14.

INCOME TAXES

The Income Before Provision for Taxes consists of the following:


	Year Ended December 31,
	2018		2017		2016
Income Before Provision for Taxes
U.S. Domestic Income	$	3,308,202	$	3,956,339	$	2,214,974
Foreign Income		204,739		161,750		166,630

	$	3,512,941	$	4,118,089	$	2,381,604

The Provision for Taxes consists of the following:


	Year Ended December 31,
	2018			2017			2016
Current
Federal Income Tax	$	73,525		$	31,457		$	32,383
Foreign Income Tax		42,128			36,083			17,322
State and Local Income Tax		53,961			40,507			32,572

		169,614			108,047			82,277

Deferred
Federal Income Tax		59,924			613,518			42,042
Foreign Income Tax		(2,518	)		(34	)		363
State and Local Income Tax		22,370			21,616			7,680

		79,776			635,100			50,085

Provision for Taxes	$	249,390		$	743,147		$	132,362

The following table summarizes Blackstone’s tax position:


	Year Ended December 31,
	2018			2017			2016
Income Before Provision for Taxes	$	3,512,941		$	4,118,089		$	2,381,604
Provision for Taxes	$	249,390		$	743,147		$	132,362
Effective Income Tax Rate		7.1	%		18.0	%		5.6	%

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


	Year Ended December 31,
	2018			2017			2016
Statutory U.S. Federal Income Tax Rate		21.0	%		35.0	%		35.0	%
Income Passed Through to Common Unitholders and Non-Controlling Interest Holders (a)		-15.5	%		-25.9	%		-28.6	%
State and Local Income Taxes		1.8	%		1.5	%		1.3	%
Equity-Based Compensation		—			-0.1	%		-0.2	%
Impact of the Tax Reform Bill		—			8.3	%		—
Other		-0.2	%		-0.8	%		-1.9	%

Effective Income Tax Rate		7.1	%		18.0	%		5.6	%

(a)	Includes income that is not taxable to the Partnership and its subsidiaries. Such income is directly taxable to the Partnership’s unitholders and the non-controlling interest holders.

U.S. federal income tax reform legislation, known as the Tax Cuts and Jobs Act, was signed into law on December 22, 2017 (the “Tax Reform Bill”). In December 2017 the SEC staff issued guidance on accounting for the tax effects of the Tax Reform Bill, which provided that the income tax effects of those aspects of the Tax Reform Bill for which the Partnership’s accounting for income taxes was complete must be reflected in that current period. The Tax Reform Bill reduced the corporate federal income tax rate from 35% to 21% effective January 1, 2018. Consequently, the Partnership recorded a decrease related to the net deferred tax assets of $500.6 million with a corresponding net adjustment to deferred income tax expense of $500.6 million for the year ended December 31, 2017. The remeasurement was partially offset by a $160.3 million tax benefit resulting from the $403.9 million reduction to the liability under the Tax Receivable Agreement resulting from the reduction of the federal income tax rate. The net impact to the 2017 effective tax rate was an 8.3% increase. During the quarter ended December 31, 2018 the Partnership completed its accounting for the income tax effects for the Tax Reform Bill, and no significant adjustments were made to the provisional amounts previously recorded.

Further, the Tax Reform Bill includes a one-time deemed repatriation on undistributed foreign earnings and profits (referred to as the transition tax), which was not material to the Partnership.

The Tax Reform Bill also established new tax laws that became effective with the tax year beginning January 1, 2018, including, but not limited to, a new provision designed to tax global intangible low-taxed income, a tax determined by base erosion and anti-tax abuse tax benefits from certain payments between a U.S. corporation and foreign subsidiaries and interest expense limitation. The net effect on the 2018 provision for income taxes for these provisions are immaterial.

