Income Taxes

Income tax expense (benefit) for 2017, 2016 and 2015 consists of the following:



	For the Years Ended
(In thousands)	2017		2016			2015

Current:
Federal	$	37,708	$	252,795		$	140,921
State	4,878		31,642			18,647
Foreign	10,156		9,030			17,205
Total current expense	52,742		293,467			176,773
Deferred:
Federal	13,676		(18,014		)	60,015
State	23,278		(2,103		)	5,680
Foreign	10,455		8,600			(450		)
Total deferred expense (benefit)	47,409		(11,517		)	65,245

Total income tax expense	$	100,151	$	281,950		$	242,018

Our current federal and state tax expense decreased in 2017 relative to 2016 and 2015 due to favorable book vs. tax timing differences recognized in 2017, and the inclusion of net excess tax benefits as discrete items within the tax provision, upon our adoption of ASU 2016-09 in the first quarter of 2017. As a result of these timing differences, we are in a prepaid income tax position in the U.S. The increase in our prepaid tax position contributed significantly to the year-over-year increase in prepaid expenses and other in our consolidated balance sheets. Refer to Note (1) for further discussion regarding our adoption of ASU 2016-09 and its impact on our consolidated financial statements.

Temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities that give rise to significant portions of deferred income taxes at the end of 2017 and 2016 relate to the following:



(In thousands)	2017			2016

Deferred tax assets:
Accrued expenses	$	23,295		$	25,454
Tax credits and separate return net operating losses	26,304			27,762
Share based compensation	56,263			81,133
Contract and service revenues and costs	—			59,217
Other	17,754			9,723
Total deferred tax assets	123,616			203,289

Deferred tax liabilities:
Software development costs	(208,494		)	(275,888		)
Depreciation and amortization	(96,492		)	(133,424		)
Prepaid expenses	(21,214		)	(30,255		)
Contract and service revenues and costs	(65,043		)	—
Other	(10,400		)	(3,050		)
Total deferred tax liabilities	(401,643		)	(442,617		)

Net deferred tax liability	$	(278,027	)	$	(239,328	)

At the end of 2017, we had net operating loss carry-forwards from foreign jurisdictions of $29 million that are available to offset future taxable income with no expiration. In addition, we had a state income tax credit carry-forward of $14 million available to offset income tax liabilities through 2030. We expect to fully utilize the net operating loss and tax credit carry-forwards in future periods. As a result of certain federal tax accounting method changes, our deferred tax amount for contract and services revenues and costs is a deferred tax liability at 2017 compared with a deferred tax asset in 2016.

H.R. 1, An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 ("U.S. Tax Reform"), was enacted on December 22, 2017. U.S. Tax reform provides for, among other things, the reduction of the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. As a result of adjusting our net deferred tax liabilities to the new enacted rate, we recorded a decrease to the deferred tax liabilities of $171 million. As a result of the aforementioned federal tax accounting method changes, and other favorable book vs. tax timing differences recognized in 2017, the decrease in deferred tax liability rate was offset by additional future taxable amounts generated during 2017.

At the end of 2017, we had not provided tax on the cumulative undistributed earnings of certain foreign subsidiaries of approximately $62 million, because it is our intention to reinvest these earnings indefinitely. The unrecognized deferred tax liability relating to these earnings is approximately $13 million. As a result of U.S. Tax Reform, we recorded a deferred tax liability in 2017 for $4 million relating to earnings for which we previously maintained an indefinite reinvestment assertion. This revision to our assertion was caused by the changes to the consequences of future repatriation enacted with U.S. Tax Reform. As of December 30, 2017, we are making an indefinite reinvestment assertion with respect to only certain of our foreign subsidiaries, whereas we previously maintained the assertion for all foreign subsidiaries.

