Income Taxes

The components of income before provision (benefit) for income taxes were as follows for the years ended December 31, 2018, 2017 and 2016 (in thousands):



	2018			2017		2016
U.S.	$	(27,379	)	$	92,588	$	280,092
Foreign	370,468			221,604		186,270
Income before provision for income taxes	$	343,089		$	314,192	$	466,362

The provision for income taxes consisted of the following for the years ended December 31, 2018, 2017 and 2016 (in thousands):



	2018			2017			2016
Current tax provision (benefit):
Federal	$	(29,982	)	$	41,090		$	89,816
State	8,085			6,336			6,238
Foreign	64,274			51,244			39,952
Deferred tax provision (benefit):
Federal	5,954			(24,136		)	6,903
State	701			21,689			(86		)
Foreign	(7,140		)	(4,367		)	3,599
Change in valuation allowance	2,824			(430		)	(787		)
Total	$	44,716		$	91,426		$	145,635

For the years ended December 31, 2017 and December 31, 2016, income taxes incurred on intercompany sales were deferred on the balance sheet and amortized into earnings over the economic life of the intellectual property that was sold. Beginning in 2018, all income taxes incurred on intercompany sales are included in the current tax provision.

The Company’s effective rate differed from the U.S. federal statutory rate as follows for the years ended December 31, 2018, 2017 and 2016:



	2018		2017		2016
U.S. federal income tax rate	21.0	%	35.0	%	35.0	%
State taxes	1.2		1.5		2.0
Share-based compensation	1.0		3.7		2.7
U.S. federal, state and foreign research and development credits	(7.6	)	(7.0	)	(3.3	)
Foreign earnings	(6.0	)	(7.9	)	(3.4	)
Domestic production activities deduction	—		(0.7	)	(1.7	)
Impact of TCJA, net	(0.8	)	6.4		—
Impact of acquisition-related uncertain tax position	—		(2.9	)	—
Intercompany sale of intellectual property	3.3		—		—
Other	0.9		1.0		(0.1	)
	13.0	%	29.1	%	31.2	%

In December 2017 the TCJA was enacted, making significant changes to the U.S. Internal Revenue Code. Changes included a corporate income tax rate decrease from 35.0% to 21.0%, the implementation of a modified territorial tax system, a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017 and the repeal of the domestic production activities deduction, among other items.

Based on the Company’s interpretation of the TCJA and associated guidance available as of the filing of the Company's 2017 consolidated financial statements, the Company recognized a provisional net tax expense of $26.0 million. The tax expense was comprised of $43.4 million of the one-time tax expense on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017, offset by a $17.4 million tax benefit related to the re-measurement of deferred tax assets and liabilities due to the lower corporate income tax rate. As of December 31, 2018, the Company finalized its accounting for the TCJA, and recorded a $5.5 million reduction in the transition tax expense and an additional tax benefit related to the re-measurement of deferred tax assets and liabilities of $2.4 million.

Beginning in 2018, the TCJA provides for a modified territorial tax system imposing an incremental tax on foreign income deemed to be taxed at a “low rate” (the global intangible low-taxed income, or GILTI, provisions). An election must be made to either (1) treat taxes due related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factor such amounts into the measurement of deferred taxes (the “deferred method”). The Company has elected to treat taxes due related to GILTI as a current-period expense when incurred.

The components of the net deferred tax assets and liabilities and the related valuation allowance as of December 31, 2018 and 2017 were as follows (in thousands):



	2018			2017
Accrued bonus	$	24,093		$	19,950
Deferred revenue	4,188			6,460
Deferred rent	11,245			8,000
Stock-based compensation	20,345			20,557
NOLs	15,743			26,698
Unrealized losses	1,039			1,239
Tax credit carryforwards	70,235			49,135
License income	2,245			6,611
Other	16,483			11,909
Deferred tax assets	165,616			150,559
Depreciation and amortization	(23,912		)	(13,933		)
Acquired intangible assets	(45,773		)	(48,781		)
Deferred commissions	(14,232		)	(14,750		)
Internal-use software development costs capitalized	(63,586		)	(54,687		)
Deferred tax liabilities	(147,503		)	(132,151		)
Valuation allowance	(2,824		)	—
Net deferred tax assets	$	15,289		$	18,408