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,
	2018		2017
Deferred Tax Assets
Fund Management Fees	$	6,955	$	9,938
Equity-Based Compensation		69,484		54,699
Amortization and Depreciation		768,984		754,924
Net Operating Loss Carry Forward		—		8,885

Total Deferred Tax Assets		845,423		828,446

Deferred Tax Liabilities
Unrealized Gains from Investments		71,472		65,883
Other		34,469		36,593

Total Deferred Tax Liabilities		105,941		102,476

Net Deferred Tax Assets	$	739,482	$	725,970

Future realization of tax benefits depends on the expectation of taxable income within a period of time that the tax benefits will reverse. The Partnership has recorded a significant deferred tax asset for the future amortization of tax basis intangibles acquired from the predecessor owners and current owners. The amortization period for these tax basis intangibles is 15 years; accordingly, the related deferred tax assets will reverse over the same period. The Partnership had a taxable loss of $43.2 million and $10.3 million for the years ended December 31, 2015 and 2016, respectively, of which $10.3 million was carried back and utilized against taxable income generated in the tax year ended December 31, 2014. $43.2 million together with the taxable loss of $18.6 million generated for the year ended December 31, 2017 were fully realized in the tax year ended December 31, 2018. The Partnership has no taxable loss carryforward as of December 31, 2018. The Partnership has considered the 15 year amortization period for the tax basis intangibles in evaluating whether it should establish a valuation allowance.

In evaluating its ability to utilize deferred tax assets, the Partnership considers projections of taxable income, beginning with historic results and incorporating assumptions of the amount of future pretax operating income. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates that the Partnership uses to manage its business. At this time, the Partnership’s projections of future taxable income indicate that it is more likely than not that the benefits from the deferred tax asset will be realized. Therefore, the Partnership has determined that no valuation allowance is needed at December 31, 2018.

Currently, the Partnership does not believe it meets the indefinite reversal criteria that would cause the Partnership to not recognize a deferred tax liability with respect to its foreign subsidiaries. Where applicable, Blackstone will record a deferred tax liability for any outside basis difference of an investment in a foreign subsidiary.

Blackstone files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, Blackstone is subject to examination by federal and certain state, local and foreign tax regulators. As of December 31, 2018, Blackstone’s U.S. federal income tax returns for the years 2015 through 2017 are open under the normal three-year statute of limitations and therefore subject to examination. State and local tax returns are generally subject to audit from 2014 through 2017. The City of New York is examining certain other subsidiaries’ tax returns for the years 2007 through 2014. The Income Tax Department of the Government of India is examining the tax returns of the Indian subsidiaries for the years 2008 and 2009. HM Revenue and Customs in the U.K. is examining certain U.K. subsidiaries’ tax returns for 2011. Blackstone believes that during 2019 certain tax examinations have a reasonable possibility of being completed and does not expect the results of these examinations to have a material impact on the consolidated financial statements.

Blackstone’s unrecognized tax benefits, excluding related interest and penalties, were:


	December 31,
	2018			2017			2016
Unrecognized Tax Benefits — January 1	$	11,454		$	3,581		$	15,698
Additions based on Tax Positions Related to Current Year		—			—			902
Reductions for Tax Positions of Current Year		—			—			(851	)
Additions for Tax Positions of Prior Years		9,671			11,167			—
Reductions for Tax Positions of Prior Years		(323	)		(1,860	)		(7,837	)
Reductions for Tax Positions as a Result of a Lapse of the Applicable Statute of Limitations		—			—			(3,774	)
Settlements		—			(1,382	)		(357	)
Exchange Rate Fluctuations		62			(52	)		(200	)

Unrecognized Tax Benefits — December 31	$	20,864		$	11,454		$	3,581

If the above tax benefits were recognized, $20.9 million and $11.5 million for the years ended December 31, 2018 and 2017, respectively, would reduce the annual effective rate. Blackstone does not believe that it will have a material increase or decrease in its unrecognized tax benefits during the coming year.

The unrecognized tax benefits are recorded in Accounts Payable, Accrued Expense and Other Liabilities in the Consolidated Statements of Financial Condition.

Blackstone recognizes interest and penalties accrued related to unrecognized tax positions in General, Administrative and Other Expenses. During the years ended December 31, 2018, 2017 and 2016, $1.8 million, $(0.4) million and $(4.1) million of interest expense were accrued (reversed), respectively. During the years ended December 31, 2018, 2017 and 2016, no penalties were accrued.

Other Income — Reduction of the Tax Receivable Agreement Liability

In 2017, the $403.9 million Reduction of the Tax Receivable Agreement Liability was primarily attributable to the reduction in the corporate federal tax rate from 35% to 21% pursuant to the Tax Reform Bill.