KKR & Co. L.P.

INCOME TAXES

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



	For the Years Ended December 31,
	2017				2016			2015
Current
Federal Income Tax	$	(34,611	)		$	(3,440	)	$	27,978
State and Local Income Tax	5,229				(443		)	6,320
Foreign Income Tax	79,371			⁽¹⁾	38,052			42,036
Subtotal	49,989				34,169			76,334
Deferred
Federal Income Tax	178,449				(15,032		)	(19,133		)
State and Local Income Tax	(424		)		1,348			8,264
Foreign Income Tax	(3,688		)	⁽¹⁾	4,076			1,171
Subtotal	174,337				(9,608		)	(9,698		)
Total Income Taxes	$	224,326			$	24,561		$	66,636


(1)	The foreign income tax provision was calculated on $171.6 million of pre-tax income generated in foreign jurisdictions.

The 2017 Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a U.S. federal corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a modified worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has calculated its best estimate of the impact of the 2017 Tax Act in its year end income tax provision in accordance with its understanding of the 2017 Tax Act and guidance available as of the date of this filing. As a result, KKR has recorded $97.9 million as an additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount that is related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $96.4 million. The provisional amount that is related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings is $3.1 million based on cumulative foreign earnings of $20.1 million. This amount is offset by the reversal of a deferred tax liability for unremitted foreign earnings and profits valued at $1.6 million.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued 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 2017 Tax Act. In accordance with SAB 118, the Company has determined that the $96.4 million of the deferred tax expense recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $1.5 million of expense, net of the reversal of the deferred tax liability related to unremitted foreign earnings, recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at December 31, 2017. Additional work is necessary to do a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to tax expense in the quarter of 2018 when the analysis is complete.

The following table reconciles the U.S. Federal Statutory Tax Rate to the Effective Income Tax Rate:



	For the Years Ended December 31,
	2017		2016		2015
Statutory U.S. Federal Income Tax Rate	35.00	%	35.00	%	35.00	%
Income not attributable to KKR Management Holdings Corp. ⁽¹⁾	(38.64	)%	(42.68	)%	(36.04	)%
Foreign Income Taxes	2.62	%	4.32	%	0.81	%
State and Local Income Taxes	0.05	%	0.05	%	0.21	%
Compensation Charges Borne by KKR Holdings	6.29	%	8.20	%	1.92	%
Change in Valuation Allowance	0.00	%	(1.03	)%	0.29	%
Impact of 2017 Tax Act	3.52	%	0.00	%	0.00	%
Other	(0.78	)%	(1.34	)%	(0.94	)%
Effective Income Tax Rate	8.06	%	2.52	%	1.25	%


(1)	Represents primarily income attributable to (i) redeemable noncontrolling interests, (ii) noncontrolling interests and appropriated capital and (iii) investment income of certain entities and net carried interest of certain general partners of KKR investment funds that are not directly or indirectly owned by KKR Management Holdings L.P.

The effective tax rate for 2017 was 8.06%, compared to 2.52% in 2016, an increase of 5.54%, which was impacted by several factors. The 2017 Tax Act was enacted on December 22, 2017, and as a result of the remeasurement of our deferred tax asset and the estimate of the one-time transition tax on unremitted earnings, our effective tax rate increased by 3.52%. Additionally, due to increased fee revenue at KKR Management Holdings Corp., a greater percentage of KKR's overall income was subject to U.S. federal and state tax than in prior years, increasing our effective tax rate by approximately 4.04% compared to 2016.

Deferred income taxes reflect the net tax effects of temporary differences that may exist between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using enacted tax rates in effect for the year in which the differences are expected to reverse. A summary of the tax effects of the temporary differences is as follows:



	December 31, 2017 ⁽³⁾			December 31, 2016
Deferred Tax Assets
Fund Management Fees	$	51,662		$	59,963
Equity Based Compensation	19,749			30,094
KKR Holdings Unit Exchanges ⁽¹⁾	93,229			156,624
Depreciation and Amortization	13,421			24,919
Federal Foreign Tax Credit	15,028			15,028
Interest Limitation Carryforward ⁽²⁾	—			13,494
Net Operating Loss Carryforwards	4,346			33,867
Other	5,875			12,599
Total Deferred Tax Assets before Valuation Allowance	203,310			346,588
Valuation Allowance	(11,872		)	(9,768		)
Total Deferred Tax Assets	191,438			336,820
Deferred Tax Liabilities
Investment Basis Differences / Net Unrealized Gains	59,494			49,872
Total Deferred Tax Liabilities	59,494			49,872
Total Deferred Taxes, Net	$	131,944		$	286,948

