(7) Income Taxes

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 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) providing bonus depreciation that will allow for full expensing of qualified property; (3) creating a new limitation on deductible interest expense; (4) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (5) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (6) adding limitations on the deductibility of certain executive compensation; and (7) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years. The SEC issued guidance on accounting for the tax effects of the Tax Act. The Company must reflect the income tax effects of those aspects of the Tax Act for which the accounting is known. 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 and the Tax Act provides a measurement period that should not extend beyond one year from the Tax Act enactment date. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply the tax laws that were in effect immediately before the enactment of the Tax Act.

The corporate rate reduction was applied to our inventory of deferred tax assets and deferred tax liabilities which resulted in the net tax benefit in the period ended December 31, 2017. Additionally, we are subject to the one-time transition tax on certain deemed unrepatriated earnings on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of Expedia’s foreign subsidiaries, which resulted in a net tax expense in the period ended December 31, 2017. The Company has determined a reasonable estimate for these amounts, and based on a continued analysis of the estimates (including changes in actual actions taken as a result of the Tax Act and assumptions used in developing estimates) and further guidance and interpretations on the application of the law, additional revisions may occur, and may be material, throughout the allowable measurement period.

Expedia Holdings, as consolidated, was included in the federal consolidated income tax return of Liberty Interactive prior to the Expedia Holdings Split-Off. For periods prior to the Expedia Holdings Split-Off, the tax provision included in these financial statements was prepared on a stand-alone basis, as if Expedia Holdings was not part of the consolidated Liberty Interactive group. Expedia was not historically included in the Liberty Interactive consolidated group tax return and is not currently included in the Expedia Holdings consolidated group tax return, as Expedia Holdings owns less than 80% of Expedia. The $73 million income taxes payable allocated to Expedia Holdings by Liberty Interactive as of November 4, 2016 was treated as an equity contribution upon completion of the Expedia Holdings Split-Off.

The following table summarizes our U.S. and foreign income (loss) before income taxes:

Income tax benefit (expense) consists of:

Income tax benefit (expense) differs from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of the following:

For the year ended December 31, 2017 the significant reconciling items are the result of the effect of the changes in the U.S. federal corporate tax rate from 35% to 21% on deferred taxes and repatriation of foreign earnings that both resulted from the Tax Act, and an impairment related to trivago (discussed in note 5). We recognized $144 million of income tax expense related to the one-time transition tax on certain unrepatriated earnings on previously untaxed accumulated and current E&P. After utilization of existing net operating loss and tax credit carryforwards, Expedia expects to pay minimal U.S. federal cash taxes on the deemed repatriation.

Due to the one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary E&P, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subjected to U.S. federal income tax. To the extent that Expedia repatriates these earnings to the United States, it estimates that it will not incur significant additional taxes related to such amounts, however its estimates are provisional and subject to further analysis.

While the Tax Act provides for a modified territorial tax system, beginning in 2018, global intangible low-taxed income (“GILTI”) provisions will be applied providing an incremental tax on low taxed foreign income. The GILTI provisions require us to include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. Under U.S. GAAP, we are required to make an accounting policy election to either (1) treat taxes related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factor such amounts into our measurement of deferred taxes (the “deferred method”).  We are continuing to evaluate the GILTI tax rules and have not yet adopted our accounting policy to account for the related impacts.

The tax benefit from the consolidation of a previously held equity method affiliate for the year ended December 31, 2016 is the result of the acquisition of a controlling interest in Expedia in the fourth quarter of 2016. The Company recorded a $2.0 billion gain on the transaction, which was excluded from the Company’s taxable income. In addition, the deferred tax liability related to the Company’s difference between the book basis and tax basis of Expedia, as previously accounted for under the equity method, was relieved and, as a result, the Company recorded additional deferred tax benefit.

The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities are presented below:

During the year ended December 31, 2017, there was a $13 million increase in the Company's valuation allowance that affected tax expense.

At December 31, 2017, the Company has a deferred tax asset of $130 million for federal, state, and foreign loss and credit carryforwards.  Of this amount, $122 million is recorded at Expedia.  If not utilized to reduce income tax liabilities at Expedia in future periods, the federal and state loss carryforwards will expire at various times between 2018 and 2037. In addition, Expedia Holdings has $8 million of loss and credit carryforwards at its level which are expected to be utilized in future periods.

A reconciliation of unrecognized tax benefits is as follows:

As of December 31, 2017, the Company had recorded tax reserves of $261 million related to unrecognized tax benefits for uncertain tax positions. If such tax benefits were to be recognized for financial statement purposes, $155 million would be reflected in the Company's tax expense and affect its effective tax rate. Prior to the acquisition of a controlling interest in Expedia, the Company did not have any unrecognized tax benefits for uncertain tax positions. The Company's estimate of its unrecognized tax benefits related to uncertain tax positions requires a high degree of judgment. We do not currently anticipate that our existing reserves related to uncertain tax positions as of December 31, 2017 will significantly increase or decrease during the twelve-month period ending December 31, 2018; however, various events could cause our current expectations to change in the future. We recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2017, total gross interest and penalties accrued was $22 million.

As of December 31, 2017, Liberty Interactive's tax years prior to 2014 are closed for federal income tax purposes, and the Internal Revenue Service (“IRS”) has completed its examination of Liberty Interactive's 2014 through 2016 tax years as part of the IRS's Compliance Assurance Process program. Expedia Holdings’ 2016 and 2017 tax years are not currently under audit.

As previously discussed, because Expedia Holdings' ownership of Expedia is less than the required 80%, Expedia is not consolidated with Expedia Holdings for federal income tax purposes. The IRS is currently examining Expedia’s U.S. consolidated federal income tax returns for the periods ended December 31, 2009 through December 31, 2013. As of December 31, 2017, for Expedia and its subsidiaries, the statutes of limitations for tax years 2009 through 2016 remain open to examination in the federal and most state jurisdictions. For the HomeAway and Orbitz groups, the statutes of limitations for tax years 2001 through 2015 remain open to examination in the federal and most state jurisdictions due to net operating loss carryforwards.

During first quarter of 2017, the IRS issued proposed adjustments related to transfer pricing with Expedia’s foreign subsidiaries for its 2009 to 2010 audit cycle. The proposed adjustments would increase Expedia’s U.S. taxable income by $105 million, which would result in federal tax expense of approximately $37 million, subject to interest. Expedia does not agree with the position of the IRS and is formally protesting the IRS position.