INCOME TAXES

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



	Year Ended December 31,
	2018		2017		2016
Domestic	$	7,074	$	8,099	$	7,646
Foreign	725		5,430		9,451
Total income before provision for income taxes	$	7,799	$	13,529	$	17,097

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



	Year Ended December 31,
	2018			2017			2016
Federal:
Current	$	1,716		$	8,817		$	3,351
Deferred	324			(123		)	(85		)
	2,040			8,694			3,266
State:
Current	162			97			131
Deferred	(17		)	(20		)	28
	145			77			159
Foreign:
Current	175			54			261
Deferred	(21		)	60			(77		)
	154			114			184
Provision for income taxes	$	2,339		$	8,885		$	3,609

The 2018 provision for income taxes included a $588 million deferred tax charge on previously acquired intangible assets resulting from a transfer of these assets between wholly owned subsidiaries. The 2017 provision for income taxes included a $5.5 billion provisional charge to income tax expense related to Tax Reform enacted in December 2017.

On December 22, 2017, Tax Reform was signed into law making significant changes to the Internal Revenue Code of 1986, as amended. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, a repatriation tax on deemed repatriated earnings of foreign subsidiaries, implementation of a modified territorial tax system, which has the effect of subjecting earnings of our foreign subsidiaries to U.S. taxation on Global Intangible Low-Taxed Income (GILTI). As a result, we recorded a provisional charge to income tax expense of $5.5 billion in December 2017, which included a provisional $308 million deferred tax benefit related to the re-measurement of certain deferred tax assets and liabilities and a $5.8 billion provisional charge related to the transition tax on the mandatory deemed repatriation of accumulated foreign earnings.

The accounting for the income tax effects of Tax Reform was completed in accordance with SAB 118 in 2018 and as a result, we recorded a $4 million net tax charge to our income tax provision primarily relating to the deferred tax revaluation partially offset by the refinement to the provisional estimate of transition tax.

As of December 31, 2017, the accrued federal liability for transition tax was $6.1 billion, which was payable over an eight year period. As of December 31, 2018, the accrued federal liability for transition tax was $4.6 billion, which was included in Long-term income taxes payable on our Consolidated Balance Sheets. The decrease of $1.5 billion was primarily due to $1.3 billion of payments in 2018 and $174 million of refinements to the provisional estimate.

For the year ended December 31, 2018, we repatriated $30.4 billion of cash, cash equivalents and marketable securities to our parent company headquartered in the United States. Prior to the enactment of Tax Reform, these earnings were considered indefinitely reinvested and no U.S. taxes had been provided. In 2017 U.S. taxes have been provided on these earnings through the accrual of the transition tax.

Additionally, we completed our evaluation of the accounting policy election required with regard to the tax on GILTI. The FASB allows companies to adopt a policy election to account for the tax on GILTI under one of two methods: (i) account for the tax on GILTI as a component of tax expense in the period in which the tax is incurred (the period cost method), or (ii) account for the tax on GILTI in a company’s measurement of deferred taxes (the deferred method). We have elected to account for the tax on GILTI under the period cost method.

The reconciliation between the federal statutory tax rate applied to income before taxes and our effective tax rate is summarized as follows:



	Year Ended December 31,
	2018		2017		2016
Federal statutory rate	21.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	0.6	%	0.1	%	0.7	%
Foreign earnings at different rates	(0.9	)%	(11.2	)%	(16.0	)%
Research and other credits	(1.1	)%	(0.6	)%	(0.7	)%
US tax on foreign earnings	2.1	%	1.2	%	0.7	%
Deferred tax charge on acquired intangibles	7.5	%	—	%	—	%
Transition tax	(0.7	)%	42.9	%	—	%
Deferred tax revaluation	0.8	%	(2.3	)%	—	%
Settlement of tax examinations	(1.9	)%	—	%	—	%
Other	2.6	%	0.6	%	1.4	%
Effective tax rate	30.0	%	65.7	%	21.1	%

Deferred income taxes reflect the net tax 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):



	December 31,
	2018			2017
Deferred tax assets:
Net operating loss carryforwards	$	344		$	322
Stock-based compensation	163			165
Reserves and accruals not currently deductible	426			336
Deferred revenue	—			27
Depreciation related	61			56
Research and other credit carryforwards	363			293
Other, net	183			102
Total deferred tax assets before valuation allowance	1,540			1,301
Valuation allowance	(331		)	(162		)
Total deferred tax assets	1,209			1,139
Deferred tax liabilities:
Intangibles	(1,667		)	(1,316		)
Other	(80		)	(70		)
Total deferred tax liabilities	(1,747		)	(1,386		)
Net deferred tax assets (liabilities)	$	(538	)	$	(247	)

The valuation allowance was $331 million and $162 million at December 31, 2018 and 2017, respectively. The increase of our valuation allowance in 2018 was primarily related to certain Kite tax attributes and certain foreign jurisdictions, which do not have sufficient history of profit to realize the benefit of the losses on a more-likely-than-not basis.

At December 31, 2018, we had U.S. federal net operating loss carryforwards of approximately $494 million. The federal net operating loss carryforwards will start to expire in 2021, if not utilized. We also had federal tax credit carryforwards of approximately $179 million which will start to expire in 2020, if not utilized. In addition, we had state net operating loss and tax credit carryforwards of approximately $1.5 billion and $414 million, respectively. The state net operating loss and tax credit carryforwards will start to expire in 2019 if not utilized.

Utilization of net operating losses and tax credits may be subject to an annual limitation due to ownership change limitations provided in the Internal Revenue Code of 1986, as amended, and similar state provisions. This annual limitation may result in the expiration of the net operating losses and credits before utilization.

We file federal, state and foreign income tax returns in the United States and in many foreign jurisdictions. For federal income tax purposes, the statute of limitations is open for 2013 and onwards and 2010 and onwards for California income tax purposes. For certain acquired entities, the statute of limitations is open for all years from inception due to our utilization of their net operating losses and credits carried over from prior years.

Our income tax returns are subject to audit by federal, state and foreign tax authorities. We are currently under examination by the IRS for the tax years from 2013 to 2015 and by various state and foreign jurisdictions. There are differing interpretations of tax laws and regulations, and as a result, significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. We periodically evaluate our exposures associated with our tax filing positions.

Of the total unrecognized tax benefits, $1.3 billion and $1.8 billion at December 31, 2018 and 2017, if recognized, would reduce our effective tax rate in the period of recognition. We include interest and penalties related to unrecognized tax benefits as part of Provision for income taxes on our Consolidated Statements of Income. We had accrued interest and penalties related to unrecognized tax benefits of $154 million and $112 million at December 31, 2018 and 2017, respectively.

As of December 31, 2018, we believe that it is reasonably possible that our unrecognized tax benefits will decrease by approximately $100 million in the next 12 months due to potential settlements with taxing authorities.

The following is a rollforward of our total gross unrecognized tax benefits (in millions):



	December 31,
	2018			2017			2016
Balance, beginning of period	$	2,181		$	1,852		$	1,350
Tax positions related to current year:
Additions	64			299			522
Reductions	—			—			—
Tax positions related to prior years:
Additions	125			67			33
Reductions	—			(16		)	(3		)
Settlements	(774		)	(12		)	(49		)
Lapse of statute of limitations	(1		)	(9		)	(1		)
Balance, end of period	$	1,595		$	2,181		$	1,852