PJT Partners Inc.

8.	INCOME TAXES

The Company’s operations were included in Blackstone subsidiaries’ U.S. federal, state and foreign tax returns for taxable periods ending before the Company’s spin-off and separation from Blackstone on October 1, 2015. With respect to such taxable periods, the Company’s income taxes were calculated on a separate tax return basis. For subsequent periods, the Company files tax returns as a stand-alone entity, and its deferred taxes and effective tax rates differ from those of the historical periods.

The Company’s pretax income (loss) is associated with activities in domestic and international jurisdictions, as follows:

	Year Ended December 31,
	2017			2016			2015
Income (Loss) Before Provision for Taxes
Domestic	$	13,597		$	38,360		$	29,581
International		(3,543	)		(23,860	)		(35,517	)
Total	$	10,054		$	14,500		$	(5,936	)

The Provision for Income Taxes consists of the following:

	Year Ended December 31,
	2017		2016			2015
Current
Federal Income Tax	$	5,083	$	4,131		$	50
State and Local Income Tax		1,749		2,777			3,576
Foreign Income Tax		587		191			331
		7,419		7,099			3,957
Deferred
Federal Income Tax		28,607		2,376			(3,698	)
State and Local Income Tax		2,354		(20	)		(17	)
Foreign Income Tax		—		(63	)		(3	)
		30,961		2,293			(3,718	)
Provision for Taxes	$	38,380	$	9,392		$	239

The following table summarizes the Company’s tax position:

	Year Ended December 31,
	2017			2016			2015
Income (Loss) Before Provision for Taxes	$	10,054		$	14,500		$	(5,936	)
Provision for Taxes	$	38,380		$	9,392		$	239
Effective Income Tax Rate		381.7	%		64.8	%		-4.0	%

The following table reconciles the effective income tax rate to the U.S. federal statutory tax rate:

	Year Ended December 31,
	2017			2016			2015
Expected Income Tax Expense (Benefit) at the Federal Statutory Rate		35.0	%		35.0	%		35.0	%
Remeasurement of Deferred Tax Assets Pursuant to Tax Legislation		246.0	%		—			—
Permanent Differences for Compensation		56.5	%		33.4	%		-24.9	%
Accrual to Blackstone Related to Employee Matters Agreement		10.4	%		9.9	%		—
Partnership (Income) Loss Not Subject to U.S. Corporate Income Taxes		-18.1	%		-21.2	%		54.2	%
Foreign Income Taxes		3.1	%		0.9	%		-4.9	%
State and Local Income Taxes, Net of Federal Benefit		27.8	%		14.0	%		-63.2	%
Return to Provision		24.0	%		-6.4	%		—
Change in Amount Due Pursuant to Tax Receivable Agreement Related to Tax Legislation		-5.4	%		—			—
Other		2.4	%		-0.8	%		-0.2	%
Effective Income Tax Rate		381.7	%		64.8	%		-4.0	%

Deferred income taxes reflect the net tax effects of temporary differences that may exist between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using enacted tax rates in effect for the year in which the differences are expected to reverse. A summary of the tax effects of the temporary differences is as follows:

	December 31,
	2017			2016
Deferred Tax Assets
Tax Basis Step-Up from Blackstone	$	28,646		$	51,321
Deferred Compensation		15,569			22,570
Net Operating Loss		3,715			4,879
Deferred Rent		2,177			3,506
Partner Exchange Basis Step-Up		3,261			1,135
Other		199			973
Deferred Tax Assets Before Valuation Allowance		53,567			84,384
Valuation Allowance		(3,715	)		(5,347	)
Total Deferred Tax Assets	$	49,852		$	79,037
Deferred Tax Liabilities
Intangible Assets	$	1,388		$	3,164
Fixed Assets		1,348			2,408
Other		3,114			2,508
Total Deferred Tax Liabilities		5,850			8,080
Deferred Tax Asset, Net	$	44,002		$	70,957

Tax Legislation was signed into law on December 22, 2017, which lowers the U.S. corporate income tax rate to 21% as of January 1, 2018. The estimated impact of the Tax Legislation was an increase in income tax expense of $24.7 million due to the effects of the remeasurement of U.S. deferred tax assets at a lower enacted corporate tax rate. Additionally, the Company recorded an adjustment related to a decrease in the Amount Due Pursuant to Tax Receivable Agreement in the amount of $1.6 million in Interest Income and Other.

With respect to foreign operations, the Company has an income tax net operating loss of $15.5 million with an unlimited life.

The realization of deferred tax assets arising from timing differences and net operating losses requires taxable income in future years in order to deduct the reversing timing differences and absorb the net operating losses. The Company assesses positive and negative evidence in determining whether to record a valuation allowance with respect to deferred tax assets. This assessment is performed separately for each taxing jurisdiction.

The Company considered its cumulative taxable income earned in recent periods and projections of future taxable income based on the growth trajectory of its business as positive evidence in evaluating its ability to utilize the deferred tax assets. The Company’s projections of future taxable income in the U.S. federal jurisdiction currently indicate that it is more likely than not that the U.S. federal deferred tax assets will be realized.

The Company evaluated the losses incurred in foreign operating jurisdictions in 2017 and 2016 as objective negative evidence, and concluded that it outweighs any positive evidence afforded by projections of taxable income in future years and the ability to carry forward such losses. Accordingly, the Company recorded a valuation allowance of $3.7 million and $5.3 million at December 31, 2017 and 2016, respectively, with respect to certain foreign deferred tax assets (consisting principally of the tax benefit associated with net operating losses incurred in certain foreign jurisdictions).

The Company does not believe that it meets the indefinite reversal criteria that would allow the Company to refrain from recognizing any deferred tax liability with respect to its foreign subsidiaries. Accordingly, the Company records a deferred tax liability with respect to an outside basis difference in its investment in a foreign subsidiary, where applicable.

The Company is subject to taxation in the United States and various state, local and foreign jurisdictions. As of December 31, 2017, the Company is not generally subject to examination by the tax authorities for years before 2014.

The Company had no unrecognized tax benefits as of December 31, 2017 and 2016.

The Company does not anticipate a material increase or decrease in its unrecognized tax benefits during the coming year.

During the years ended December 31, 2017, 2016 and 2015, no interest or penalties were accrued with respect to unrecognized tax positions and there were no settlements with taxing authorities.