(1)

In connection with exchanges of KKR Holdings units into common units of KKR & Co. L.P., KKR records a deferred tax asset associated with an increase in KKR Management Holdings Corp.'s share of the tax basis of the tangible and intangible assets of KKR Management Holdings L.P. This amount is offset by an adjustment to record amounts due to KKR Holdings and principals under the tax receivable agreement, which is included within Due to Affiliates in the consolidated statements of financial condition. The net impact of these adjustments was recorded as an adjustment to equity at the time of the exchanges.

(2) Represents interest expense limitations under IRC Section 163(j) (as existing prior to the 2017 Tax Act), which has an indefinite carryforward.

(3) A provisional adjustment in the amount of $97.9 million was recorded to adjust our U.S. federal deferred income tax assets and liabilities as of December 31, 2017 in order to reflect the impact of the 2017 Tax Act. A majority of this charge was due to the reduction in the U.S. statutory corporate tax rate from 35% to 21%.

Future realization of the above deferred tax assets is dependent on KKR generating sufficient taxable income within the period of time that the tax benefits are expected to reverse. KKR considers projections of taxable income in evaluating its ability to utilize those deferred tax assets. In projecting its taxable income, KKR begins with historical results and incorporates assumptions concerning the amount and timing of future pretax operating income. Those assumptions require significant judgment and are consistent with the plans and estimates that KKR uses to manage its business.

As of December 31, 2017, KKR has a U.S. federal income tax net operating loss ("NOL") carryforward of $106.8 million and a cumulative state and local NOL carryforward of $14.3 million that will begin to expire in 2036. KKR intends to carry back its U.S. federal NOL to past years during 2018, and is reflecting the estimated refund amount related to the carryback within other assets as a prepaid tax. In addition, KKR has U.S. federal foreign tax credit ("FTC") carryforwards of $15.0 million as of December 31, 2017. The FTC carryforwards are related to taxes paid in foreign jurisdictions, which if not utilized, will begin to expire in 2024. KKR has determined that a portion of the FTC carryforwards will not ultimately be realized due to U.S. federal limitations on FTC utilization. Therefore, KKR has established a valuation allowance of $11.9 million as of December 31, 2017 against the deferred tax asset. For all other deferred tax assets, including net operating loss carryforwards, KKR has determined that it is more likely than not that they will be realized and that a valuation allowance is not needed as of December 31, 2017.

KKR files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, KKR is subject to examination by U.S. federal and certain state, local and foreign tax regulators. As of December 31, 2017, the U.S. federal, state and local tax returns of KKR and its predecessor entities for the years 2011 through 2016 are open under general statute of limitations provisions and therefore subject to examination.

At December 31, 2017, 2016 and 2015, KKR's unrecognized tax benefits, excluding related interest and penalties, were:



	For the Years Ended December 31,
	2017			2016			2015
Unrecognized Tax Benefits, beginning of period	$	43,996		$	22,792		$	7,180
Gross increases in tax positions in prior periods	—			—			—
Gross decreases in tax positions in prior periods	—			(1,351		)	(116		)
Gross increases in tax positions in current period	4,406			22,810			15,959
Lapse of statute of limitations	(232		)	(255		)	(231		)
Unrecognized Tax Benefits, end of period	$	48,170		$	43,996		$	22,792

If the above tax benefits were recognized it would reduce the annual effective income tax rate. KKR believes that there will not be a significant increase or decrease to the tax positions within 12 months of the reporting date.

The unrecognized tax benefits are recorded in Accounts Payable, Accrued Expenses and Other Liabilities. KKR recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expense. Related to the unrecognized tax benefits, KKR accrued penalties of $0.1 million and interest of $2.2 million during 2017 and in total, as of December 31, 2017, recognized a liability for penalties of $2.3 million and interest of $7.9 million. During 2016, penalties of $0.6 million and interest of $1.2 million were accrued and in total, as of December 31, 2016, recognized a liability for penalties of $2.3 million and interest of $5.7 million.