INCOME TAXES

Income (loss) before income tax expense (benefit) consisted of the following (in thousands):



	Year Ended March 31,
	2019			2018			2017
Domestic	$	(107,088	)	$	(35,032	)	$	32,475
Foreign	14,176			16,373			19,710
	$	(92,912	)	$	(18,659	)	$	52,185

The components of the income tax expense (benefit) are as follows (in thousands):



	Year Ended March 31,
	2019			2018			2017
Current income tax expense (benefit):
Federal	$	3,902		$	14,191		$	15,912
State	(136		)	1,925			3,152
Foreign	10,618			12,249			11,175
	14,384			28,365			30,239
Deferred income tax expense (benefit):
Federal	(25,347		)	(113,122		)	(8,278		)
State	(3,845		)	(10,037		)	3,578
Foreign	(4,780		)	(3,677		)	(6,645		)
	(33,972		)	(126,836		)	(11,345		)
	$	(19,588	)	$	(98,471	)	$	18,894

The income tax expense (benefit) computed using the federal statutory income tax rate differs from NetScout's effective tax rate primarily due to the following:



	Year Ended March 31,
	2019		2018		2017
Statutory U.S. federal tax rate	21.0	%	31.6	%	35.0	%
State taxes, net of federal tax effect	3.4		6.9		9.7
Research and development tax credits	7.1		39.5		(8.2	)
Effect of foreign operations	(0.6	)	15.5		(6.7	)
Meals and entertainment	(1.0	)	(6.7	)	2.5
Domestic production activities deduction	—		13.8		(4.0	)
Change in valuation allowance	2.2		(0.2	)	(0.1	)
Stock Compensation	(2.6	)	(2.5	)	3.1
Divestiture	(1.0	)	—		—
GILTI/FDII	2.9		—		—
BEAT	(7.0	)	—		—
2017 Tax Act (transition tax and re-measurement of deferreds)	0.4		454.1		—
Foreign withholding	(3.0	)	(21.0	)	3.8
Other permanent differences	(0.7	)	(3.3	)	1.1
	21.1	%	527.7	%	36.2	%

The components of net deferred tax assets and liabilities are as follows (in thousands):



	Year Ended March 31,
	2019			2018
Deferred tax assets:
Accrued expenses	$	4,359		$	4,068
Deferred revenue	11,278			12,168
Reserves	5,463			3,375
Pension and other retiree benefits	5,960			5,307
Net operating loss carryforwards	14,992			21,251
Tax credit carryforwards	9,043			6,625
Share-based compensation	5,505			5,164
Other	166			418
Total gross deferred tax assets	56,766			58,376
Valuation allowance	(835		)	(3,108		)
Net deferred tax assets	55,931			55,268
Deferred tax liabilities:
Intangible assets	(164,199		)	(195,959		)
Other Deferred Liabilities	(1,609		)	—
Depreciation	(7,134		)	(4,187		)
Total deferred tax asset (liability)	$	(117,011	)	$	(144,878	)

Deferred tax assets and liabilities are recognized based on the anticipated future tax consequences, attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company evaluates the recoverability of deferred tax assets by considering all positive and negative evidence relating to future profitability. The Company weighs objective and verifiable evidence more heavily in this analysis. In situations where the Company concludes that it does not have sufficient objective and verifiable evidence to support the realizability of the asset it creates a valuation allowance against it. As a result, the Company established a valuation allowance of $3.1 million as of March 31, 2018 and $0.8 million as of March 31, 2019, representing a decrease of $2.3 million. The decrease in the valuation allowance as of March 31, 2019, as compared to March 31, 2018, is primarily related to deferred tax assets related to Psytechnics Ltd that the Company believes are more likely than not to be realized. If it is later determined the Company is able to use all or a portion of the deferred tax assets for which a valuation allowance has been established, then the Company may be required to recognize these deferred tax assets through a tax benefit recorded in the period such determination is made.

