Note 10. Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act, or the Tax Reform Act, was signed into law. The Tax Reform Act included significant changes to existing law, including among other items, a reduction to the U.S. federal statutory corporate tax rate from 35% to 21% effective January 1, 2018. ASC 740, Income Taxes (Topic 740), or ASC 740, requires that the effects of changes in tax laws or rates be recognized in the period in which the law is enacted. Those effects, both current and deferred, are reported as part of the tax provision, regardless of income in which the underlying pretax income (expense) or asset (liability) was or will be reported.

The Company’s estimated fiscal 2018 blended U.S. federal statutory corporate income tax rate of 31.5% was applied in the computation of the income tax provision for the year ended March 31, 2018. The blended U.S. federal statutory corporate tax rate of 31.5% represents the average rate between the pre-enactment U.S. federal statutory corporate tax rate of 35% prior to the January 1, 2018 effective date and the post-enactment U.S. federal statutory corporate tax rate of 21% thereafter.

The Company’s income tax provision was $48.3 million, $39.2 million and $27.7 million for the fiscal years ended March 31, 2018, 2017 and 2016, respectively. The Company’s effective tax rate was 30.1%, 43.0% and 42.1% for the fiscal years ended March 31, 2018, 2017 and 2016. Consistent with guidance issued by the U.S. Securities and Exchange Commission, or SEC, which provides for a measurement period of one year from the enactment date to finalize the accounting for effects of the Tax Reform Act, the Company provisionally recorded an income tax expense adjustment of $21.4 million during the year ended March 31, 2018, due to the re-measurement of its net deferred tax assets due to the lower U.S. federal statutory corporate tax rate. This provisional estimate reflects estimable current year impacts of the Tax Reform Act on the Company’s estimated annual effective tax rate and discrete items resulting directly from the enactment of the Tax Reform Act based on the information available, prepared, or analyzed (including computations) in reasonable detail. Any adjustments to this provisional estimate will be recorded as adjustments to income tax expense in the period in which those adjustments become estimable and/or are finalized, if necessary. As a result of the Tax Reform Act, the Company is currently evaluating the realizability of its tax attributes, such as net operating losses, foreign tax credits, and research credits along with potential planning strategies.

As discussed in “Note 2. Basis of Presentation and Summary of Significant Accounting Policies,” the Company adopted ASU 2016-09 in the first quarter of fiscal 2018. ASU 2016-09 requires excess tax benefits and shortfalls to be recognized in the income tax provision as discrete items in the period when restricted stock units vest or stock option exercises occur, whereas previously such income tax effects were recorded as part of additional paid-in capital only when the related tax deduction resulted in a reduction of current income taxes payable. The Company recognized excess tax benefits associated with stock-based awards of $31.0 million as an income tax benefit for fiscal year ended March 31, 2018. These recognized excess tax benefits resulted from restricted stock units that vested or stock options that were exercised during the fiscal year ended March 31, 2018. The amount of future excess tax benefits or shortfalls will likely fluctuate from period to period based on the price of the Company’s stock, the number of restricted stock unit vestings or stock option exercises, and the fair value assigned to such stock-based awards under U.S. GAAP. Accordingly, the Company expects that the adoption of ASU 2016-09 will result in more volatility to its effective income tax rate, net income and earnings per share in future periods.

The components of the Company’s income tax provision for the fiscal years ended March 31, 2018, 2017 and 2016 are as follows:

		2018				2017				2016
						(in $000's)
Income before provision for income taxes:
United States	$		134,006		$		78,172		$		54,406
Foreign			26,431				13,170				11,432
Income before income taxes	$		160,437		$		91,342		$		65,838

Current tax expense:
Federal	$		752		$		7,313		$		1,690
State			1,491				5,045				2,113
Foreign			3,400				1,066				1,592
			5,643				13,424				5,395
Deferred tax expense (benefit):
Federal			38,848				23,008				18,769
State			(1,014	)			(349	)			1,284
Foreign			4,790				3,144				2,243
			42,624				25,803				22,296
Total income tax provision	$		48,267		$		39,227		$		27,691

The components of the Company’s net deferred taxes were as follows:

