Income Taxes

Both ASU 2016-09, which we adopted on January 1, 2017, and U.S. tax reform enacted in December 2017, impacted our income tax provision for 2018 and 2017.

As of December 31, 2017, we had not completed our accounting for the tax effects of the Act. In accordance with SAB 118, we recorded provisional amounts related to the transition tax, impacts of the Act on state taxes, provisions of the Act related to deferred tax balances, and foreign tax implications. As a result of the Act, we recorded a provisional tax benefit of $12.0 million in the fourth quarter of 2017, which primarily reflected the re-measurement of our net deferred tax liability to the new U.S. Federal tax rate.

As of December 31, 2018, we have resolved our contingent accounting related to the tax effects of the Act. We filed our federal income tax return in the third quarter of 2018, and our return to provision adjustment, which addresses the provisional tax benefit recorded under SAB 118, was not material.

We have considered the impact of the statutory changes from the Act on our estimated effective tax rate for 2018, including reasonable estimates of those provisions effective for the 2018 tax year. We believe our net benefit is based on reasonable estimates for those tax effects of the Act. Changes to these estimates or new guidance issued by regulators may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made.

We reduce federal and state income taxes payable by the tax benefits associated with the exercise of deductible nonqualified stock options and the lapse of restrictions on deductible restricted stock awards. To the extent realized tax deductions exceed the amount of previously recognized deferred tax benefits related to share-based compensation, we record an excess tax benefit. Upon adoption of ASU 2016-09, we were required to record all excess tax benefits or deficiencies as income tax benefit or expense in the income statement. We recorded excess tax benefits of $15.3 million to our income tax provision in 2018 and $12.6 million in 2017. Prior to the adoption of this guidance, we were required to record excess tax benefits in stockholders’ equity, of which we recorded $7.4 million in 2016. For additional discussion of our adoption of this accounting guidance, see Note 1.

Income before income taxes and equity earnings is attributable to the following jurisdictions (in thousands):



	Year Ended December 31,
	2018		2017		2016
United States	$	278,311	$	259,436	$	234,646
Foreign	14,682		9,746		6,732
Total	$	292,993	$	269,182	$	241,378

The provision for income taxes consisted of the following (in thousands):



	Year Ended December 31,
	2018			2017			2016
Current:
Federal	$	39,504		$	71,329		$	77,000
State and other	14,609			11,289			12,182
Total current provision for income taxes	54,113			82,618			89,182

Deferred:
Federal	4,676			(6,643		)	4,079
State and other	(15		)	2,007			(330		)
Total deferred provision for income taxes	4,661			(4,636		)	3,749
Provision for income taxes	$	58,774		$	77,982		$	92,931

A reconciliation of the U.S. federal statutory tax rate to our effective tax rate on Income before income taxes and equity earnings is as follows:



	Year Ended December 31,
	2018		2017		2016
Federal statutory rate	21.00	%	35.00	%	35.00	%
Change in valuation allowance	(0.13	)	(0.06	)	0.10
Stock-based compensation	(5.23	)	(4.67	)	—
Re-measurement of net deferred tax liability	—		(4.46	)	—
Other, primarily state income tax rate	4.42		3.16		3.40
Total effective tax rate	20.06	%	28.97	%	38.50	%

The table below presents the components of our deferred tax assets and liabilities (in thousands):



	December 31,
	2018			2017
Deferred tax assets:
Product inventories	$	5,413		$	4,287
Accrued expenses	776			1,804
Leases	1,189			1,188
Share-based compensation	9,427			8,884
Uncertain tax positions	2,558			2,087
Net operating losses	5,058			5,441
Other	2,080			1,629
Total non-current	26,501			25,320
Less: Valuation allowance	(5,058		)	(5,440		)
Component reclassified for net presentation	(20,897		)	(19,071		)
Total non-current, net	546			809

Total deferred tax assets	546			809

Deferred tax liabilities:
Trade discounts on purchases	2,094			1,520
Prepaid expenses	1,804			1,857
Intangible assets, primarily goodwill	30,988			29,348
Depreciation	14,924			10,870
Interest rate swaps	486			61
Total non-current	50,296			43,656
Component reclassified for net presentation	(20,897		)	(19,071		)
Total non-current, net	29,399			24,585

Total deferred tax liabilities	29,399			24,585

Net deferred tax liability	$	28,853		$	23,776

At December 31, 2018, certain of our international subsidiaries had tax loss carryforwards totaling approximately $19.0 million, which expire in various years after 2019. Deferred tax assets related to the tax loss carryforwards of these international subsidiaries were $5.1 million as of December 31, 2018 and $5.4 million as of December 31, 2017. We have recorded a corresponding valuation allowance of $5.1 million and $5.4 million in the respective years.

As of December 31, 2018, United States income taxes were not provided on earnings or cash balances of our foreign subsidiaries, outside of the provisions of the transition tax from U.S. tax reform. As we have historically invested or expect to invest the undistributed earnings indefinitely to fund current cash flow needs in the countries where held, additional income tax provisions may be required. Determining the amount of unrecognized deferred tax liability on these undistributed earnings and cash balances is not practicable due to the complexity of tax laws and regulations and the varying circumstances, tax treatments and timing of any future repatriation.

The following table summarizes the activity related to uncertain tax positions for the past three years (in thousands):



	2018		2017		2016
Balance at beginning of year	$	9,937	$	7,846	$	5,978
Increases for tax positions taken during a prior period	76		129		10
Increases for tax positions taken during the current period	3,809		3,260		2,819
Decreases resulting from the expiration of the statute of limitations	1,603		869		961
Decreases relating to settlements	40		429		—
Balance at end of year	$	12,179	$	9,937	$	7,846

The total amount of unrecognized tax benefits that, if recognized, would decrease the effective tax rate was $9.6 million at December 31, 2018 and $7.9 million at December 31, 2017.

We record interest expense related to unrecognized tax benefits in Interest and other non-operating expenses, net, while we record related penalties in Selling and administrative expenses on our Consolidated Statements of Income. For unrecognized tax benefits, we had interest expense of $0.2 million in 2018, $0.2 million in 2017 and $0.2 million in 2016. Accrued interest related to unrecognized tax benefits was approximately $1.1 million at December 31, 2018 and $0.9 million at December 31, 2017.

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2015.