The determination of the annual effective tax is based upon a number of significant estimates and judgments, including the estimated annual pretax income in each tax jurisdiction in which we operate and the ongoing development of tax planning strategies during the year. In addition, our provision for income taxes can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

The following is a summary of our provision for income taxes and effective tax rate from continuing operations (dollars in thousands):

	For the Quarter Ended September 30,						For the Year to Date Ended September 30,
	2019			2018			2019			2018
Pretax income	$	26,046		$	20,157		$	59,422		$	53,343
Provision for income taxes	$	7,653		$	5,089		$	16,362		$	11,527
Effective rate		29.4	%		25.2	%		27.5	%		21.6	%

As of December 31, 2018, a valuation allowance of $48.0 million was maintained with respect to our foreign tax credits, state net operating losses and Illinois edge credits. During the quarter ended June 30, 2019, the valuation allowance was reduced by $0.8 million to reflect the results of a Florida income tax audit and the realizability of that state’s net operating loss carryforward. After considering both positive and negative evidence related to the realization of the deferred tax assets, we have determined that it is necessary to continue to maintain a $47.2 million valuation allowance against our foreign tax credits, state net operating losses and Illinois edge credits as of September 30, 2019.

The effective tax rate for the quarter and year to date ended September 30, 2019 reflects the tax effect of the partial non-deductibility of the FTC settlement, which increased the effective tax rate for the quarter and year to date by 5.7% and 6.5%, respectively. The effective tax rate for the quarter and year to date ended September 30, 2019 was impacted by the tax effect of stock-based compensation and net adjustments that increased the state deferred tax asset. The year to date effective tax rate also includes the release of previously recorded tax reserves. The effect of these discrete items decreased the current effective tax rate for the quarter and year to date by 2.4% and 4.8%, respectively. For the quarter and year to date ended September 30, 2018, the effective tax rate reflects the tax effect of expenses that are not deductible for tax purposes and other adjustments which on a relative basis are a higher percentage of projected full-year earnings. The effective rate for the quarter and year to date ended September 30, 2018 includes the impact of tax reserves, the tax effect of stock-based compensation and adjustments to increase the state deferred tax asset. The effect of these discrete items decreased the effective tax rate for the quarter and year to date by 2.7% and 5.2%, respectively.

We estimate that it is reasonably possible that the gross liability for unrecognized tax benefits for a variety of uncertain tax positions will decrease by up to $1.6 million in the next twelve months as a result of the completion of various tax audits currently in process and the expiration of the statute of limitations in several jurisdictions. The income tax rate for the quarter and year to date ended September 30, 2019 does not take into account the possible reduction of the liability for unrecognized tax benefits. The impact of a reduction to the liability will be treated as a discrete item in the period the reduction occurs. We recognize interest and penalties related to unrecognized tax benefits in tax expense. As of September 30, 2019, we had accrued $1.8 million as an estimate for reasonably possible interest and accrued penalties.

Our tax returns are routinely examined by federal, state and local tax authorities and these audits are at various stages of completion at any given time. The Internal Revenue Service has completed its examination of our U.S. income tax returns through our tax year ended December 31, 2014.

Effective January 1, 2019, the Company adopted ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). This new guidance provides the option to reclassify stranded tax effects within AOCI to retained earnings in each period when the effect of the change in the U.S. federal corporate income tax rate in the Tax Cut and Jobs Act is recorded. The Company evaluated and concluded the stranded tax effects were immaterial and elected not to reclassify the income tax effects of the Tax Cuts and Jobs Act from AOCI to retained earnings.