	March 31,
	2018			2017
	(in $000's)
Deferred tax assets
Non-operating loss and tax credit carryforwards	$	48,724		$	8,814
Stock-based compensation		13,271			16,560
Nondeductible reserves and accruals		8,290			10,303
Foreign non-operating loss carryforwards		9,598			13,634
Deferred revenue		3,770			4,308
Depreciation and amortization		826			2,135
Other, net		822			1,308
	85,301			57,062
Deferred tax liabilities
Goodwill		(6,787	)		(9,444	)
In-process research and development		(5,045	)		(4,374	)
Depreciation		(1,011	)		—
Domestic deferred tax liability on foreign non-operating loss carryforwards		(963	)		(6,836	)
		(13,806	)		(20,654	)

Net deferred tax assets		71,495			36,408
Valuation allowance		(1,652	)		(2,468	)
Net deferred tax assets	$	69,843		$	33,940

Reported as:
Long-term deferred tax assets, net	$	70,746		$	34,723
Long-term deferred tax liabilities		(903	)		(783	)
Net deferred tax assets	$	69,843		$	33,940

A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows for the fiscal years ended March 31, 2018, 2017, and 2016:

	2018				2017				2016
Statutory income tax rate		31.5		%		35.0		%		35.0		%
(Decrease) increase resulting from:
Change in valuation allowance		0.5				0.2				0.7
Credits		(4.9	)			(3.3	)			(4.1	)
Foreign taxes		2.2				2.0				2.5
State taxes, net		2.0				3.8				3.7
Permanent differences		2.4				3.3				3.0
Stock-based compensation		(17.2	)			0.2				0.3
Rate differential on foreign operations		—				0.1				—
Effect of the Tax Reform Act on net deferred tax assets		13.0				—				—
Other		0.6				1.7				1.0
Effective tax rate		30.1		%		43.0		%		42.1		%

The Company regularly assesses its ability to realize its deferred tax assets. Assessing the realization of deferred tax assets requires significant management judgment. In determining whether its deferred tax assets are more likely than not realizable, the Company evaluates all available positive and negative evidence, and weights the evidence based on its objectivity.

As of March 31, 2018 and 2017, respectively, the Company maintained a valuation allowance of $1.7 million and $2.5 million for deferred tax assets primarily related to non-operating loss, or NOL, carryforwards in certain foreign jurisdictions in which the Company has had limited or no history of profitability. Based on the review of all available evidence, the Company recorded a valuation allowance to reduce these deferred tax assets to the amount that is more likely than not to be realizable as of March 31, 2018 and 2017.

Changes in the valuation allowance for deferred tax assets during the fiscal years ended March 31, 2018, 2017 and 2016 were as follows:

		2018				2017			2016
		(in $000's)
Balance at beginning of year	$		2,468		$		2,418	$		2,912
Increases			325				50			677
Decreases			(1,141	)			—			(1,171	)
Balance at end of year	$		1,652		$		2,468	$		2,418

At March 31, 2018, the Company had NOLs, of approximately $72.2 million which expire in varying years from fiscal 2019 through fiscal 2035. At March 31, 2018, the Company had foreign NOLs of approximately $3.9 million, primarily in Germany and France, which do not expire. In addition, at March 31, 2018, the Company had federal and state research and development credit carryforwards of approximately $16.6 million and $9.0 million, respectively, which expire in varying years from fiscal 2019 through fiscal 2038.

As of March 31, 2018 and 2017, the Company has no material uncertain tax positions and no interest and penalties were recognized during the years ended March 31, 2018, 2017 and 2016, respectively.

The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of multiple state and foreign jurisdictions. Fiscal years 2012 through 2017 remain open to examination in Germany and Abiomed Europe GmbH, the Company’s main operating subsidiary in Germany, is currently being audited for fiscal years 2012 through 2015. In July 2017, the Company was notified by the Internal Revenue Service, or IRS, that it has selected the Company’s federal tax return for fiscal 2016 for examination. In September 2017, the Company was notified by German tax authorities that our ECP subsidiary in Germany will be audited for the year ended December 31, 2014 and the three months ended March 31, 2015. The ECP audit was completed in fiscal 2018 and no adjustments were made as a result of the audit. All tax years remain subject to examination by the IRS and state tax authorities, because the Company has net operating loss and tax credit carryforwards which may be utilized in future years to offset taxable income, those years may also be subject to review by relevant taxing authorities if the carryforwards are utilized.