The effective income tax rates for 2017, 2016, and 2015 were 10%, 31%, and 31%, respectively. These effective rates differ from the U.S. federal statutory rate of 35% as follows:



	For the Years Ended
(In thousands)	2017			2016			2015

Tax expense at statutory rates	$	338,495		$	321,452		$	273,483
State income tax, net of federal benefit	22,214			22,644			16,129
Tax credits	(17,727		)	(23,881		)	(20,681		)
Foreign rate differential	(26,379		)	(16,468		)	(14,821		)
Share-based compensation	(62,501		)	—			—
Change in U.S. tax rate	(170,999		)	—			—
Deemed mandatory repatriation	25,114			—			—
Permanent differences	(10,700		)	(20,330		)	(14,314		)
Other, net	2,634			(1,467		)	2,222

Total income tax expense	$	100,151		$	281,950		$	242,018

Upon our adoption of ASU 2016-09 in the first quarter of 2017, we include net excess tax benefits in our income tax provision. These net excess tax benefits are included within share-based compensation in the table above. Refer to Note (1) for further discussion regarding our adoption of ASU 2016-09 and its impact on our consolidated financial statements.

As reflected in the table above, our tax rate was impacted by the enactment of U.S. Tax Reform into law on December 22, 2017. The impact of U.S. Tax Reform on our 2017 tax rate includes the impact of the revaluation of our net deferred tax liability to the lower enacted tax rate, and the impact of mandatory deemed repatriation.

Relevant accounting guidance provides that the impact of U.S. Tax Reform may be provisionally recorded, and adjusted during a measurement period of up to one year. The impacts of U.S. Tax Reform on our income tax balances are complex and wide-reaching, and the enactment date of such U.S. Tax Reform fell in close proximity to our 2017 fiscal year-end. Accordingly, the adjustments we have made to our deferred and current tax balances are provisional, and it is reasonably possible that our estimates regarding the impact of U.S. Tax Reform on our current and deferred tax balances might materially change in the near term. Our provisional adjustments include the reduction to our net deferred tax liability of $171 million as a result of the federal rate reduction and the $25 million liability recorded as a result of the mandatory deemed repatriation provisions.

Additional analysis and computations will be performed with respect to these provisional amounts. The ultimate impact may differ from these provisional amounts, possibly materially, due to among other things, additional regulatory guidance that may be issued, changes to assumptions and interpretations that we have made, and actions we may take as a result of U.S. Tax Reform. We will complete our accounting for these items during 2018, after completion of our 2017 U.S. income tax return.

U.S. Tax Reform creates new global intangible low-taxed income ("GILTI") tax provisions. The GILTI provisions require us to include in our future U.S. taxable income, the earnings of foreign subsidiaries in excess of an allowable return on the foreign subsidiaries' tangible assets. This inclusion may be offset by a portion of the foreign taxes incurred on these earnings. We have elected to account for GILTI tax in the period in which it is incurred, and therefore have not provided any deferred tax impacts of GILTI in our consolidated financial statements for the year ended December 30, 2017.

A reconciliation of the beginning and ending amount of unrecognized tax benefit is presented below:



(In thousands)	2017			2016			2015

Unrecognized tax benefit - beginning balance	$	9,769		$	4,878		$	7,202
Gross decreases - tax positions in prior periods	(1,734		)	—			(4,323		)
Gross increases - tax positions in prior periods	7,252			—			690
Gross increases - tax positions in current year	—			6,945			2,824
Settlements	—			(1,859		)	(1,299		)
Currency translation	—			(195		)	(216		)

Unrecognized tax benefit - ending balance	$	15,287		$	9,769		$	4,878

If recognized, $8 million of the unrecognized tax benefit will favorably impact our effective tax rate. It is reasonably possible that our unrecognized tax benefits may decrease by up to $12 million within the next twelve months. Our federal returns have been examined by the Internal Revenue Service through 2013. We have various state and foreign returns under examination.

The ending amounts of accrued interest and penalties related to unrecognized tax benefits were $2 million in 2017 and less than $1 million in 2016. We classify interest and penalties as income tax expense in our consolidated statement of operations, and our income tax expense for 2017 includes $1 million of interest and penalties.

The foreign portion of our earnings before income taxes was $126 million, $86 million, and $83 million in 2017, 2016, and 2015 respectively, and the remaining portion was domestic.