INCOME TAXES

Income tax expense (benefit) for Fiscal Years 2017, 2018, and 2019 consisted of the following:



	Fiscal Year Ended March 31,
(in thousands)	2017			2018			2019
Current:
Federal	$	10,591		$	82,523		$	(1,199	)
State	457			4,274			2,550
Foreign	7,731			6,860			(1,550		)
Total current provision for (benefit from) income taxes	18,779			93,657			(199		)
Deferred:
Federal	1,022			9,002			(37,577		)
State	(117		)	(1,585		)	(4,160		)
Foreign	(618		)	22			(8,195		)
Total deferred income tax expense (benefit)	287			7,439			(49,932		)
Income tax expense (benefit)	$	19,066		$	101,096		$	(50,131	)

The components of income (loss) before income taxes for Fiscal Years 2017, 2018, and 2019 are as follows:



	Fiscal Year Ended March 31,
(in thousands)	2017		2018		2019
United States	$	43,377	$	17,654	$	(179,387	)
Foreign	58,288		82,573		(6,305		)
Income (loss) before income taxes	$	101,665	$	100,227	$	(185,692	)

The following is a reconciliation between statutory federal income taxes and the income tax expense (benefit) for Fiscal Years 2017, 2018, and 2019:



	Fiscal Year Ended March 31,
(in thousands)	2017			2018			2019
Tax expense at statutory rate	$	35,583		$	31,631		$	(38,995	)
Foreign operations taxed at different rates	(13,183		)	(17,970		)	(4,965		)
State taxes, net of federal benefit	340			2,689			(1,610		)
Research and development credit	(3,119		)	(2,023		)	(4,288		)
Net GILTI Inclusion	—			—			4,398
Impact of Tax Act	—			87,790			(3,728		)
Stock based compensation	(365		)	(1,771		)	(1,196		)
Other, net	(190		)	750			253
Income tax expense (benefit)	$	19,066		$	101,096		$	(50,131	)

Deferred tax assets and liabilities represent the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes.

Significant components of the Company's deferred tax assets and liabilities as of March 31, 2018 and 2019 are as follows:



	March 31,
(in thousands)	2018			2019
Accruals and other reserves	$	4,809		$	24,167
Deferred compensation	3,467			2,980
Net operating loss carry forward	1,540			16,921
Stock compensation	8,384			9,484
Interest expense	—			11,550
Tax credits	6,504			7,072
Engineering costs	—			31,015
Other deferred tax assets	1,070			635
Valuation allowance⁽¹⁾	(2,514		)	(15,787		)
Total deferred tax assets	23,260			88,037
Deferred gains on sales of properties	(1,160		)	(1,155		)
Purchased intangibles	—			(92,544		)
Unearned revenue	—			(5,054		)
Unremitted earnings of certain subsidiaries	(1,976		)	(17,879		)
Fixed asset depreciation	(4,150		)	(7,881		)
Total deferred tax liabilities	(7,286		)	(124,513		)
Net deferred tax assets⁽²⁾	$	15,974		$	(36,476	)

⁽¹⁾ Valuation allowance on state deferred tax assets are net of federal tax impact.

⁽²⁾ The Company's deferred tax assets for the Fiscal Year ended March 31, 2018 and March 31, 2019, are included as a component of other assets on the consolidated balance sheets.

The Company evaluates its deferred tax assets, including a determination of whether a valuation allowance is necessary, based upon its ability to utilize the assets using a more likely than not analysis. Deferred tax assets are only recorded to the extent that they are realizable based upon past and future income. The Company has a long-established earnings history with taxable income in its carryback years and forecasted future earnings. The Company has concluded that no valuation allowance is required, except for the specific items discussed below.

The valuation allowance of $15.8 million as of March 31, 2019 included (1) $9.8 million related to the net operating losses of a foreign subsidiary which can be carried forward indefinitely, but are not anticipated to be utilized as a result of an insufficient recent history of earnings coupled with changes to the company’s anticipated operating structure abroad; (2) $5.7 million for deferred tax assets related to state net operating losses in the current year as a result of changes to the company’s operating structure in the United States, after applying state tax rates and federal tax benefit; and (3) $0.3 million related to China net operating losses, which begin to expire in Fiscal Year 2021. The valuation allowance of $2.5 million as of March 31, 2018 was related to the net operating losses of a foreign subsidiary with an insufficient recent history of earnings to support the realization of their deferred tax assets, as well as to excess California research credit carryforwards.

