Entity information:
NOTE 10 — Income taxes

The provision (benefit) for income taxes consists of the following:
In thousands
2017
Current
 
Deferred
 
Total
Federal
$
2,210

 
$
28,775

 
$
30,985

State and other
(787
)
 
(4,652
)
 
(5,439
)
Foreign
920

 
7,388

 
8,308

Total
$
2,343

 
$
31,511

 
$
33,854

In thousands
2016
Current
 
Deferred
 
Total
Federal
$
(7,094
)
 
$
8,278

 
$
1,184

State and other
(528
)
 
262

 
(266
)
Foreign
5,606

 
7,194

 
12,800

Total
$
(2,016
)
 
$
15,734

 
$
13,718

In thousands
2015
Current
 
Deferred
 
Total
Federal
$
(5,383
)
 
$
36,489

 
$
31,106

State and other
(560
)
 
4,046

 
3,486

Foreign
6,447

 
6,845

 
13,292

Total
$
504

 
$
47,380

 
$
47,884



The components of net income before income taxes consist of the following:
In thousands
 
2017
 
2016
 
2015
Domestic
$
4,006

 
$
19,349

 
$
128,316

Foreign
36,735

 
47,079

 
65,659

Total
$
40,741

 
$
66,428

 
$
193,975



In December 2017, the Tax Cuts and Jobs Act (the Tax Act) was signed into law. The Tax Act contains significant changes to corporate taxation, including reducing the corporate tax rate from 35% to 21%. Deferred tax assets and liabilities are measured 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. We recorded $42.8 million as additional income tax expense in the fourth quarter of 2017 to reduce the value of our deferred tax assets as a result of the reduction in the federal income tax rate.

As of December 31, 2017, we had not completed our accounting for the tax effects of enactment of the Tax Act; however, where possible, as described herein, we made a reasonable estimate of the effects on our existing deferred tax balances and related items and other tax liabilities. We remeasured our deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% for U.S. federal tax purposes. The provisional amount recorded related to the remeasurement of our deferred tax assets and liabilities of $42.8 million. The Tax Act also establishes a partial territorial system and one-time transition tax on historical foreign earnings. We have made a reasonable estimate that we do not have historical foreign earnings that are subject to the transition tax. These estimates are as of the enactment date of the Tax Act and our existing analysis of the numerous complex tax law changes in the Tax Act. As we finalize our analysis of the tax law changes in the Tax Act, including the impact on our current year tax return filing positions, throughout 2018, we will update our provisional amounts for this remeasurement.

During the third quarter of 2017, we made an election to treat one of our ReachLocal international subsidiaries as a disregarded entity for U.S. federal income tax purposes, which resulted in a worthless stock and bad debt deduction. As a result of this election, we incurred a tax loss that resulted in a $20.1 million tax benefit, net of reserve for uncertain tax positions. An additional state tax benefit of $0.9 million for this item was recorded in the fourth quarter. We expect our domestic operations to generate sufficient taxable income to fully utilize the tax benefit of the loss. This tax loss may be subject to audit and future adjustment by the IRS, which could result in a reversal of none, part, or all of the income tax benefit or could result in a benefit higher than the net amount recorded. If the IRS rejects or reduces the amount of the income tax benefit related to the worthless stock and bad debt deduction, we may have to pay additional cash income taxes, which could adversely affect our results of operations, financial condition, and cash flows. We cannot guarantee what the ultimate outcome or amount of the benefit we receive, if any, will be.

For 2017 and 2016, net income generated in foreign jurisdictions was 90% and 71%, respectively, where the income tax rate is lower than in the U.S., whereas 34% of our 2015 net income was generated in foreign jurisdictions. The lower domestic net income is attributable to higher expenses domestically for corporate expenses related to restructuring charges, asset impairments, and public company costs as compared with foreign jurisdictions. The recent changes in the mix of income generated from lower tax rate foreign jurisdictions relative to U.S. domestic net income have had the effect of decreasing our tax expense.