Valuation allowances will be recognized on deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be utilized. In measuring deferred tax assets, the Company considers all available evidence, both positive and negative, to determine whether a valuation allowance is needed. As of December 31, 2018, the Company recorded a $2.8 million valuation allowance against deferred tax assets related to tax credits in which it is more likely than not that such credits will expire prior to utilization.

The table below summarizes the Company's NOL and tax credit carryforwards in federal, state and foreign jurisdictions as of December 31, 2018 and 2017 (in thousands, except for years):



	2018		2017		Expirations at Various Dates Through:
NOL carryforwards:
Federal	$	52,500	$	99,200	2038
State	20,500		89,500		2038
Foreign	8,500		—		—
Federal and state research and development tax credit and other credit carryforwards	88,200		65,900		2033

The Company's U.S. federal and state NOL carryforwards relate to acquisitions completed in 2012 and 2017.

As of December 31, 2018, foreign earnings of approximately $621.5 million have been taxed due to the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings required by the TCJA. No provision for U.S. income and foreign withholding taxes has been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional basis differences inherent in these entities, as these amounts continue to be indefinitely reinvested. Determination of the amount of the unrecognized deferred tax liability on outside basis differences is not practicable because of the complexity of laws and regulations, the varying tax treatment of alternative repatriation scenarios and the variation due to multiple potential assumptions relating to the timing of any future repatriation.

The following is a roll forward of the Company’s unrecognized tax benefits for the years ended December 31, 2018, 2017 and 2016 (in thousands):



	2018			2017			2016
Balance at beginning of year	$	85,845		$	69,117		$	65,290
Gross increases — tax positions of prior periods	2,704			2,692			6,391
Gross increases — current period tax positions	3,021			27,163			6,252
Gross decreases — tax positions of prior periods	(15,287		)	(277		)	(6,491		)
Gross decreases — lapse of applicable statute of limitations	(6,186		)	(12,850		)	(287		)
Gross decreases — settlements	(5,205		)	—			(2,038		)
Balance at end of year	$	64,892		$	85,845		$	69,117

As of December 31, 2018, 2017 and 2016, the Company had approximately $67.8 million, $90.7 million and $77.1 million of unrecognized tax benefits, respectively. Total interest and penalties for unrecognized tax benefits include $11.8 million, $10.7 million and $13.7 million as of December 31, 2018, 2017 and 2016, respectively. Interest and penalties related to unrecognized tax benefits are recorded in the provision for income taxes and were $1.3 million, $2.3 million and $3.9 million for the years ended December 31, 2018, 2017 and 2016, respectively. The amount of unrecognized tax benefits that, if recognized, would impact the effective income tax rate is approximately $67.8 million.

As of December 31, 2018, it is reasonably possible that $33.2 million of unrecognized tax benefits may be recognized within the next 12 months due to the expiration of local statutes of limitations; however, certain U.S. federal, state and foreign income tax returns from 2011 through 2017 are currently under audit. The Company is currently involved in litigation related to certain adverse audit determinations. In the second quarter of 2018, the Company filed an appeal with the Massachusetts Appellate Tax Board contesting the adverse audit findings related to certain tax benefits and exemptions. The Company has determined that it is more-likely-than-not that it will prevail, and no reserve has been recorded related to these controversies. However, over the next 12 months, the Company's current assumptions and positions could change based on audit determinations and other events impacting its analysis. Such events, if resolved unfavorably, could significantly impact the Company’s effective income tax rate and results of operations. The Company has estimated that an adverse ruling related to its Massachusetts controversy could result in an income tax charge of approximately $35.0 million.