Entity information:
Income Taxes
The provision for income taxes for continuing operations for each of the three years in the period ended December 31, 2017 was as follows (in thousands):
 
2017
 
2016
 
2015
Current taxes:
 
 
 
 
 
  U.S. Federal
$
413

 
$
(574
)
 
$
709

U.S. state and local
33,845

 
8,672

 
(25,308
)
Foreign
14,654

 
(4,620
)
 
3,504

    Total current
48,912

 
3,478

 
(21,095
)
 
 
 
 
 
 
Deferred taxes:
 
 
 
 
 
  U.S. Federal
694,207

 
108,241

 
134,590

U.S. state and local
9,697

 
8,335

 
4,552

Foreign
8,151

 
2,055

 
(8,100
)
    Total deferred
712,055

 
118,631

 
131,042

 
 
 
 
 
 
Total income tax provision
$
760,967

 
$
122,109

 
$
109,947



On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code that will impact many areas of taxation, including, but not limited to, (1) reduction of the U.S. federal corporate tax rate from 35% to 21%; (2) elimination of the corporate alternative minimum tax; (3) the introduction of the base erosion anti-abuse tax, a new minimum tax; (4) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (5) a new provision designed to tax global intangible low-taxed income; (6) a new limitation on deductible interest expense; (7) the repeal of the domestic production activity deduction; (8) limitations on the deductibility of certain executive compensation; (9) limitations on the use of foreign tax credits to reduce U.S. income tax liability; (10) limitations on NOLs generated after December 31, 2017, to 80% of taxable income; (11) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over 8 years; and (12) bonus depreciation that will allow for full expensing of qualified property.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. SAB 118 provides a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined: and (3) where a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with the law prior to the enactment of the Tax Act.

Due to the complex nature of the Tax Act, we have not completed our accounting for the income tax effects of certain elements of the Tax Act. If we were able to make reasonable estimates of the effects of certain elements for which our analysis is not yet complete, we recorded a provisional estimate in the financial statements. If we were not yet able to make reasonable estimates of the impact of certain elements, we have not recorded any adjustments related to those elements and have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Act. The ultimate impact of the Tax Act may differ from this estimate, possibly materially, due to changes in interpretations and assumptions, and guidance that may be issued and actions we may take in response to the Tax Act. We note that the Tax Act is complex and we continue to assess the impact that various provisions will have on our business.

Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting for the deferred tax asset remeasurements, the transition tax, and other items to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. In connection with our initial analysis, we have recorded a discrete tax expense of $450.5 million as a provisional estimate of the impact of the Tax Act, including the portion related to Jefferies, during 2017 increasing our effective tax rate by 44.4% to 75.1%. This provisional estimate primarily consists of a $415.0 million expense related to the revaluation of our deferred tax asset and a $35.5 million expense related to the deemed repatriation of foreign earnings. Additionally, for the year ended December 31, 2017, our provision for income taxes was reduced by a $31.9 million benefit resulting from the repatriation of Jefferies earnings from certain of its foreign subsidiaries, along with their associated foreign tax credits.

For the year ended December 31, 2016, our provision for income taxes included a $24.9 million charge related to previously issued stock awards. The majority of the awards expired during the first quarter of 2016. The tax deductions associated with the remainder of the awards was less than the compensation cost recognized for financial reporting purposes. For the year ended December 31, 2015, we recorded a benefit related to certain state and local net operating loss carryforwards which we believe are more likely than not to be realized in the future, a significant portion of which resulted from enacted state and local tax law changes.

The following table presents the U.S. and non-U.S. components of income from continuing operations before income taxes for each of the three years in the period ended December 31, 2017 (in thousands):
 
2017
 
2016
 
2015
 
 
 
 
 
 
U.S.
$
944,014

 
$
337,374

 
$
336,856

Non-U.S. (1)
69,800

 
(20,944
)
 
19,680

Income from continuing operations before income taxes
$
1,013,814

 
$
316,430

 
$
356,536


(1)
For purposes of this table, non-U.S. income is defined as income generated from operations located outside the U.S.

For each of the three years in the period ended December 31, 2017, income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rate of 35% to income from continuing operations before income taxes as a result of the following (dollars in thousands):
 
2017
 
2016
 
2015
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
 
 
 
 
 
 
 
 
 
 
 
Computed expected federal income tax
$
354,835

 
35.0
 %
 
$
110,751

 
35.0
 %
 
$
124,788

 
35.0
 %
Increase (decrease) in income taxes resulting from:
 
 
 
 
 
 
 
 
 
 
 
State and local income taxes, net of federal income tax benefit
19,938

 
2.0

 
1,045

 
0.3

 
(6,928
)
 
(1.9
)
International operations (including foreign rate differential)
(11,577
)
 
(1.1
)
 
(3,137
)
 
(1.0
)
 
(11,474
)
 
(3.2
)
Increase (decrease) in valuation allowance
—

 
—

 
2,825

 
0.9

 
(13,227
)
 
(3.7
)
Permanent differences
7,474

 
0.7

 
7,523

 
2.4

 
13,892

 
3.9

Tax exempt income
(3,850
)
 
(0.4
)
 
(4,640
)
 
(1.5
)
 
(6,789
)
 
(1.9
)
Foreign tax credits
(32,974
)
 
(3.2
)
 
—

 
—

 
(7,240
)
 
(2.0
)
(Income) loss allocated to noncontrolling interest, not subject to tax
(28,392
)
 
