Income Taxes

Switch, Inc. incurs U.S. federal, state, and local income taxes on Switch, Inc.'s allocable share of taxable income of Switch. As a result, the consolidated statements of operations and comprehensive income (loss) reflect an adjustment to provide for corporate income taxes at Switch, Inc.'s effective rate of 10.2% for the year ended December 31, 2017. The effective rate includes the provision for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state and local jurisdiction. As the IPO occurred during the year ended December 31, 2017, and Switch, Inc. had no business transactions or activities prior to the IPO, with the exception of the issuance of one share at par value of $0.001, which was canceled as of the closing date of the IPO, no amounts related to the provision for income taxes were incurred for the period from January 1, 2017 to October 10, 2017, and for the years ended December 31, 2016 and 2015. The operations of Switch are primarily conducted in the state of Nevada, which does not have a corporate level income tax.

Consolidated loss before taxes and non-controlling interests for domestic and foreign operations is as follows:



	Year Ended December 31, 2017
	(in thousands)
Domestic	$	(8,386	)
Foreign	(1,175		)
Total loss before income taxes	$	(9,561	)

Switch, Inc. recognized an income tax benefit of $981,000 on its share of Switch's taxable loss, exclusive of the non-controlling interest of $6.6 million for the year ended December 31, 2017.

Components of income tax benefit consist of the following:



	Year Ended December 31, 2017
	(in thousands)
Current
Federal	$	—
State and local	—
Total current tax benefit	$	—

Deferred
Federal	$	(978	)
State and local	(3		)
Total deferred tax benefit	$	(981	)
Total tax benefit	$	(981	)

The provision for income taxes from operations differs from the amount of income tax computed by applying the applicable U.S. statutory federal income tax rate to income before provision for income taxes. A reconciliation of the U.S. statutory rate to the effective tax rate is presented below:



	Year Ended December 31, 2017
U.S statutory tax rate	35.0	%
Foreign rate differential	(4.3	)
Rate effect from flow-through entity	(34.8	)
Rate change impact due to tax reform	(7.0	)
Partnership outside basis difference	26.2
Other	(4.9	)
Effective tax rate	10.2	%

Switch, Inc.'s effective tax rate includes a rate benefit attributable to approximately 85.5% of Switch's earnings of which are not subject to corporate level taxes as the applicable income tax expense will be incurred by, and be the obligation of, the members of Switch, Ltd. holding non-controlling interests. Thus, the effective tax rate on the portion of loss attributable to Switch, Inc. is 10.2% for the year ended December 31, 2017.

Deferred tax balances reflect the impact of temporary differences between the carrying amount of assets and liabilities and their tax basis and are stated at the tax rates in effect when the temporary differences are expected to be recovered or settled.

Significant components of Switch, Inc.'s deferred tax assets and liabilities were as follows as of:



	December 31,
	2017
	(in thousands)
Deferred tax assets
Net operating loss carryforwards	$	981
Subtotal	981
Valuation allowance	—
Total deferred tax assets	$	981

Deferred tax liabilities
Other	—
Total deferred tax liabilities	$	—
Net deferred tax assets	$	981

As of December 31, 2017, Switch had net operating losses ("NOLs") of approximately $4.8 million available to offset future taxable income that begin to expire in 2037. Switch also has state NOLs for the state of Michigan of $16,000 and local NOLs for Grand Rapids, Michigan, of $161,000, which begin to expire in 2027 and 2037, respectively. Management believes on a more-likely-than not basis that Switch will be able to realize the tax benefit of its NOLs.

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. A majority of the provisions of the newly enacted federal income tax law are effective for taxable years beginning after December 31, 2017 and includes, but is not limited to:


•	Significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%;


•	Limitation of the tax deduction for interest expense to 30% of adjusted earnings;


•	Limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of NOL carrybacks;


•	Immediate deductions for certain new investments instead of deductions for depreciation expense over time;


•	Modifying or repealing many business deductions and credits; and


•	One-time taxation of offshore earnings at reduced rates regardless of repatriation.

Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain. In addition, it is uncertain how various states will respond to the newly enacted federal tax law.

The Staff of the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB No. 118") to provide guidance to registrants in applying Accounting Standards Codification Topic 740 ("ASC 740") in connection with the Tax Cuts and Jobs Act. SAB No. 118 provides that in the period of enactment, the income tax effects of the Tax Cuts and Jobs Act may be reported as a provisional amount based on a reasonable estimate to the extent a reasonable estimate can be determined, which would be subject to adjustment during a "measurement period." The measurement period begins in the reporting period of the Tax Cuts and Jobs Act's enactment and ends when a registrant has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements under ASC 740. SAB No. 118 also describes supplemental disclosures that should accompany the provisional amounts. The Company has applied the guidance in SAB No. 118 to account for the financial accounting impacts of the Tax Cuts and Jobs Act as of December 31, 2017.

For the year ended December 31, 2017, the Company recorded a provisional tax benefit of $667,000 related to the remeasurement of its net deferred tax asset using the new U.S. federal corporate tax rate of 21%. The Company is still in the process of analyzing certain aspects of the Tax Cuts and Jobs Act and, as a result, the amounts reflected in its annual consolidated financial statements may be subject to revision based on the future issuance of new guidance and interpretations. If the final tax outcome of these matters is different from the provisional amounts recorded by the Company, then adjustments to the provisional amounts will impact the tax provision and effective tax rate in the period recorded.

As of December 31, 2017 and 2016, the Company has not recognized any uncertain tax positions, penalties, or interest as management has concluded that no such positions exist. The Company is subject to examination for tax years beginning with the year ended December 31, 2017. The Company is not currently subject to income tax audits in any U.S. or state jurisdictions for any tax year.