Note 10. Income Taxes

Income taxes have been based on the following components of earnings (loss) from continuing operations before income taxes for the years ended December 31, 2017, 2016 and 2015:

	2017			2016			2015
U.S.	$	(12.1	)	$	(617.9	)	$	(36.3	)
Foreign		87.6			120.7			25.6
Total	$	75.5		$	(497.2	)	$	(10.7	)

The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2017, 2016 and 2015 were as follows:

	2017			2016			2015
Federal:
Current	$	60.9		$	(7.3	)	$	8.5
Deferred		31.0			(51.7	)		(11.9	)
State:
Current		0.2			(6.0	)		(8.3	)
Deferred		(6.0	)		12.5			(4.6	)
Foreign:
Current		26.4			34.4			19.7
Deferred		(3.8	)		5.8			17.6
Total	$	108.7		$	(12.3	)	$	21.0

The Tax Act was signed into law on December 22, 2017 and represents the most significant change to U.S. tax law since 1986. Key changes of the Tax Act are not limited to, but include the following: reduces the U.S. federal statutory rate from 35% to 21%; creates a territorial tax system rather than a worldwide system, generally allowing companies to repatriate future foreign-sourced earnings without incurring additional U.S. taxes; subjects certain foreign earnings on which U.S. income tax is currently deferred to a one-time transition tax; provides for new anti-deferral provisions to tax certain foreign earnings and a new base erosion tax; limits the deduction for net interest expense incurred by U.S. Companies; and eliminates or reduces certain other deductions.

Also on December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (SAB 118) which provides guidance for companies analyzing their accounting for the income tax effects of the Tax Act. SAB 118 provides that a company may report provisional amounts based on reasonable estimates. The provisional estimates are then subject to adjustment during a measurement period up to one year and should be accounted for as a prospective change.

During 2017, we recorded provisional estimates of the impact of the Tax Act within our income tax expense. To determine the amount of the transition tax, we were required to quantify, among other factors, the amount of post-1986 earnings and profits of applicable foreign subsidiaries, as well as the amount of non-U.S. tax paid on those earnings. We were able to make a reasonable estimate of the transition tax and impact to deferred taxes; however, we will continue to analyze our data and refine our estimated amounts accordingly. We will also continue to interpret any guidance or subsequent clarification of the tax law. As a result, we may make adjustments to the provisional amounts recorded, in accordance with the guidance outlined in SAB 118.

The following table outlines the reconciliation of differences between the Federal statutory tax rate and the Company’s effective income tax rate:

	2017			2016			2015
Federal statutory tax rate		35.0	%		35.0	%		35.0	%
Change in valuation allowances		2.8			(7.1	)		(225.5	)
Venezuelan devaluation and sale		—			—			(122.8	)
State and local income taxes, net of U.S. federal income tax benefit		(2.9	)		—			36.0
Impairment charges		6.6			(32.3	)		(57.8	)
Foreign tax		4.2			(1.2	)		(19.8	)
Adjustment of uncertain tax positions and interest		(3.2	)		0.5			45.9
Reorganization		—			3.9			—
Foreign tax rate differential		(21.2	)		3.0			169.7
Impact of the Tax Act		146.2			—			—
Tax impact of net gain on sale of Donnelley Financial and LSC shares		(21.6	)		—			—
Other		(1.9	)		0.7			(57.0	)
Effective income tax rate		144.0	%		2.5	%		(196.3	%)

Included in 2017 is the impact associated with the enactment of the Tax Act which included a provisional estimate for the one-time transition tax on foreign earnings of $103.5 million, of which $64.3 million is payable over eight years, net of current year tax benefit on U.S. operations, as well as a provisional adjustment to net deferred tax assets for the reduced corporate income tax rate of $6.8 million. The income tax expense also reflects non-deductible goodwill impairment charges, the inability to recognize a tax benefit on certain losses and the impact of the non-taxable gain on the sale of the Donnelley Financial retained shares. The sale of the LSC retained shares generated a pre-tax capital loss of $51.6. The related tax capital loss will be carried forward; however, it is more likely than not that the benefit of such deferred tax asset will not be fully realized and a valuation allowance was recorded.

Included in 2016 is the impact of the non-deductible goodwill impairment charges and $9.5 million of a valuation allowance provision, net of federal tax benefits, on certain deferred taxes assets within state and local jurisdictions.

Included in 2015 is an $11.3 million valuation allowance provision on certain deferred tax assets within the International segment and the impact of the non-deductible pre-tax loss of $30.3 million related to the Venezuela currency remeasurement and the related impact of the devaluation.

Deferred income taxes

The significant deferred tax assets and liabilities at December 31, 2017 and 2016 were as follows:

	2017			2016
Deferred tax assets:
Pension and other postretirement benefits plan liabilities	$	58.8		$	100.1
Net operating losses and other tax carryforwards		255.1			164.9
Accrued liabilities		51.5			86.1
Foreign depreciation		19.4			14.6
Other		16.5			25.1
Total deferred tax assets		401.3			390.8
Valuation allowances		(238.3	)		(154.1	)
Net deferred tax assets	$	163.0		$	236.7

Deferred tax liabilities:
Accelerated depreciation	$	(45.8	)	$	(68.2	)
Other intangible assets		(20.0	)		(36.0	)
Inventories		(7.3	)		(7.6	)
Other		(14.0	)		(23.1	)
Total deferred tax liabilities		(87.1	)		(134.9	)

