Income Taxes

12 Months Ended

Dec. 01, 2017

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Income before income taxes for fiscal 2017, 2016 and 2015 consisted of the following (in thousands):

	2017		2016		2015
Domestic	$	1,056,156	$	805,749	$	589,371
Foreign	1,081,485		629,389		284,410
Income before income taxes	$	2,137,641	$	1,435,138	$	873,781

The provision for income taxes for fiscal 2017, 2016 and 2015 consisted of the following (in thousands):

	2017			2016			2015
Current:
United States federal	$	298,802		$	94,396		$	204,834
Foreign	60,962			59,749			52,125
State and local	33,578			15,222			(14,975		)
Total current	393,342			169,367			241,984
Deferred:
United States federal	48,905			33,924			(31,011		)
Foreign	(4,242		)	(2,751		)	(9,368		)
State and local	5,682			(9,287		)	(25,511		)
Total deferred	50,345			21,886			(65,890		)
Tax expense attributable to employee stock plans	—			75,103			68,136
Provision for income taxes	$	443,687		$	266,356		$	244,230

Total income tax expense differs from the expected tax expense (computed by multiplying the U.S. federal statutory rate of 35% by income before income taxes) as a result of the following (in thousands):

	2017			2016			2015
Computed “expected” tax expense	$	748,174		$	502,298		$	305,824
State tax expense, net of federal benefit	25,131			10,636			(8,316		)
Tax credits	(38,000		)	(48,383		)	(25,967		)
Differences between statutory rate and foreign effective tax rate	(215,490		)	(133,778		)	(90,063		)
Stock-based compensation, net of tax deduction	(42,512		)	15,101			9,623
Resolution of income tax examinations	(31,358		)	(68,003		)	(17,595		)
Domestic manufacturing deduction benefit	(32,200		)	(26,990		)	(16,800		)
Tax charge for licensing acquired company technology to foreign subsidiaries	24,771			5,346			80,015
Other, net	5,171			10,129			7,509
Provision for income taxes	$	443,687		$	266,356		$	244,230

Deferred Tax Assets and Liabilities

The tax effects of the temporary differences that gave rise to significant portions of the deferred tax assets and liabilities as of December 1, 2017 and December 2, 2016 are presented below (in thousands):

	2017			2016
Deferred tax assets:
Acquired technology	$	4,846		$	7,421
Reserves and accruals	48,761			35,440
Deferred revenue	23,452			21,039
Unrealized losses on investments	11			2,391
Stock-based compensation	74,942			56,353
Net operating loss carryforwards of acquired companies	44,465			31,305
Credit carryforwards	124,205			63,315
Capitalized expenses	13,428			15,571
Benefits relating to tax positions	33,318			39,492
Other	30,289			26,439
Total gross deferred tax assets	397,717			298,766
Deferred tax asset valuation allowance	(93,568		)	(24,265		)
Total deferred tax assets	304,149			274,501
Deferred tax liabilities:
Depreciation and amortization	84,064			78,619
Undistributed earnings of foreign subsidiaries	382,744			292,844
Acquired intangible assets	117,282			120,698
Total deferred tax liabilities	584,090			492,161
Net deferred tax liabilities:	$	279,941		$	217,660

Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Included in the deferred tax assets and liabilities for fiscal 2017 and 2016 are amounts related to various acquisitions. The deferred tax assets are offset by a valuation allowance to the extent it is more likely than not that they are not expected to be realized.

We provide U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the United States. To the extent that the foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings. As of December 1, 2017, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $5.0 billion. The unrecognized deferred tax liability for these earnings is approximately $1.4 billion.

As of December 1, 2017, we have net operating loss carryforwards of approximately $118.4 million for federal and $52.6 million for state. We also have state and foreign tax credit carryforwards of approximately $166.2 million and $16.2 million, respectively. The net operating loss carryforward assets and tax credits will expire in various years from fiscal 2018 through 2036. The state tax credit carryforwards can be carried forward indefinitely. The net operating loss carryforward assets and certain credits are reduced by the valuation allowance and are subject to an annual limitation under Internal Revenue Code Section 382, the carrying amount of which are expected to be fully realized.

As of December 1, 2017, a valuation allowance of $93.6 million has been established for certain deferred tax assets related to the impairment of investments and certain state and foreign assets. For fiscal 2017, the total change in the valuation allowance was $69.3 million, of which $55.3 million was related to the deferred tax attributes recorded due to our early adoption of the new accounting guidance related to stock-based compensation.

Accounting for Uncertainty in Income Taxes

During fiscal 2017 and 2016, our aggregate changes in our total gross amount of unrecognized tax benefits are summarized as follows (in thousands):

	2017			2016
Beginning balance	$	178,413		$	258,718
Gross increases in unrecognized tax benefits – prior year tax positions	3,680			6,047
Gross decreases in unrecognized tax benefits – prior year tax positions	(30,166		)	(67,870		)
Gross increases in unrecognized tax benefits – current year tax positions	24,927			23,068
Settlements with taxing authorities	(3,876		)	(33,265		)
Lapse of statute of limitations	(8,819		)	(8,456		)
Foreign exchange gains and losses	8,786			171
Ending balance	$	172,945		$	178,413

The combined amount of accrued interest and penalties related to tax positions taken on our tax returns were approximately $23.6 million and $22.4 million for fiscal 2017 and 2016, respectively. These amounts were included in non-current income taxes payable in their respective years.

We file income tax returns in the United States on a federal basis and in many U.S. state and foreign jurisdictions. We are subject to the continual examination of our income tax returns by the IRS and other domestic and foreign tax authorities. Our major tax jurisdictions are Ireland, California and the United States. For Ireland, California and the United States, the earliest fiscal years open for examination are 2008, 2010 and 2013, respectively. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from these examinations. We believe such estimates to be reasonable; however, there can be no assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.

The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. These events could cause large fluctuations in the balance of current and non-current assets, liabilities and income taxes payable. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from $0 to approximately $40 million.

Subsequent to December 1, 2017, the “Tax Cuts and Jobs Act” (the “Act”) was enacted and included broad tax reforms that are applicable to Adobe. Under the provisions of the Act, the U.S. corporate tax rate decreased from 35% to 21% effective January 1, 2018, our undistributed foreign earnings are subject to taxation in fiscal 2018 and are available for repatriation, and our future foreign earnings are subject to U.S. taxation. These changes will require us to remeasure our deferred tax assets and liabilities and reclassify deferred tax liabilities related to undistributed foreign earnings to long-term income taxes payable due over eight years.