Entity information:
Income Taxes

Income (loss) before income taxes is as follows (in thousands):
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
United States
 
$
35,213

 
$
26,440

 
$
(2,303
)
Foreign
 
32

 
148

 
314

Total
 
$
35,245

 
$
26,588

 
$
(1,989
)


The components of the provision for (benefit from) income taxes are as follows (in thousands):
 
 
December 31,
 
 
2017
 
2016
 
2015
Federal:
 
 
 
 
 
 
Current
 
$
912

 
$
837

 
$
(23
)
Deferred
 
(2,884
)
 
7,306

 
(2,053
)
 
 
(1,972
)
 
8,143

 
(2,076
)
State:
 
 
 
 
 
 
Current
 
3,937

 
188

 
768

Deferred
 
3,050

 
1,895

 
91

 
 
6,987

 
2,083

 
859

Foreign:
 
 
 
 
 
 
Current
 
472

 
758

 
258

Deferred
 
(327
)
 
(302
)
 
(187
)
 
 
145

 
456

 
71

Total income tax expense (benefit):
 
 
 
 
 
 
Current
 
5,321

 
1,783

 
1,003

Deferred
 
(161
)
 
8,899

 
(2,149
)
 
 
$
5,160

 
$
10,682

 
$
(1,146
)


The Company’s actual tax expense differed from the statutory federal income tax rate, as follows:
 
 
December 31,
 
 
2017
 
2016
 
2015
Income tax expense at statutory rate
 
35.0
 %
 
35.0
 %
 
35.0
 %
State income taxes
 
0.8

 
(2.8
)
 
142.6

Stock-based compensation
 
(3.2
)
 
(0.4
)
 
8.9

R&D tax credit
 
(4.3
)
 
(6.6
)
 
173.5

Non-deductible executive compensation
 
5.4

 
4.7

 
(116.5
)
Valuation allowance
 
6.4

 
7.4

 
(170.7
)
Uncertain tax benefit liability settlement
 
—

 
1.4

 
—

Tax reform
 
(25.2
)
 
—

 
—

Other
 
(0.3
)
 
1.5

 
(15.3
)
 
 
14.6
 %
 
40.2
 %
 
57.5
 %


On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act”). The Tax Act introduces tax reform that reduces the current corporate federal income tax rate from 35% to 21%, among other changes. The rate reduction is effective January 1, 2018. The Company has determined that the Tax Act requires a revaluation of its net deferred tax asset upon its enactment during the current quarter. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, like the Tax Act, deferred tax assets and liabilities are adjusted through income tax expense during the fourth quarter of 2017.

Subsequent to the enactment of the Act, the Securities and Exchange Commission 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 ("ASC 740"). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

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, the Company considers the accounting of the deferred tax re-measurements and other items to be provisional due to the forthcoming guidance and the Company's ongoing analysis of final year-end data and tax positions. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.

At December 31, 2017 the Company had approximately $0.7 million and $23.5 million of Federal and California net operating loss carryforwards, respectively. None of these net operating loss carryforwards are associated with windfall tax benefits for federal and state income tax purposes. Effective January 1, 2017, the Company adopted ASU 2016-09 resulting in excess tax benefits or tax deficiencies from stock-based compensation being recorded to the consolidated statement of income within the provision for income taxes rather than in the consolidated balance sheet within additional paid-in capital. These carryforwards will expire beginning in the year 2023 and 2031 for federal and California purposes, respectively.

The Company also had research and development credit carryforwards of approximately $12.5 million and $16.5 million for federal and state income tax purposes, respectively, at December 31, 2017. None of these are associated with windfall tax benefits for federal and state income tax purposes due to adoption of ASU 2016-09. The research and development credits may be carried forward over a period of 20 years for federal tax purposes, indefinitely for California tax purposes, and 15 years for Arizona purposes. The research and development tax credit will expire starting in 2021 for federal and 2024 for Arizona.

The Internal Revenue Code ("IRS") limits the use of net operating loss and tax credit carryforwards in the case of an “ownership change” of a corporation. Any ownership changes, as defined, may restrict utilization of carryforwards.

The components of the net deferred tax assets as of December 31, 2017 and 2016 are as follows (in thousands):
 
 
December 31,
 
 
2017
 
2016
Deferred tax assets:
 
 
 
 
Net operating loss carryforwards
 
$
1,837

 
$
460

Reserves and other tax benefits
 
33,145

 
50,178

Tax credits
 
32,057

 
17,149

Deferred tax assets
 
67,039

 
67,787

Valuation allowance
 
(17,111
)
 
(9,998
)
Net deferred tax assets
 
49,928

 
57,789

Deferred tax liabilities:
 
 

 
 

Depreciation and amortization
 
(47,293
)
 
(77,455
)
Net deferred tax assets (liabilities)
 
$
2,635

 
$
(19,666
)


Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. The valuation allowance related to deferred income taxes was $17.1 million as of December 31, 2017 and $10.0 million as of December 31, 2016. The increase in the valuation allowance was attributed to the Company's generation of certain California and other state income tax credits which it believes it will not be able to utilize.

Based on the Company’s assessment, excluding the valuation allowance recorded related to certain state deferred tax assets that are not likely to be realized, it is more likely than not that the Company’s U.S. net deferred tax asset will be realized through future taxable earnings, and/or the reversal of existing taxable temporary differences as of December 31, 2017. Shutterfly's business is cyclical and taxable income is highly dependent on revenue that historically has occurred during the fourth quarter. If there are changes to this historic trend and the Company's fourth quarter does not yield results in-line with expectations, the Company may not be profitable in a given year resulting in a potential cumulative loss.  When a tax planning strategy is feasible and prudent, the Company would pursue any possible tax planning strategies to avoid the expiration of the Company's tax attributes and none have been identified or considered as of December 31, 2017. Accordingly, with exception of the valuation allowance discussed above, no additional valuation allowance has been recorded on this net asset as of December 31, 2017. The Company will continue to assess the need for a valuation allowance in the future.

As of December 31, 2017, the Company had $9.0 million of unrecognized tax benefits. A reconciliation of the beginning and ending amounts of unrecognized income tax benefits is as follows (in thousands):
 
 
2017
 
2016
 
2015
Balance of unrecognized tax benefits at January 1
 
$
6,586

 
$
5,703

 
$
8,566

Additions for tax positions of prior years
 
1,393

 
—

 
—

Additions for tax positions related to current year
 
1,050

 
951

 
1,050

Reductions for tax positions of prior years
 
—

 
(68
)
 
(3,913
)
Balance of unrecognized tax benefits at December 31
 
$
9,029

 
$
6,586

 
$
5,703



If the $9.0 million of unrecognized tax benefits as of December 31, 2017 is recognized, approximately $4.5 million would decrease the effective tax rate in the period in which each of the benefits is recognized. The remaining amount would be offset by the reversal of related deferred tax assets on which a valuation allowance is placed. The Company does not expect any material changes to its unrecognized tax benefits within the next twelve months.

The Company’s policy is to recognize interest and /or penalties related to all tax positions in income tax expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. The amounts accrued for interest and penalties related to tax uncertainties were not significant for the year ended December 31, 2017. No amounts were accrued for the year ended December 31, 2016.

The Company provides for federal income taxes on the earnings of its foreign subsidiary, as such, earnings are currently recognized as U.S. taxable income.

As of December 31, 2017, the Company is subject to taxation in the United States and Israel. The Company is subject to examination for tax years including and after 2014 for federal income taxes. Certain tax years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years which have been carried forward and may be audited in subsequent years when utilized.