At March 31, 2019, the Company had U.S. federal net operating loss carry forwards of approximately $26 million, state net operating loss carryforwards of approximately $21 million and tax credit carryforwards of approximately $11 million. The net operating loss and credit carryforwards will expire at various dates beginning in 2021. The Company also had foreign net operating loss carryforwards of approximately $59 million at March 31, 2019. The majority of foreign net operating losses have no expiration dates. Utilization of the U.S. net operating losses and credits are subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state tax provisions.

The Company files U.S. federal tax returns and files returns in various state, local and foreign jurisdictions. With respect to the U.S. federal and primary state jurisdictions, the Company is no longer subject to examinations by tax authorities for tax years before 2015, although carryforward attributes that were generated prior to 2015 may still be adjusted upon examination if they either have been or will be used in a future period. The Company also receives inquiries from various tax jurisdictions during the year, and some of those inquiries may include an audit of the tax return previously filed. In the normal course of business, NetScout and its subsidiaries are examined by various taxing authorities, including the IRS in the United States.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the fiscal years ended March 31, 2019, 2018 and 2017 is as follows (in thousands):



	Year Ended March 31,
	2019			2018			2017
Balance at April 1,	$	2,215		$	2,926		$	1,588
Additions based on tax positions related to the current year	28			126			46
Release of tax positions of prior years	(194		)	(481		)	(154		)
Increase in unrecognized tax benefits as a result of a tax position taken during a prior period	—			—			1,446
Decrease relating to settlements with taxing authorities	(735		)	(356		)	—
Balance at March 31,	$	1,314		$	2,215		$	2,926

The Company is unable to make a reliable estimate when cash settlement, if any, will occur with a tax authority as the timing of examinations and ultimate resolution of those examinations is uncertain. All of the unrecognized tax benefits would affect the effective tax rate if recognized.

The Company includes interest and penalties accrued in the consolidated financial statements as a component of the tax provision.

Several key provisions under the Tax Cuts and Jobs Act of 2017 (TCJA), enacted on December 22, 2017, impact the Company. The final impact of the TCJA, as described below, did not differ from the estimates reported at December 31, 2017. The key changes from the TCJA that were reported as of March 31, 2019 are the impact due to the reduced U.S. Federal corporate tax rate from 35.0% to 21.0%, a one-time transition tax on certain foreign earnings on which U.S. income tax was deferred, the Base Erosion Anti-Abuse Tax (BEAT), the deduction for Foreign Derived Intangible Income (FDII) and the Global Intangible Low Tax Income (GILTI).

The Company is required to record deferred tax assets and liabilities based on the enacted tax rate which they are expected to reverse in the future. Therefore, any U.S. related deferred taxes were re-measured from 35.0% down to 21.0% based on the recorded balances. As of December 31, 2017, the Company recorded an estimate related to the re-measurement of its deferred tax balances, which was a benefit of approximately $87.0 million. During the third quarter of the current fiscal year the Company finalized its calculation and did not adjust its estimate recorded.

Additionally, the Company is required to calculate a one-time transition tax based on its total post-1986 foreign subsidiaries’ earnings and profits that were previously deferred from U.S. income taxes. As of December 31, 2017, the Company recorded an estimate related to this one-time transition charge of approximately $2.0 million. During the third quarter of the current fiscal year the Company finalized its calculation and did not adjust its estimate recorded.

The Company is subject to the tax on the Global Intangible Low-Taxed Income (GILTI). The Company is required to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the "period cost method") or (2) factoring such amounts into the Company's measurement of its deferred taxes (the "deferred method"). The Company has elected to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the "period cost method").

The Company expects that current and future foreign earnings may be repatriated tax efficiently as a result of the TCJA. After fully assessing the impact of the TCJA, the Company has determined that its current and future foreign earnings will not be indefinitely reinvested where the Company can repatriate those earnings in a tax efficient manner acceptable to management and which comply with local statutory and operational requirements. Additionally, the Company intends a one-time repatriation of certain previously taxed historical earnings because of TCJA which can be repatriated in a tax efficient manner. The Company continues to assert that any remainder of its historical book basis in excess of tax basis will be permanently reinvested. It is not practicable to estimate the amount of unrecognized deferred U.S. taxes on these differences.