Net deferred tax assets	$	75.9		$	101.8

Transactions affecting the valuation allowances on deferred tax assets during the years ended December 31, 2017, 2016 and 2015 were as follows:

	2017			2016			2015
Balance, beginning of year	$	154.1		$	130.8		$	144.3
Current year expense-net		84.5			35.2			11.8
Write-offs		(6.8	)		(1.0	)		(15.0	)
Foreign exchange and other		6.5			(10.9	)		(10.3	)
Balance, end of year		238.3		$	154.1		$	130.8

As of December 31, 2017, the Company had domestic and foreign net operating loss and other tax carryforwards of approximately $141.1 million and $114.0 million ($63.3 million and $101.6 million, respectively, at December 31, 2016), of which $119.6 million expires between 2018 and 2027. Limitations on the utilization of these tax assets may apply. The Company has provided valuation allowances to reduce the carrying value of certain deferred tax assets, as management has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be fully realized.

Deferred income taxes are not provided on the excess of the investment value for financial reporting over the tax basis of investments in those foreign subsidiaries for which such excess is considered to be permanently reinvested in those operations. The Company has recognized deferred tax liabilities of $4.7 million and $6.7 million as of December 31, 2017 and December 31, 2016, respectively, related to local taxes on certain foreign earnings which are not considered to be permanently reinvested. Undistributed earnings of foreign subsidiaries that are considered indefinitely reinvested outside of the U.S. were approximately $837.3 million as of December 31, 2017. Upon repatriation of these earnings to the U.S. in the form of dividends or otherwise, the tax cost would depend on income tax laws and circumstances at the time of distribution. The Tax Act included a one-time transition tax on foreign earnings and generally allows companies to repatriate future foreign-sourced earnings without incurring U.S. taxes in future years. The Company continues to analyze the global working capital and cash requirements and the potential tax liabilities attributable to repatriation, but the Company has yet to determine whether to change the prior assertion and repatriate earnings. The Company will record the tax effects of any change in the prior assertion in the period the analysis is complete and reasonable estimates are made.

Cash payments for income taxes were $46.1 million, $108.2 million and $129.1 million during the years ended December 31, 2017, 2016 and 2015, respectively. Cash refunds for income taxes were $43.3 million, $7.2 million and $14.8 million during the years ended December 31, 2017, 2016 and 2015, respectively.

The Company’s income taxes payable for federal and state purposes has been reduced by the tax benefits associated with the exercise of employee stock options and the vesting of restricted stock units. The Company adopted ASU No. 2016-09 "Compensation--Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" on January 1, 2017. Under this guidance, when awards vest or are settled, the excess tax benefits and tax deficiencies are recorded as income tax expense or benefit in the income statement instead of within additional paid-in-capital. The impact to the Company's Consolidated Financial Statements for the year ended December 31, 2017 was $0.5 million. Prior to January 1, 2017, a component of the income tax benefit, calculated as the tax effect of the difference between the fair market value at the time stock options are exercised or restricted stock units vests and the grant date fair market value, directly increased or reduced RRD stockholders' equity. For the years ended December 31, 2016 and 2015, the tax expense recognized as a reduction of RRD’s stockholders’ equity was $2.3 million and $3.2 million, respectively.

See Note 14, Comprehensive Income, for details of the income tax expense or benefit allocated to each component of other comprehensive income.

Uncertain tax positions

Changes in the Company’s unrecognized tax benefits at December 31, 2017, 2016 and 2015 were as follows:

	2017			2016			2015
Balance at beginning of year	$	41.9		$	51.0		$	58.5
Additions for tax positions of the current year		0.2			0.6			1.1
Reductions for tax positions of prior years		(9.0	)		(1.5	)		(5.4	)
Settlements during the year		(0.1	)		(1.8	)		(0.3	)
Lapses of applicable statutes of limitations		(2.1	)		(6.4	)		(2.9	)
Balance at end of year	$	30.9		$	41.9		$	51.0

As of December 31, 2017, 2016 and 2015, the Company had $30.9 million, $41.9 million and $51.0 million, respectively, of unrecognized tax benefits. Unrecognized tax benefits of $24.3 million as of December 31, 2017, if recognized, would have decreased income taxes and the corresponding effective income tax rate and increased net earnings. This potential impact on net earnings reflects the reduction of these unrecognized tax benefits, net of certain deferred tax assets and the federal tax benefit of state income tax items.

As of December 31, 2017, it is reasonably possible that the total amount of unrecognized tax benefits will decrease within twelve months by as much as $2.5 million due to the resolution of audits or expirations of statutes of limitations related to U.S. federal, state and international tax positions.

The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense. The total interest expense (benefits) related to tax uncertainties recognized in the Consolidated Statements of Operations were $0.2 million, $(0.5) million and $(0.1) million for the years ended December 31, 2017, 2016 and 2015, respectively. There were no benefits from the reversal of accrued penalties for the years ended December 31, 2017, 2016 and 2015. Accrued interest of $4.2 million and $4.0 million related to income tax uncertainties were reported as a component of other noncurrent liabilities in the Consolidated Balance Sheets at December 31, 2017 and 2016, respectively. There were no accrued penalties related to income tax uncertainties for the years ended December 31, 2017 and 2016.

The Company has tax years from 2010 and thereafter that remain open and subject to examination by the IRS, certain state taxing authorities or certain foreign tax jurisdictions.