PAPA JOHNS INTERNATIONAL INC

15. Income Taxes

A summary of the provision for income taxes follows (in thousands):


	2017		2016		2015
Current:
Federal	$	28,951	$	32,477	$	36,077
Foreign		4,602		2,669		4,183
State and local		(234)		2,947		3,169
Deferred		498		11,624		(6,246)
Total	$	33,817	$	49,717	$	37,183

Significant deferred tax assets (liabilities) follow (in thousands):


	December 31,		December 25,
	2017		2016
Accrued liabilities	$	11,378	$	14,479
Accrued bonuses		192		5,399
Other assets and liabilities		7,913		12,434
Equity awards		5,690		7,704
Other		2,178		3,716
Foreign net operating losses		2,773		3,418
Foreign tax credit carryforwards		4,707		2,347
Total deferred tax assets		34,831		49,497
Valuation allowance on foreign net operating and capital losses, foreign deferred tax assets, and foreign tax credit carryforwards		(7,415)		(5,462)
Total deferred tax assets, net of valuation allowances		27,416		44,035

Deferred expenses		(6,912)		(9,544)
Accelerated depreciation		(19,228)		(25,072)
Goodwill		(12,248)		(18,480)
Other		(989)		(217)
Total deferred tax liabilities		(39,377)		(53,313)
Net deferred liability	$	(11,961)	$	(9,278)

The Company had approximately $9.4 million and $14.5 million of foreign net operating loss carryovers as of December 31, 2017 and December 25, 2016, respectively. The Company had approximately $2.1 million and $3.1 million of valuation allowances primarily related to these foreign net operating losses as of December 31, 2017 and December 25, 2016, respectively. A substantial majority of our foreign net operating losses do not have an expiration date.

In addition, the Company had approximately $4.7 million in foreign tax credit carryforwards as of December 31, 2017 that expire 10 years from inception, or 2025. Our ability to utilize these foreign tax credit carryforwards is dependent on our ability to generate foreign earnings in future years sufficient to claim foreign tax credits in excess of foreign taxes paid in those years. The Company provided a full valuation allowance of $4.7 million for these foreign tax credit carryforwards as we believe realization based on the more-likely-than-not criteria has not been met as of December 31, 2017.

The reconciliation of income tax computed at the U.S. federal statutory rate to income tax expense for the years ended December 31, 2017, December 25, 2016 and December 27, 2015 is as follows in both dollars and as a percentage of income before income taxes ($ in thousands):


	2017				2016				2015
	Income Tax		Income		Income Tax		Income		Income Tax		Income
	Expense		Tax Rate		Expense		Tax Rate		Expense		Tax Rate

Tax at U.S. federal statutory rate	$	49,120	35.0	%	$	55,583	35.0	%	$	41,702	35.0	%
State and local income taxes		2,432	1.7	%		2,972	1.9	%		2,106	1.8	%
Foreign income taxes		5,306	3.8	%		3,143	2.0	%		2,432	2.0	%
Income of consolidated partnerships
attributable to noncontrolling interests		(1,554)	(1.1)	%		(2,312)	(1.4)	%		(2,311)	(1.9)	%
Non-qualified deferred compensation plan
(income) loss		(1,236)	(0.9)	%		(428)	(0.3)	%		218	0.2	%
Excess tax benefits on equity awards		(1,879)	(1.4)	%		—	—	%		—	—	%
Remeasurement of deferred taxes		(7,020)	(5.0)	%		—	—	%		—	—	%
Tax credits		(6,909)	(4.9)	%		(6,771)	(4.3)	%		(4,846)	(4.1)	%
Other		(4,443)	(3.1)	%		(2,470)	(1.6)	%		(2,118)	(1.8)	%
Total	$	33,817	24.1	%	$	49,717	31.3	%	$	37,183	31.2	%

Income taxes paid were $37.2 million in 2017, $35.1 million in 2016 and $23.3 million in 2015.

The decrease in the effective income tax rate in 2017 is primarily attributable to the impact of the Tax Cuts and Jobs Act, (the “Tax Act”) which was signed into law on December 22, 2017. The Tax Act contains substantial changes to the Internal Revenue Code, including a reduction of the corporate tax rate from 35% to 21% effective January 1, 2018. Upon enactment, 2017 deferred tax assets and liabilities were remeasured. This remeasurement yielded a one-time benefit of approximately $7.0 million in the fourth quarter of 2017. Given the substantial changes associated with the Tax Act, the estimated financial impacts for 2017 are provisional and subject to further interpretation and clarification of the Tax Act during 2018. See “Items Impacting Comparability” and Note 2 for additional information.

In addition, 2017 also includes the favorable impact of adopting the new guidance for share-based compensation. This guidance requires excess tax benefits recognized on stock based awards to be recorded as a reduction of income tax expense rather than equity. See “Items Impacting Comparability” and Note 2 for additional information.

The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company, with few exceptions, is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2013. The Company is currently undergoing examinations by various tax authorities. The Company anticipates that the finalization of these current examinations and other issues could result in a decrease in the liability for unrecognized tax benefits (and a decrease of income tax expense) of approximately $337,000 during the next 12 months.

The Company had $2.0 million of unrecognized tax benefits at December 31, 2017 which, if recognized, would affect the effective tax rate. A reconciliation of the beginning and ending liability for unrecognized tax benefits excluding interest and penalties is as follows, which is recorded as an other long-term liability (in thousands):


Balance at December 27, 2015	$	5,670
Additions for tax positions of current year		126
Additions for tax positions of prior years		183
Reductions for lapse of statute of limitations		(1,152)
Balance at December 25, 2016		4,827
Additions for tax positions of current year		134
Reductions for tax positions of prior years		(2,862)
Reductions for lapse of statute of limitations		(71)
Balance at December 31, 2017	$	2,028

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as part of income tax expense. The Company’s 2017 and 2016 income tax expense includes interest benefits of $416,000 and $278,000, respectively. The Company has accrued approximately $124,000 and $544,000 for the payment of interest and penalties as of December 31, 2017 and December 25, 2016, respectively.