremental U.S. tax on GILTI income beginning in 2018, due to expense allocations required by the U.S. foreign tax credit rules. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017.

On December 22, 2017, the SEC staff issued SAB 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. In accordance with the SAB 118 guidance, the Company has recognized the provisional tax impacts related to deemed repatriated earnings and the benefit for the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017. The final impact may differ from these provisional amounts, possibly materially, due to, among other things, issuance of additional regulatory guidance, changes in interpretations and assumptions the Company has made, and actions the Company may take as a result of the Tax Reform Act. In accordance with SAB 118 the financial reporting impact of the Tax Reform Act will be completed in the fourth quarter of 2018.

Unrecognized Tax Benefits

The Company files U.S., federal, state, local and foreign tax returns. The Company is routinely audited by the tax authorities in these jurisdictions, and a number of audits are currently underway. It is reasonably possible during the next twelve months that uncertain tax positions may be settled, which could result in a decrease in the gross amount of unrecognized tax benefits. This decrease may result in an income tax benefit. Due to the potential for resolution of federal, state and foreign examinations, and the expiration of various statutes of limitation, the Company's gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $14.1 million. The Company is no longer subject to examinations of its federal income tax returns for prior years through 2013. All significant state, local and international matters have been concluded for prior years through 2012. The Company believes adequate provision has been made for all income tax uncertainties.

The following table is a reconciliation of the beginning and ending balances of the Company’s unrecognized tax benefits:



	Total
Unrecognized tax benefits at January 1, 2015	$	77,089
Additions based on tax positions related to the current year	17,131
Additions for tax positions of prior years	2,900
Reductions for tax positions of prior years ⁽¹⁾	(17,135		)
Cash settlements	(1,153		)
Lapse of statutes	(12,744		)
Unrecognized tax benefits at December 31, 2015	66,088
Additions based on tax positions related to the current year	7,929
Additions for tax positions of prior years	9,076
Reductions for tax positions of prior years	(3,067		)
Cash settlements	(3,106		)
Lapse of statutes	(6,605		)
Unrecognized tax benefits at December 31, 2016	70,315
Additions based on tax positions related to the current year	14,466
Additions for tax positions of prior years	4,105
Reductions for tax positions of prior years	(9,653		)
Cash settlements	(954		)
Lapse of statutes	(10,245		)
Unrecognized tax benefits at December 31, 2017 ⁽²⁾	$	68,034


(1)	The settlement of certain income tax examinations of 2011 and 2012 tax years (in the year ended December 31, 2015) resulted in a significant decrease in unrecognized tax benefits.

(2)

If recognized, the net amount of potential tax benefits that would impact the Company’s effective tax rate is $59.2 million. During the years ended December 31, 2017, 2016 and 2015, the Company recorded expense (income) of $(0.5) million, $0.7 million and $(4.3) million, respectively, as a component of provision for income taxes related to the accrued interest and penalties on unrecognized tax benefits. The Company had accrued interest and penalties of $16.5 million at December 31, 2017 and $14.6 million at December 31, 2016, which are not included in the above table.