(2.8
)
 
(22,512
)
 
(7.1
)
 
11,039

 
3.1

Excess stock detriment
161

 
—

 
24,907

 
7.9

 
—

 
—

Revaluation of deferred tax asset
415,000

 
40.9

 
—

 
—

 
—

 
—

Transition tax
35,500

 
3.5

 
—

 
—

 
—

 
—

Other
4,852

 
0.5

 
5,347

 
1.7

 
5,886

 
1.5

Actual income tax provision
$
760,967

 
75.1
 %
 
$
122,109

 
38.6
 %
 
$
109,947

 
30.8
 %


The following table presents a reconciliation of gross unrecognized tax benefits for each of the three years in the period ended December 31, 2017 (in thousands):
 
2017
 
2016
 
2015
 
 
 
 
 
 
Balance at beginning of period
$
148,848

 
$
150,867

 
$
148,590

Increases based on tax positions related to the current period
18,619

 
5,045

 
3,475

Increases based on tax positions related to prior periods
10,358

 
3,697

 
22,030

Decreases based on tax positions related to prior periods
(8,805
)
 
(9,414
)
 
(15,349
)
Decreases related to settlements with taxing authorities
—

 
(1,347
)
 
(7,879
)
Balance at end of period
$
169,020

 
$
148,848

 
$
150,867



Net interest expense related to unrecognized tax benefits was $9.7 million, $8.6 million and $4.2 million for the years ended December 31, 2017, 2016 and 2015, respectively. At December 31, 2017 and 2016, we had interest accrued of approximately $57.4 million and $47.7 million, respectively, included in Payables, expense accruals and other liabilities in the Consolidated Statements of Financial Condition. No material penalties were accrued for the years ended December 31, 2017 and 2016.

The statute of limitations with respect to our federal income tax returns has expired for all years through 2012. Our 2013 federal tax return is currently under examination by the Internal Revenue Service. Our New York State and New York City income tax returns are currently being audited for the 2012 to 2014 period and 2011 to 2012 period, respectively. Prior to becoming a wholly-owned subsidiary, Jefferies filed a consolidated U.S. federal income tax return with its qualifying subsidiaries and was subject to income tax in various states, municipalities and foreign jurisdictions. Jefferies is currently under examination by the Internal Revenue Service and other major tax jurisdictions. The statute of limitations with respect to Jefferies federal income tax returns has expired for all years through 2012.

We do not expect that resolution of these examinations will have a significant effect on our consolidated financial position, but could have a significant impact on the consolidated results of operations for the period in which resolution occurs. Over the next twelve months, we believe it is reasonably possible that various tax examinations will be concluded and statutes of limitation will expire which would have the effect of reducing the balance of unrecognized tax benefits by $14.0 million. If recognized, the total amount of unrecognized tax benefits reflected in the table above would lower our effective income tax rate.

The principal components of deferred taxes at December 31, 2017 and 2016 are as follows (in thousands):
 
2017
 
2016
Deferred tax asset:
 
 
 
Net operating loss carryover
$
599,839

 
$
1,262,584

Compensation and benefits
213,340

 
309,100

Long-term debt
11,799

 
54,102

Other assets
97,061

 
155,028

Tax credits
93,026

 
10,749

Securities valuation reserves
3,012

 
12,345

Intangible assets, net and goodwill
270

 
311

Other liabilities
21,605

 
39,188

 
1,039,952

 
1,843,407

Valuation allowance
(93,758
)
 
(106,042
)
 
946,194

 
1,737,365

Deferred tax liability:
 

 
 

Unrealized gains on investments
(8,060
)
 
(998
)
Amortization of intangible assets
(71,583
)
 
(107,437
)
Property and equipment
(8,209
)
 
(14,228
)
Investment in FXCM
(37,942
)
 
(117,594
)
Transition tax
(35,165
)
 
—

Other
(41,424
)
 
(35,293
)
 
(202,383
)
 
(275,550
)
Net deferred tax asset
$
743,811

 
$
1,461,815


As of December 31, 2017, we have consolidated U.S. federal NOLs of $1.2 billion that may be used to offset the taxable income of any member of our consolidated tax group. In addition, we have $1.2 billion of U.S. federal NOLs that are only available to offset the taxable income of certain subsidiaries. Federal NOLs begin to expire in 2023, with a substantial amount expiring between 2023 and 2025. We have various state NOLs that expire at different times, which are reflected in the above table to the extent our estimate of future taxable income will be apportioned to those states. We have gross foreign net operating loss carryforwards of approximately $68.6 million. There is a valuation allowance with respect to $10.0 million of these foreign net operating loss carryforwards. Uncertainties that may affect the utilization of our tax attributes include future operating results, tax law changes, rulings by taxing authorities regarding whether certain transactions are taxable or deductible and expiration of carryforward periods.
Under certain circumstances, the ability to use the NOLs and future deductions could be substantially reduced if certain changes in ownership were to occur. In order to reduce this possibility, our certificate of incorporation includes a charter restriction that prohibits transfers of our common stock under certain circumstances.
We are currently evaluating the impact of the Tax Act on our indefinite reinvestment assertion. At December 31, 2016, we had approximately $157.0 million of earnings attributable to foreign subsidiaries that were indefinitely reinvested abroad and for which no U.S. federal income tax provision had been recorded. Accordingly, deferred tax liabilities of approximately $55.0 million had not been recorded with respect to these earnings at December 31, 2016.