Piper Jaffray Companies

Income Taxes

Income tax expense/(benefit) is provided using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between amounts reported for income tax purposes and financial statement purposes, using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The Tax Reform Act was enacted on December 22, 2017. ASC 740 requires companies to recognize the effect of the tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017. In accordance with SAB 118, the Company has made a reasonable estimate of the impact of the Tax Reform Act, and recorded a discrete item in its 2017 provisional income tax expense of $54.2 million. This amount reflects an estimated reduction of deferred tax assets as a result of the statutory federal rate decrease from 35 percent to 21 percent. The Company continues to evaluate its estimates surrounding the remeasurement of deferred tax assets.

The components of income tax expense/(benefit) are as follows:



	Year Ended December 31,
(Dollars in thousands)	2017			2016			2015
Current:
Federal	$	27,611		$	11,704		$	33,818
State	5,550			2,454			7,030
Foreign	93			(703		)	58
	33,254			13,455			40,906
Deferred:
Federal	5,783			(27,764		)	(11,620		)
State	(7,554		)	(3,758		)	(1,901		)
Foreign	(1,254		)	939			556
	(3,025		)	(30,583		)	(12,965		)

Total income tax expense/(benefit)	$	30,229		$	(17,128	)	$	27,941

A reconciliation of federal income taxes at statutory rates to the Company's effective tax rates is as follows:



	Year Ended December 31,
(Dollars in thousands)	2017			2016			2015
Federal income tax expense/(benefit) at statutory rates	$	(10,263	)	$	(10,806	)	$	30,248
Increase/(reduction) in taxes resulting from:
Impact of the Tax Cuts and Jobs Act	54,154			—			—
State income taxes, net of federal tax benefit	(791		)	(1,110		)	3,155
Net tax-exempt interest income	(5,040		)	(4,600		)	(4,299		)
Foreign jurisdictions tax rate differential	865			1,860			191
Change in valuation allowance	(752		)	362			—
Vestings of stock awards	(9,172		)	—			—
Income attributable to noncontrolling interests	(835		)	(2,872		)	(2,243		)
Other, net	2,063			38			889
Total income tax expense/(benefit)	$	30,229		$	(17,128	)	$	27,941

In accordance with ASC 740, U.S. income taxes are not provided on undistributed earnings of international subsidiaries that are permanently reinvested. As of December 31, 2017, no deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of our foreign earnings to the U.S.

Deferred income tax assets and liabilities reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for the same items for income tax reporting purposes. The net deferred income tax assets consisted of the following items:



	December 31,			December 31,
(Dollars in thousands)	2017			2016
Deferred tax assets:
Deferred compensation	$	61,555		$	79,230
Goodwill tax basis in excess of book basis	38,592			18,357
Net operating loss carryforwards	4,789			3,900
Liabilities/accruals not currently deductible	1,744			1,060
Other	3,296			5,474
Total deferred tax assets	109,976			108,021
Valuation allowance	(159		)	(911		)

Deferred tax assets after valuation allowance	109,817			107,110

Deferred tax liabilities:
Unrealized gains on firm investments	6,599			6,406
Fixed assets	1,813			2,075
Other	200			796

Total deferred tax liabilities	8,612			9,277

Net deferred tax assets	$	101,205		$	97,833

The realization of deferred tax assets is assessed and a valuation allowance is recorded to the extent that it is more likely than not that any portion of the deferred tax asset will not be realized. The Company believes that its future tax profits will be sufficient to recognize its deferred tax assets, with the exception of $0.2 million in state net operating loss carryforwards.

The Company accounts for unrecognized tax benefits in accordance with the provisions of ASC 740, which requires tax reserves to be recorded for uncertain tax positions on the consolidated statements of financial condition. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



(Dollars in thousands)
Balance at December 31, 2014	$	2,323
Additions based on tax positions related to the current year	—
Additions for tax positions of prior years	—
Reductions for tax positions of prior years	(2,000		)
Settlements	(200		)
Balance at December 31, 2015	$	123
Additions based on tax positions related to the current year	—
Additions for tax positions of prior years	—
Reductions for tax positions of prior years	—
Settlements	—
Balance at December 31, 2016	$	123
Additions based on tax positions related to the current year	—
Additions for tax positions of prior years	166
Reductions for tax positions of prior years	—
Settlements	(123		)
Balance at December 31, 2017	$	166

As of December 31, 2017, approximately $0.2 million of the Company's unrecognized tax benefits would impact the annual effective rate, if recognized.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense. The Company had no accruals related to the payment of interest and penalties at December 31, 2017, 2016 and 2015, respectively. The Company or one of its subsidiaries files income tax returns with the various states and foreign jurisdictions in which the Company operates. The Company is not subject to examination by U.S. federal tax authorities for years before 2014 and is not subject to examination by state and local or non-U.S. tax authorities for taxable years before 2013. The Company anticipates all of its uncertain income tax positions will be resolved within the next twelve months.