INCOME TAXES

ANGI Homeservices is included within IAC’s tax group for purposes of federal and consolidated state income tax return filings. In all periods presented, current and deferred income tax benefit and provision have been computed for ANGI Homeservices on an as if stand-alone, separate return basis. ANGI Homeservices’ payments to IAC for its share of IAC’s consolidated federal and state tax return liabilities have been reflected within cash flows from operating activities in the accompanying consolidated and combined statement of cash flows.

U.S. and foreign (loss) earnings before income taxes and noncontrolling interests are as follows:



	Years Ended December 31,
	2017			2016			2015
	(In thousands)
U.S.	$	(132,000	)	$	27,284		$	1,149
Foreign	(21,633		)	(4,819		)	(3,387		)
Total	$	(153,633	)	$	22,465		$	(2,238	)

The components of the (benefit) provision for income taxes are as follows:



	Years Ended December 31,
	2017			2016			2015
	(In thousands)
Current income tax provision (benefit):
Federal	$	(443	)	$	13,440		$	2,901
State	21			2,274			601
Foreign	(334		)	(161		)	1,725
Current income tax (benefit) provision	(756		)	15,553			5,227
Deferred income tax benefit
Federal	(38,587		)	(2,483		)	(2,823		)
State	(8,467		)	(775		)	(557		)
Foreign	(1,296		)	(461		)	(89		)
Deferred income tax benefit	(48,350		)	(3,719		)	(3,469		)
Income tax (benefit) provision	$	(49,106	)	$	11,834		$	1,758

The deferred tax asset for net operating losses ("NOLs") was increased by $35.8 million for the year ended December 31, 2017 for excess tax deductions attributable to stock-based compensation. The related income tax benefit was recorded as a component of the deferred income tax benefit. The current income tax payable was reduced by $7.7 million and $0.1 million for the years ended December 31, 2016 and 2015, respectively, for excess tax deductions attributable to stock-based compensation. For the years ended December 31, 2016 and 2015, the related income tax benefits were recorded as increases to invested capital.

The tax effects of cumulative temporary differences that give rise to significant deferred tax assets and deferred tax liabilities are presented below. The valuation allowance relates to deferred tax assets for which it is more likely than not that the tax benefit will not be realized.



	December 31,
	2017			2016
	(In thousands)
Deferred tax assets:
Accrued expenses	$	5,468		$	3,527
NOL carryforwards	135,042			12,869
Stock-based compensation	34,408			10,382
Allowance for bad debts	1,999			3,186
Deferred revenue	10,924			—
Property and equipment	650			—
Other	3,575			1,811
Total deferred tax assets	192,066			31,775
Less valuation allowance	(61,563		)	(14,180		)
Net deferred tax assets	130,503			17,595
Deferred tax liabilities:
Intangible and other assets	(85,227		)	(1,818		)
Property and equipment	—			(2,661		)
Other	(179		)	(133		)
Total deferred tax liabilities	(85,406		)	(4,612		)
Net deferred tax assets	$	45,097		$	12,983

At December 31, 2017, the Company has federal and state NOLs of $317.5 million and $378.6 million, respectively. If not utilized, the federal NOLs will expire between 2024 and 2037 and the state NOLs will expire at various times primarily between 2027 and 2037. Federal and state NOLs of $116.0 million and $121.1 million, respectively, can be used against future taxable income without restriction and the remaining NOLs will be subject to limitations under Section 382 of the Internal Revenue Code, separate return limitations, and applicable state law. At December 31, 2017, the Company has foreign NOLs of $298.4 million available to offset future income. Of these foreign NOLs, $286.1 million can be carried forward indefinitely and $12.3 million, if not utilized, will expire at various times between 2022 and 2037. During 2017, the Company recognized tax benefits related to NOLs of $103.8 million. Included in this amount is $74.0 million of tax benefits of acquired attributes which was recorded as a reduction in goodwill.

At December 31, 2017, the Company has tax credit carryforwards of $3.4 million relating to federal and state tax credits for research activities. Of these credit carryforwards, $0.6 million can be carried forward indefinitely and $2.8 million will expire between 2033 and 2037.

