Entity information:
INCOME TAXES
On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act (the “2017 Tax Act”) into law effective January 1, 2018. The 2017 Tax Act significantly revised the U.S. tax code by, in part but not limited to: reducing the U.S. corporate maximum tax rate from 35% to 21%, imposing a mandatory one-time transition tax on certain un-repatriated earnings of foreign subsidiaries, modifying executive compensation deduction limitations, and repealing the deduction for domestic production activities. Under Accounting Standards Codification 740, Income Taxes, the Company must recognize the effects of tax law changes in the period in which the new legislation is enacted.
The SEC staff acknowledged the challenges companies face incorporating the effects of the 2017 Tax Act by their financial reporting deadlines. In response, on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete accounting for certain income tax effects of the 2017 Tax Act. As of December 31, 2017, the Company recorded a provisional income tax charge of $64.8 million for the re-measurement of its U.S. deferred tax assets and liabilities because of the federal corporate tax rate reduction from 35% to 21%. The Company recorded a provisional income tax charge of $364.6 million for the transition tax on deemed repatriation of deferred foreign income. The Company also provisionally accounted for the modified executive compensation deduction limitations pursuant to the 2017 Tax Act as of December 31, 2017.

The Company considers the accounting of the transition tax, deferred tax re-measurements and its ongoing analysis of final year-end data and tax positions to be estimates. The provisional amounts recorded are based on the Company’s current interpretation and understanding of the 2017 Tax Act and may change as the Company receives additional clarification and implementation guidance and finalizes their analysis of all impacts and positions with regard to the 2017 Tax Act. The Company will continue to gather and evaluate the data and guidance to refine the income tax impact of the 2017 Tax Act. Pursuant to SAB 118, the Company will complete the accounting for the tax effects of all of the provisions of the 2017 Tax Act within the required measurement period not to extend beyond one year from the enactment date.
The United States and foreign components of income before income taxes are as follows:
 
 
2017
 
2016
 
2015
 
 
(In thousands)
United States
 
$
78,897

 
$
59,344

 
$
(135,978
)
Foreign
 
471,449

 
468,426

 
300,562

Total
 
$
550,346

 
$
527,770

 
$
164,584


The components of the provision for income taxes are as follows:
 
 
2017
 
2016
 
2015
 
 
(In thousands)
Current:
 
 
 
 
 
 
Federal
 
$
374,602

 
$
18,832

 
$
(12,450
)
Foreign
 
56,526

 
52,978

 
40,613

State
 
3,075

 
7,759

 
6,523

Total current
 
434,203

 
79,569

 
34,686

Deferred:
 
 
 
 
 
 
Federal
 
52,842

 
(7,688
)
 
(69,104
)
Foreign
 
(5,468
)
 
(3,139
)
 
(2,991
)
State
 
46,784

 
(10,827
)
 
(13,140
)
Total deferred
 
94,158

 
(21,654
)
 
(85,235
)
Total provision
 
$
528,361

 
$
57,915

 
$
(50,549
)

The following table presents the breakdown of net deferred tax assets:
 
 
December 31,
 
 
2017
 
2016
 
 
(In thousands)
Deferred tax assets
 
$
152,362

 
$
233,900

Deferred tax liabilities
 
(237
)
 
(1,472
)
Total net deferred tax assets
 
$
152,125

 
$
232,428


The significant components of the Company’s deferred tax assets and liabilities consisted of the following:
 
 
December 31,
 
 
2017
 
2016
 
 
(In thousands)
Deferred tax assets:
 
 
 
 
Accruals and reserves
 
$
30,317

 
$
41,094

Deferred revenue
 
65,016

 
95,969

Tax credits
 
80,772

 
50,072

Net operating losses
 
36,674

 
41,986

Stock based compensation
 
21,714

 
34,349

Transaction costs
 
—

 
557

Depreciation and amortization

4,939

 
1,933

Other
 
—

 
267

Valuation allowance
 
(76,789
)
 
(14,156
)
Total deferred tax assets
 
162,643

 
252,071

Deferred tax liabilities:
 
 
 
 
Acquired technology
 
(2,882
)
 
(8,524
)
Prepaid expenses
 
(7,414
)
 
(11,119
)
Other
 
(222
)
 
—

Total deferred tax liabilities
 
(10,518
)
 
