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Income Taxes | 12 Months Ended
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Dec. 31, 2018
Income Taxes | Q. INCOME TAXES The components of income (loss) before income taxes and the provision (benefit) for income taxes as shown in the consolidated statements of operations were as follows:
|  | 2018 |  |  | 2017 |  |  | 2016 |
|  | (in thousands) |
Income (loss) before income taxes: |  |  |  |  |  |  |  |  |  |  |  |
U.S. |  | $ | 189,691 |  |  | $ | 76,699 |  |  | $ | (341,018 | )
Non-U.S. |  |  | 278,110 |  |  |  | 447,713 |  |  |  | 285,958 |
|  | $ | 467,801 |  |  | $ | 524,412 |  |  | $ | (55,060 | )
Provision (benefit) for income taxes: |  |  |  |  |  |  |  |  |  |  |  |
Current: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Federal |  | $ | (59,122 | ) |  | $ | 162,679 |  |  | $ | 7,750 |
Non-U.S. |  |  | 45,083 |  |  |  | 64,313 |  |  |  | 41,579 |
State |  |  | 1,721 |  |  |  | 2,623 |  |  |  | 1,968 |
|  |  | (12,318 | ) |  |  | 229,615 |  |  |  | 51,297 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Federal |  |  | 29,252 |  |  |  | 43,687 |  |  |  | (51,482 | )
Non-U.S. |  |  | (1,243 | ) |  |  | (6,476 | ) |  |  | (9,240 | )
State |  |  | 331 |  |  |  | (106 | ) |  |  | (2,214 | )
|  |  | 28,340 |  |  |  | 37,105 |  |  |  | (62,936 | )
Total provision (benefit) for income taxes: |  | $ | 16,022 |  |  | $ | 266,720 |  |  | $ | (11,639 | )
Income tax expense for 2018 and 2017 totaled $ 16.0 and $ 266.7 million, respectively. Income tax benefit for 2016 totaled $ 11.6 million. The effective tax rate for 2018, 2017 and 2016 was 3.4 %, 50.9 %, and 21.1 %, respectively. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”), making significant changes to the Internal Revenue Code. The Tax Reform Act has significant direct and indirect implications for accounting for income taxes under ASC 740, “Accounting for Income Taxes” some of which could not be calculated with precision until further clarification and guidance was made available from tax authorities, regulatory bodies or the FASB. In light of this uncertainty, on December 22, 2017 the SEC issued Staff Accounting Bulletin (“SAB”) No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” to address uncertainty in the application of U.S. GAAP when the registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. In accordance with SAB 118, Teradyne recorded a provisional amount of $186.0 million of additional income tax expense in the fourth quarter of 2017 which represented Teradyne’s best estimate of the impact of the Tax Reform Act in accordance with Teradyne’s understanding of the Tax Reform Act and available guidance as of that date. The $186.0 million was primarily composed of expense of $161.0 million related to the one- time transition tax on the mandatory deemed repatriation of foreign earnings, $33.6 million of expense related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, and a benefit of $10.3 million associated with the impact of correlative adjustments on uncertain tax positions. In accordance with the requirements of SAB 118, in the fourth quarter of 2018 Teradyne completed its analysis of the effect of the Tax Reform Act based on the application of the most recently available guidance as of December 31, 2018 and recorded $ 49.5 million of net income tax benefit. The net benefit consisted of $51.7 million of benefit resulting from a reduction in the estimate of the one-time transition tax on the mandatory deemed repatriation of foreign earnings and an expense of $2.2 million associated with the impact of correlative adjustments on uncertain tax positions. The Tax Reform Act also includes a new U.S. tax base erosion provision, the global intangible low-taxed income (“GILTI”) provision, which imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Teradyne has made an accounting policy election to account for GILTI as a component of tax expense in the period in which Teradyne is subject to the rules and therefore did not provide any deferred tax impacts of GILTI in its consolidated financial statements. The decrease in the effective tax rate from 2017 to 2018 was primarily attributable to the $186.0 million of income tax expense recorded in the fourth quarter of 2017 as a provisional estimate of the impact of the Tax Reform Act and the $51.7 million of income tax benefit recorded in the fourth quarter of 2018 resulting from a reduction in the estimate of the one-time transition tax on the mandatory deemed repatriation of foreign earnings and an expense of $2.2 million associated with the impact of correlative adjustments on uncertain tax positions. The change in the effective tax rate from 2017 to 2018 was also impacted by a shift in the geographic