During the second quarter of Fiscal Year 2019, the Company released its partial valuation allowance against California Research and Development credits. This release was a direct result of the Acquisition, as fewer credits are expected to be generated in California as a percentage of worldwide taxable income in future periods.

The Company has California research and development credit carryforwards for income tax purposes of $11.7 million that can be carried forward indefinitely as well as $3.9 million of U.S federal net operating losses that have limited use under US Internal Revenue Code section 382. These losses begin to expire in fiscal year 2024.

The impact of an uncertain income tax position on income tax expense must be recognized at the largest amount that is more likely than not to be sustained. An uncertain income tax position will not be recognized unless it has a greater than 50% likelihood of being sustained. As of March 31, 2017, 2018, and 2019, the Company had $12.9 million, $12.6 million, and $26.5 million, respectively, of unrecognized tax benefits. The increase of uncertain tax positions when compared to the prior year is predominantly due to acquired uncertain tax benefits of Polycom. The unrecognized tax benefits as of March 31, 2019 would favorably impact the effective tax rate in future periods if recognized.

A reconciliation of the change in the amount of gross unrecognized income tax benefits for the periods is as follows:



	March 31,
(in thousands)	2017			2018			2019
Balance at beginning of period	$	12,692		$	12,854		$	12,612
Increase (decrease) of unrecognized tax benefits related to prior fiscal years	(2		)	(1,310		)	254
Increase of unrecognized tax benefits related to business combinations	—			—			13,329
Increase of unrecognized tax benefits related to current year income statement	2,195			3,085			2,069
Reductions to unrecognized tax benefits related to settlements with taxing authorities	—			(115		)	—
Reductions to unrecognized tax benefits related to lapse of applicable statute of limitations	(2,031		)	(1,902		)	(1,806		)
Balance at end of period	$	12,854		$	12,612		$	26,458

The Company's continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. The interest related to unrecognized tax benefits was $1.4 million and $2.0 million as of March 31, 2018 and 2019, respectively. No penalties have been accrued.

The Company and its subsidiaries are subject to taxation in various foreign and state jurisdictions, including the U.S. The Company is currently being audited by the Internal Revenue Service for fiscal year 2016. All federal tax matters have been concluded for tax years prior to Fiscal Year 2014. Foreign and State income tax matters for material tax jurisdictions have been concluded for tax years prior to Fiscal Year 2012 and Fiscal Year 2014, respectively.

The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations; however, the outcome of such examinations cannot be predicted with certainty. If any issues addressed in the tax examinations are resolved in a manner inconsistent with the Company's expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. The possible reduction in liabilities for uncertain tax that may impact the statements of operations in the next 12 months is approximately $1.2 million.

During Fiscal 2019, the Company completed its computation of the tax act in accordance with Staff Accounting Bulletin SAB 118 (“SAB 118”), which addressed concerns about reporting entities’ ability to timely comply with the requirements to recognize the effects of the Tax Cuts and Jobs Act. During the fiscal year ended March 31, 2018, the Company recorded a provisional toll charge of $79.7 million. During fiscal year 2019, the toll charge was completed resulting in a tax benefit of $0.8 million. The Company has paid $21.5 million of the toll charge and the remaining toll charge liability of $57.3 million will be paid over the next six years. The Company also paid a $6.9 million toll charge in October 2018 related to Polycom’s pre-acquisition period. During the fiscal year ended March 31, 2018, the Company recorded a provisional expense of $5.0 million related to state income taxes and foreign withholding taxes for unrepatriated foreign earnings through the Tax Act’s enactment date, as the Company no longer intends to indefinitely reinvest foreign earnings abroad. During fiscal year 2019, the toll charge computation of state and foreign withholding taxes was completed resulting in the recognition of a tax benefit of $3.2 million. The effect of the SAB 118 measurement period adjustments on the effective tax rate for Fiscal Year 2019 was (2.1)%, Polycom recorded a toll charge which was paid in October 2018 with the filing of its 2017 tax return.

For the global intangible low-taxed income provisions of the Tax Act, the Company has selected an accounting policy to record related period costs if and when incurred.