(21) Income Taxes

Net deferred tax assets and liabilities consist of the following as of December 31, 2017 and 2016 (in millions):

 

The Company provides a valuation allowance against deferred tax assets if, based on management’s assessment of historical and projected future operating results and other available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. A valuation allowance of $1.6 million was recorded against gross deferred tax assets for net operating losses as of December 31, 2017. 

As of December 31, 2017, we have state net operating loss carryforwards of $24.9 million, which, if unused, will expire beginning in 2029.

The provision for income taxes for the years ended December 31, 2017, 2016 and 2015 consists of the following (in millions):

 

The Company considers a portion of its non-U.S. earnings to be indefinitely reinvested outside of the U.S. to the extent these earnings are not subject to U.S. income tax under an anti-deferral tax regime.  As of December 31, 2017, all non-U.S. undistributed earnings were subject to a transition tax in the U.S. due to the Jobs Act. A distribution of these earnings is not expected to result in additional income tax.

For the years ended December 31, 2017, 2016, and 2015, income from continuing operations before taxes consists of the following (in millions):

 

A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended December 31, 2017, 2016, and 2015 is as follows:

 

The effective tax rate for 2017 was (19.8)% compared to 39.4% in 2016 and 36.7% in 2015. The effective tax rate increased from 2015 to 2016 primarily due to changes in unrecognized tax benefits and decreased from 2016 to 2017 primarily due to the tax benefit associated with re-measuring net deferred tax liabilities as a result of the Jobs Act.

A reconciliation of the beginning and ending uncertain tax positions, excluding interest and penalties, is as follows (in thousands):

 

As of December 31, 2017, 2016 and 2015, the Company had $68.2 million, $40.5 million, and $29.7 million, respectively, of uncertain tax positions, net of federal benefit, which, if recognized in the future, would affect the effective income tax rate. Reductions to uncertain tax positions from the lapse of the applicable statutes of limitations and potential audit settlements during the next twelve months are estimated to be approximately $1.8 million and $6.5 million, respectively. 

Estimated interest costs and penalties are classified as part of the provision for income taxes in the Company's consolidated statements of income and were $(1.5) million, $2.5 million, and $2.5 million for the periods ended December 31, 2017, 2016 and 2015, respectively. Accrued interest and penalties were $11.1 million, $10.2 million and $7.7 million as of December 31, 2017, 2016 and 2015, respectively.

The following table summarizes the tax years that are either currently under audit or remain open and subject to examination by the tax authorities in the most significant jurisdictions in which Cboe operates:

 

The Company has petitioned the Tax Court for a redetermination of an IRS deficiency for tax years 2011 through 2013 related to the Section 199 claims of Bats and certain of its subsidiaries. Management anticipates that in 2018 the IRS will determine a deficiency for tax years 2008-2013 relating to the Section 199 claims of Cboe and certain of its subsidiaries. The Company believes the aggregate amount of any additional liabilities that may result from these examinations, if any, will not have a material adverse effect on the financial position, results of operations, or cash flows of the Company.

On December 22, 2017 the U.S. enacted the Tax Cuts and Jobs Act (the “Jobs Act”). The Jobs Act significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. Given the predominance of our U.S. earnings contribution, we expect a significant reduction in our overall effective tax rate in 2018. The change in the effective tax rate was due to the tax benefit associated with re-measuring net deferred tax liabilities as a result of the Jobs Act. Due to the timing of the enactment and the complexity involved in applying the provisions of the Jobs Act, we have made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As we collect and prepare necessary data and interpret the Jobs Act and any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies, we may make adjustments to the provisional amounts.