The provision for income taxes varies from the U.S. federal statutory tax rate as a result of the following differences:
 
2017
 
2016
 
2015
U.S. statutory tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
Increase (decrease) in taxes resulting from:
 
 
 
 
 
State/other income taxes net of federal income tax
(0.7
)
 
(3.8
)
 
2.4

Statutory rate differential and permanent differences in earnings in foreign jurisdictions
(17.5
)
 
(10.7
)
 
(6.3
)
Impact of rate change in U.S. and foreign tax jurisdictions
105.3

 
1.6

 
1.9

Valuation allowance
20.0

 
3.5

 
—

Net of additional reserves and lapse of statutes of limitations
29.1

 
3.3

 
(1.1
)
Impact of accounting method change
—

 
—

 
(3.4
)
Domestic manufacturing deduction
—

 
—

 
(1.4
)
Meals and entertainment
5.1

 
2.7

 
—

Stock-based compensation (a)
(3.9
)
 
(12.3
)
 
—

Worthless stock and bad debt deduction
(90.0
)
 
—

 
—

Transaction costs
—

 
3.4

 
—

Other, net
0.9

 
(2.0
)
 
(2.4
)
Effective tax rate
83.3
 %
 
20.7
 %
 
24.7
 %

(a)
We adopted new accounting guidance related to employee stock-based compensation in the fourth quarter of 2016. The adoption reduced our 2016 full year combined income tax provision for federal, state, and foreign by $8.9 million and the tax rate by approximately 13.5%.

Deferred income taxes reflect temporary differences in the recognition of revenue and expense for tax reporting and financial statement purposes. Deferred tax liabilities and assets are adjusted for enacted changes in tax laws or tax rates of the various tax jurisdictions. The amount of such adjustments for 2017 was $42.2 million compared to 2016 adjustments of $1.1 million and 2015 adjustments of $3.8 million. The adjustments for 2017 are related to the statutory rate reduction in the United States, and the adjustments in 2016 and 2015 were due to rate reductions in U.K. statutory tax rates.

Our deferred tax assets were further reduced for the establishment of valuation allowances related to two of our publishing properties of $7.7 million and state net operating losses of $3.4 million, which was recorded as additional income tax expense in 2017. 

Deferred tax liabilities and assets were composed of the following at the end of 2017 and 2016:
In thousands
 
December 31, 2017
 
December 25, 2016
Liabilities
 
 
 
Accelerated depreciation
$
(69,048
)
 
$
(152,551
)
Total deferred tax liabilities
(69,048
)
 
(152,551
)
Assets
 
 
 
Accrued compensation costs
25,596

 
29,670

Pension and postretirement benefits
144,837

 
302,565

Basis difference and amortization of intangibles
57,012

 
95,653

Federal tax benefits of uncertain state tax positions
2,026

 
7,015

Partnership investments including impairments
9,171

 
21,670

Loss carryforwards
68,914

 
55,335

Other
33,539

 
53,789

Total deferred tax assets
341,095

 
565,697

Valuation allowance
(170,764
)
 
(194,914
)
Total net deferred tax assets
$
101,283

 
$
218,232

 
Noncurrent deferred tax assets (net of deferred tax liabilities of $1,209 and $0 at December 31, 2017 and December 25, 2016, respectively)
$
101,283

 
$
218,232



As of December 31, 2017, we had approximately $52.5 million of U.S. federal net operating loss carryforwards, $6.6 million of other business tax credits, $4.1 million of foreign tax credits, $7.2 million of state credits, $266.9 million of apportioned state net operating loss carryforwards, $255.0 million of foreign net operating loss carryforwards, and $33.1 million of foreign capital loss carryforwards. The U.S. federal net operating losses, the foreign tax credits, the state tax credits, and the state net operating loss carryovers expire in various amounts beginning in 2018 through 2037. The countries where we have foreign net operating loss carryovers allow for these losses to be carried forward indefinitely except for Canada, Japan, and the Netherlands. Net operating loss carryovers in Canada, Japan, and the Netherlands expire in various amounts beginning in 2020 through 2037. Our foreign capital losses can be carried forward indefinitely.