distribution of income which increased income subject to taxation in the U.S. relative to lower tax rate jurisdictions, the benefit of the U.S. foreign derived intangible income deduction and increases in discrete benefit from non-taxable foreign exchange gains and losses. The increase in the effective tax rate from 2016 to 2017 was primarily attributable to the $186.0 million of income tax expense recorded in the fourth quarter of 2017 as a provisional estimate of the impact of the Tax Reform Act. The change in the effective rate from 2016 to 2017 was also impacted by the U.S. non-deductible goodwill impairment charge recorded in 2016, a shift in the geographic distribution of income which increased income subject to taxation in the U.S. relative to lower tax rate jurisdictions, decreases in the discrete benefits from tax reserve releases, increases in discrete expense from non-taxable foreign exchange gains and losses and an increase in the discrete benefit from stock-based compensation. A reconciliation of the effective tax rate for the years 2018, 2017, and 2016 is as follows:
|  | 2018 |  |  | 2017 |  |  | 2016 |
U.S. statutory federal tax rate |  |  | 21.0 | % |  |  | 35.0 | % |  |  | 35.0 | %
U.S. transition tax |  |  | (10.5 | ) |  |  | 28.7 |  |  |  | — |
U.S. foreign derived intangible income |  |  | (1.8 | ) |  |  | — |  |  |  | — |
Impact of rate change on deferred tax |  |  | 0.3 |  |  |  | 6.9 |  |  |  | — |
Uncertain tax positions |  |  | 1.0 |  |  |  | 1.7 |  |  |  | (2.6 | )
Foreign taxes |  |  | (2.0 | ) |  |  | (16.3 | ) |  |  | 78.0 |
Foreign tax credits |  |  | (2.2 | ) |  |  | (2.2 | ) |  |  | 49.1 |
U.S. research and development credit |  |  | (2.2 | ) |  |  | (1.6 | ) |  |  | 15.8 |
Equity compensation |  |  | (1.2 | ) |  |  | (0.8 | ) |  |  | (2.7 | )
State income taxes, net of federal tax benefit |  |  | 0.1 |  |  |  | (0.4 | ) |  |  | 2.3 |
Domestic production activities deduction |  |  | — |  |  |  | (0.3 | ) |  |  | 2.3 |
Goodwill impairment |  |  | — |  |  |  | — |  |  |  | (162.1 | )
U.S. alternative minimum tax credit |  |  | — |  |  |  | — |  |  |  | 3.7 |
Inventory cost capitalization |  |  | — |  |  |  | — |  |  |  | 1.8 |
Other, net |  |  | 0.9 |  |  |  | 0.2 |  |  |  | 0.5 |
|  |  | 3.4 | % |  |  | 50.9 | % |  |  | 21.1 | %
Teradyne qualifies for a tax holiday in Singapore by fulfilling the requirements of an agreement with the Singapore Economic Development Board under which certain headcount and spending requirements must be met. The tax savings attributable to the Singapore tax holiday for the years ended December 31, 2018, 2017 and 2016 were $11.9 million or $0.06 per diluted share, $24.8 million or $0.12 per diluted share and $17.0 million or $0.08 per diluted share, respectively. The tax holiday is scheduled to expire on December 31, 2020. Significant components of Teradyne’s deferred tax assets (liabilities) as of December 31, 2018 and 2017 were as follows:
|  | 2018 |  |  | 2017 |
|  | (in thousands) |
Deferred tax assets: |  |  |  |  |  |  |  |
Tax credits |  | $ | 69,091 |  |  | $ | 76,083 |
Accruals |  |  | 23,449 |  |  |  | 27,508 |
Pension liabilities |  |  | 20,826 |  |  |  | 22,602 |
Inventory valuations |  |  | 18,514 |  |  |  | 17,793 |
Deferred revenue |  |  | 9,130 |  |  |  | 9,016 |
Equity compensation |  |  | 7,190 |  |  |  | 6,861 |
Vacation accrual |  |  | 4,772 |  |  |  | 4,747 |
Net operating loss carryforwards |  |  | 3,658 |  |  |  | 5,440 |
Marketable securities |  |  | 962 |  |  |  | — |
Other |  |  | 685 |  |  |  | 713 |
Gross deferred tax assets |  |  | 158,277 |  |  |  | 170,763 |
Less: valuation allowance |  |  | (69,852 | ) |  |  | (63,919 | )
Total deferred tax assets |  | $ | 88,425 |  |  | $ | 106,844 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Intangible assets |  | $ | (24,211 | ) |  | $ | (16,120 | )
Depreciation |  |  | (14,028 | ) |  |  | (12,293 | )
Marketable securities |  |  | — |  |  |  | (1,125 | )
Total deferred tax liabilities |  | $ | (38,239 | ) |  | $ | (29,538 | )
Net deferred assets |  | $ | 50,186 |  |  | $ | 77,306 |
As of December 31, 2018 and 2017, Teradyne evaluated the likelihood that it would realize the deferred income taxes to offset future taxable income and concluded that it is more likely than not that a substantial majority of its deferred tax assets will be realized through consideration of both the positive and negative evidence. At December 31, 2018 and 2017, Teradyne maintained a valuation allowance for certain deferred tax assets of $69.9 million and $63.9 million, respectively, primarily related to state net operating losses and state tax credit carryforwards, due to the uncertainty regarding their realization. Adjustments could be required in the future if Teradyne estimates that the amount of deferred tax assets to be realized is more or less than the net amount recorded. At December 31, 2018, Teradyne had operating loss carryforwards that expire in the following years:
|  | State Operating Loss Carryforwards |  |  | Foreign Operating Loss Carryforwards |
| (in thousands) |
2019 |  | $ | 258 |  |  | $ | — |
2020 |  |  | 269 |  |  |  | — |
2021 |  |  | 2,977 |  |  |  | — |
2022 |  |  | 5,749 |  |  |  | — |
2023 |  |  | 6,241 |  |  |  | — |
2024-2028 |  |  | 4,672 |  |  |  | — |
2029-2033 |  |  | 22,724 |  |  |  | 44 |
Beyond 2033 |  |  | 5,305 |  |  |  | 72 |
Non-expiring |  |  | — |  |  |  | 4,389 |
Total |  | $ | 48,195 |  |  | $ | 4,505 |
Teradyne has approximately $98.4 million of tax credit carryforwards including federal business tax credits of approximately $ 0.9 million which expire in 2028, and state tax credits of $97.5 million, of which $55.6 million do not expire and the remainder expires in the years 2019 through 2038. Teradyne’s gross unrecognized tax benefits for the years ended December 31, 2018, 2017, and 2016 were as follows:
|  | 2018 |  |  | 2017 |  |  | 2016 |
|  | (in thousands) |
Beginning balance, as of January 1 |  | $ | 36,263 |  |  | $ | 38,958 |  |  | $ | 36,792 |
Additions: |  |  |  |  |  |  |  |  |  |  |  |
Tax positions for current year |  |  | 4,716 |  |  |  | 8,208 |  |  |  | 9,766 |
Tax positions for prior years |  |  | 2,626 |  |  |  | 199 |  |  |  | 187 |
Reductions: |  |  |  |  |  |  |  |  |  |  |  |
Tax positions for prior years |  |  | (153 | ) |  |  | (10,573 | ) |  |  | (1,960 | )
Expiration of statutes |  |  | (57 | ) |  |  | (325 | ) |  |  | (3,532 | )
Settlements with tax authorities |  |  | — |  |  |  | (204 | ) |  |  | (2,295 | )
Ending balance as of December 31 |  | $ | 43,395 |  |  | $ | 36,263 |  |  | $ | 38,958 |
Current year and prior year additions include assessment of potential transfer pricing issues worldwide, federal and state tax credits and incentives, capitalization rules, domestic production activities deductions and correlative effects of the transition tax charge. Of the $ 43.4 million of unrecognized tax benefits as of December 31, 2018, $30.7 million would impact the consolidated income tax rate if ultimately recognized. The remaining $12.6 million would impact deferred taxes if recognized. On February 4, 2019, the IRS issued a closing audit letter related to the U.S. Federal income tax return for the year ended December 31, 2015 indicating that there was no change to the reported tax. As a result of the completion of the 2015 audit, Teradyne anticipates recording a $ 33.8 million reduction in the balance of unrecognized tax benefits in the first quarter of 2019 primarily composed of federal and state reserves related to transfer pricing and research credits. Of the $ 33.8 million reduction in the balance of unrecognized tax benefits, $ 5.9 million will be offset by valuation allowance. The remaining $ 27.9 million, net of a $ 2.0 million reduction for the federal benefit of state reserves, will be recognized as an income tax benefit. Teradyne estimates that it is reasonably possible that the balance of unrecognized tax benefits as of December 31, 2018 may decrease an additional $ 0.2 million in the next twelve months, as a result of the lapse of statutes of limitation. Teradyne records all interest and penalties related to income taxes as a component of income tax expense. Accrued interest and penalties related to income tax items at December 31, 2018 and 2017 amounted to $0.3 million and $0.3 million, respectively. For the years ended December 31, 2018, 2017, and 2016, expense of $0.1 million, benefit of $0.1 million and benefit of $0.1 million, respectively, was recorded for interest and penalties related to income tax items. Teradyne is subject to U.S. federal income tax, as well as income tax in multiple state, local and foreign jurisdictions. As of December 31, 2018, all material state and local income tax matters have been concluded through 2013, all material federal income tax matters have been concluded through 2014 and all material foreign income tax matters have been concluded through 2012. However, in some jurisdictions, including the United States, operating losses and tax credits may be subject to adjustment until such time as they are utilized and the year of utilization is closed to adjustment. As of December 31, 2018, Teradyne is not permanently reinvested with respect to the unremitted earnings of non-U.S. subsidiaries to the extent that those earnings exceed local statutory and operational requirements. Remittance of those earnings is not expected to result in material income tax.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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