(19,643
)
Total net deferred tax assets
 
$
152,125

 
$
232,428


The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if it is not more likely than not that some portion or all of the deferred tax assets will be realized. At December 31, 2017, the Company determined a $76.8 million valuation allowance was necessary, which relates to deferred tax assets for net operating losses and tax credits that may not be realized.
At December 31, 2017, the Company retained $135.9 million of remaining net operating loss carry forwards in the United States from acquisitions. The utilization of these net operating loss carry forwards are limited in any one year pursuant to Internal Revenue Code Section 382 and may begin to expire in 2018. At December 31, 2017, the Company held $47.2 million of remaining net operating loss carry forwards in foreign jurisdictions that do not expire. At December 31, 2017, the Company held $108.6 million of federal and state research and development tax credit carry forwards in the United States, a portion of which may begin to expire in 2018.
A reconciliation of the Company’s effective tax rate to the statutory federal rate is as follows:
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Federal statutory taxes
 
35.0
 %
 
35.0
 %
 
35.0
 %
State income taxes, net of federal tax benefit
 
2.1

 
0.8

 
(1.0
)
Foreign operations
 
(20.0
)
 
(21.6
)
 
(41.1
)
Permanent differences
 
2.6

 
3.2

 
13.9

The 2017 Tax Act - tax rate impact on deferred taxes
 
11.8

 
—

 
—

The 2017 Tax Act - transition tax
 
66.3

 
—

 
—

Change in valuation allowance reserve
 
8.8

 
—

 
—

Change in deferred tax liability related to acquired intangibles
 
0.3

 
(0.8
)
 
(12.6
)
Tax credits
 
(7.6
)
 
(7.9
)
 
(20.7
)
Stock-based compensation
 
(3.6
)
 
0.3

 
0.8

Change in accruals for uncertain tax positions
 
0.3

 
2.2

 
(5.9
)
Other
 
—

 
(0.2
)
 
0.9

 
 
96.0
 %
 
11.0
 %
 
(30.7
)%

The Company’s effective tax rate generally differs from the U.S. federal statutory rate primarily due to lower tax rates on earnings generated by the Company’s foreign operations that are taxed primarily in Switzerland.
The Company's effective tax rate was approximately 96.0% and 11.0% for the year ended December 31, 2017 and 2016, respectively. The increase in the effective tax rate when comparing the year ended December 31, 2017 to the year ended December 31, 2016 was primarily due to accounting for the estimated tax impact of the 2017 Tax Act and the separation of the GoTo Business. Specifically, the Company recorded a $364.6 million provisional income tax charge for the transition tax on deemed repatriation of deferred foreign income, and a $64.8 million provisional income tax charge for the re-measurement of U.S. deferred tax assets and liabilities because of the maximum U.S. federal corporate rate reduction from 35% to 21%. The Company also recorded a $48.6 million income tax charge to establish a valuation allowance primarily due to a change in expectation of realizability of state R&D credits arising from the separation of the GoTo Business. These charges were marginally offset by a $22.0 million tax benefit due to the adoption of an accounting standard update requiring recognition of income tax effects related to stock based compensation when the awards vest or settle.
The increase in the effective tax rate when comparing the year ended December 31, 2016 to the year ended December 31, 2015 was primarily due to change in the combination of income between the Company’s U.S. and foreign operations, the impact of discrete tax benefits related to the extension of the 2015 federal research and development tax credit and the impact of settling the Internal Revenue Service (“IRS”) examination for tax years 2011 and 2012 that closed during 2015. Specifically, during the quarter ended June 30, 2015, the IRS concluded its field examination, finalized tax adjustments primarily related to transfer pricing and the research and development tax credit, and formally closed the audit for the 2011 and 2012 tax years. Subsequently, during 2015 the Company recognized a net tax benefit of $20.3 million related to the IRS examination settlement.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017 and 2016 is as follows (in thousands):
Balance at January 1, 2016
$
54,621

Additions based on tax positions related to the current year
11,588

Additions for tax positions of prior years
4,759

Reductions related to the expiration of statutes of limitations
(1,167
)
Balance at December 31, 2016
69,801

Additions based on tax positions related to the current year
$
9,293

Additions for tax positions of prior years
7,656

Reductions related to audit settlements
(137
)
Reductions related to the expiration of statutes of limitations
(8,764
)
Balance at December 31, 2017
$
77,849


As of December 31, 2017, unrecognized tax benefits of $31.6 million were offset against long-term deferred tax assets. All amounts included in this balance affect the annual effective tax rate. The Company recognizes interest accrued related to uncertain tax positions and penalties in income tax expense. For the year ended December 31, 2017, the Company accrued $2.7 million for the payment of interest.
The Company and one or more of its subsidiaries are subject to U.S. federal income taxes in the United States, as well as income taxes of multiple state and foreign jurisdictions. The Company is currently no longer subject to U.S. federal income tax examination. With few exceptions, the Company is generally not under examination for state and local income tax, or non-U.S. jurisdictions by tax authorities for years prior to 2014.