The Company regularly assesses the realizability of deferred tax assets considering all available evidence including, to the extent applicable, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, tax filing status, the duration of statutory carryforward periods, available tax planning and historical experience. As of December 31, 2017, the Company has a gross deferred tax asset of $84.4 million that the Company expects to fully utilize on a more likely than not basis. However, the tax sharing agreement between ANGI Homeservices and IAC governs the parties’ respective rights, responsibilities and obligations with respect to tax matters, including responsibility for taxes attributable to ANGI Homeservices, entitlement to refunds, allocation of tax attributes and other matters. Any differences between taxes currently due or receivable under the tax sharing agreement and the current tax provision computed on an as if standalone, separate return basis are reflected as adjustments to additional paid-in capital.

During 2017, the Company’s valuation allowance increased by $47.4 million primarily due to the establishment of foreign NOLs related to a recent acquisition. At December 31, 2017, the Company has a valuation allowance of $61.6 million related to the portion of NOLs and other items for which it is more likely than not that the tax benefit will not be realized.

A reconciliation of the income tax (benefit) provision to the amounts computed by applying the statutory federal income tax rate to earnings before income taxes is shown as follows:



	Years Ended December 31,
	2017			2016			2015
	(In thousands)
Income tax (benefit) provision at the federal statutory rate of 35%	$	(53,771	)	$	7,862		$	(783	)
Change in tax reserves, net	235			(72		)	1,895
State income taxes, net of effect of federal tax benefit	(3,678		)	1,063			(39		)
Unbenefited losses	5,915			2,592			1,133
Research credit	(784		)	(930		)	(645		)
Federal tax rate change to 21%	33,002			—			—
Stock-based compensation	(32,702		)	—			—
Other, net	2,677			1,319			197
Income tax (benefit) provision	$	(49,106	)	$	11,834		$	1,758

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	December 31,
	2017		2016			2015
	(In thousands)
Balance at January 1	$	602	$	1,863		$	129
Additions based on tax positions related to the current year	235		279			376
Additions for tax positions of prior years	711		—			1,358
Reductions for tax positions of prior years	—		(263		)	—
Settlements	—		(1,277		)	—
Balance at December 31	$	1,548	$	602		$	1,863

The Company recognizes interest and, if applicable, penalties related to unrecognized tax benefits in the income tax provision. At both December 31, 2017 and December 31, 2016, the Company has not accrued any amount for the payment of either interest or penalties.

ANGI Homeservices is routinely under audit by federal, state, local and foreign authorities in the area of income tax as a result of previously filed separate company and consolidated tax returns with IAC. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. The Internal Revenue Service is currently auditing IAC’s federal income tax returns for the years ended December 31, 2010 through 2012, which includes the operations of the HomeAdvisor business. The statute of limitations for the years 2010 through 2012 has been extended to June 30, 2019, and the statute of limitations for the year 2013 has been extended to June 30, 2018. Returns filed in various other jurisdictions are open to examination for various tax years beginning with 2009. Income taxes payable include reserves considered sufficient to pay assessments that may result from examination of prior year tax returns. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Although management currently believes changes to reserves from period to period and differences between amounts paid, if any, upon resolution of issues raised in audits and amounts previously provided will not have a material impact on liquidity, results of operations, or financial condition of the Company, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.

At December 31, 2017 and 2016, unrecognized tax benefits are $1.5 million and $0.6 million respectively, for tax positions included in IAC’s consolidated tax return filings. If unrecognized tax benefits at December 31, 2017 are subsequently recognized, income tax provision would be reduced by $1.5 million. The comparable amount as of December 31, 2016 is $0.6 million.

On December 22, 2017, the U.S. enacted the Tax Act. The Tax Act implements a number of changes that take effect on January 1, 2018, including, but not limited to, a reduction of the U.S. federal corporate income tax rate from 35% to 21% and a new minimum tax on intangible income earned by foreign subsidiaries. The Company's income tax provision for the year ended December 31, 2017, includes an expense of $33.0 million related to the Tax Act, for the remeasurement of U.S. net deferred tax assets due to the reduction in the corporate income tax rate. The Company was not subject to the one-time transition tax because it has cumulative losses from its international operations. While the Company was able to make a reasonable estimate of the impacts of the Tax Act, certain amounts are provisional as the Company gathers additional data. Any adjustment of the Company’s provisional tax expense will be reflected as a change in estimate in its results in the period in which the change in estimate is made in accordance with Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act. In addition, our estimates may also be impacted and adjusted as the law is clarified and additional guidance is issued at the federal and state levels.