Included in total deferred tax assets are valuation allowances of approximately $170.8 million in 2017 and $194.9 million in 2016, primarily related to unamortizable intangible assets, foreign tax credits, state net operating losses, state credits, and foreign losses available for carry forward to future years. We recorded valuation allowances of $7.7 million related to unamortizable intangible assets for two of our publishing properties and $3.4 million related to state net operating losses during 2017. The decrease in the valuation allowance from 2016 to 2017 is primarily related to the tax rate change. The valuation allowance is based on an analysis of future sources of taxable income and other sources of positive and negative evidence and whether it is more likely than not that the identified deferred tax assets will not be realized before their expiration. The following table summarizes the activity related to our valuation allowance for deferred tax assets for the year ended December 31, 2017:
In thousands
Balance at Beginning of Period
 
Additions/(Reductions) Charged to Expenses
 
Additions/(Reductions) for Acquisitions/Dispositions
 
Other (Deductions from)/Additions to Reserves
 
Foreign Currency Translation
 
Balance at
End of Period
$
194,914

 
$
11,131

 
$
71

 
$
(40,979
)
 
$
5,627

 
$
170,764



Realization of deferred tax assets for which valuation allowances have not been established is dependent upon generating sufficient future taxable income. We expect to realize the benefit of these deferred tax assets through future reversals of our deferred tax liabilities, through the recognition of taxable income in the allowable carryback and carryforward periods, and through implementation of future tax planning strategies. Although realization is not assured, we believe it is more likely than not that all deferred tax assets for which valuation allowances have not been established will be realized.


The following table summarizes the activity related to unrecognized tax benefits, excluding the federal tax benefit of state tax deductions:
In thousands
 
 
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
Change in unrecognized tax benefits
 
 
 
 
 
Balance at beginning of year
$
23,890

 
$
17,032

 
$
10,919

Additions based on tax positions related to the current year
15,850

 
125

 
2,021

Additions for tax positions of prior years
136

 
9,416

 
6,713

Reductions for tax positions of prior years
—

 
(792
)
 
—

Settlements
(4,727
)
 
—

 
—

Reductions due to lapse of statutes of limitations
(2,165
)
 
(1,891
)
 
(2,621
)
Balance at end of year
$
32,984

 
$
23,890

 
$
17,032



The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $30.1 million as of December 31, 2017, $17.3 million as of December 25, 2016, and $11.3 million as of December 27, 2015. Additions to current year positions of $14.6 million and prior year positions of $4.3 million are recorded as reductions to deferred tax assets as unrecognized tax benefits. Remaining amounts are recorded as an income tax liability and include the federal tax benefit of state tax deductions.

We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. We also recognize interest income attributable to overpayment of income taxes and from the reversal of interest expense previously recorded for uncertain tax positions which are subsequently released as a component of income tax expense. We recognized income from interest and the release of penalty reserves of $5.3 million in 2017, $0.6 million in each of 2016 and 2015. The amount of accrued interest and payables related to unrecognized tax benefits was $0.9 million as of December 31, 2017, $3.8 million as of December 25, 2016, and $3.4 million as of December 27, 2015.

We file income tax returns in the United States, various states, and certain foreign jurisdictions. The tax years 2013 through 2016 generally remain subject to examination by the Internal Revenue Services and other foreign tax authorities. Tax years prior to 2013 remain subject to examination by certain states due to ongoing audits.

It is reasonably possible the amount of unrecognized benefit with respect to certain of our unrecognized tax positions will significantly increase or decrease within the next 12 months. These changes may be the result of settlement of ongoing audits, lapses of statutes of limitations, or regulatory developments. At this time, we estimate the amount of our gross unrecognized tax positions may decrease by up to approximately $3.3 million within the next 12 months primarily due to lapses of statutes of limitations and settlement of ongoing audits in various jurisdictions.

In connection with the spin-off, we entered into a tax matters agreement with our former parent which states each company's rights and responsibilities with respect to payment of taxes, tax return filings, and control of tax examinations. We are generally responsible for taxes allocable to periods (or portions of periods) beginning after the spin-off. Although any changes with regard to additional income tax liabilities which relate to periods prior to the spin-off may impact our effective tax rate in the future, we may be entitled to seek indemnification for these items from our former parent under the tax matters agreement.