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Income Taxes | 12 Months Ended
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Dec. 31, 2019
Income Taxes | S. 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:
|  | 2019 |  |  | 2018 |  |  | 2017 |
|  | (in thousands) |
Income before income taxes |  |  |  |  |  |  |  |  |  |  |  |
U.S. |  | $ | 192,442 |  |  | $ | 189,691 |  |  | $ | 76,699 |
Non-U.S. |  |  | 333,330 |  |  |  | 278,110 |  |  |  | 447,713 |
|  | $ | 525,772 |  |  | $ | 467,801 |  |  | $ | 524,412 |
Provision (benefit) for income taxes |  |  |  |  |  |  |  |  |  |  |  |
Current: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Federal |  | $ | 19,297 |  |  | $ | (59,122 | ) |  | $ | 162,679 |
Non-U.S. |  |  | 52,810 |  |  |  | 45,083 |  |  |  | 64,313 |
State |  |  | (4,347 | ) |  |  | 1,721 |  |  |  | 2,623 |
|  |  | 67,760 |  |  |  | (12,318 | ) |  |  | 229,615 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Federal |  |  | (4,522 | ) |  |  | 29,252 |  |  |  | 43,687 |
Non-U.S. |  |  | (8,007 | ) |  |  | (1,243 | ) |  |  | (6,476 | )
State |  |  | 3,073 |  |  |  | 331 |  |  |  | (106 | )
|  |  | (9,456 | ) |  |  | 28,340 |  |  |  | 37,105 |
Total provision for income taxes |  | $ | 58,304 |  |  | $ | 16,022 |  |  | $ | 266,720 |
Income tax expense for 2019 , 2018 and 2017 totaled $58.3 million , $16.0 million and $266.7 million, respectively. The effective tax rate for 2019, 2018 and 2017 was 11.1%, 3.4% and 50.9%, 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 $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. 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 increase in the effective tax rate from 2018 to 2019 is primarily attributable to increases in expense associated with GILTI and the transition tax on the mandatory deemed repatriation of foreign earnings. These increases in expense were partially offset by increased benefit from the U.S. foreign derived intangible income deduction, foreign tax credits and a net reduction of reserves for uncertain tax positions. On July 27, 2015, in Altera Corp. (“Altera”) v. Commissioner, the U.S. Tax Court issued an opinion invalidating the regulations relating to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued by the Tax Court in December 2015. The IRS appealed the decision in June 2016. On July 24, 2018, the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”) issued a decision that was subsequently withdrawn and a reconstituted panel conferred on the appeal. On June 7, 2019, the Ninth Circuit upheld the cost-sharing regulations. On November 12, 2019 the Ninth Circuit denied Altera’s petition for rehearing of its case. As a result, during the fourth quarter of 2019, Teradyne recognized a tax expense of approximately $6.3 million related to the inclusion of stock-based compensation in its intercompany cost-sharing arrangement. 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 for 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. A reconciliation of the effective tax rate for the years 2019, 2018 and 2017 is as follows:
|  | 2019 |  |  | 2018 |  |  | 2017 |
U.S. statutory federal tax rate |  |  | 21.0 | % |  |  | 21.0 | % |  |  | 35.0 | %
U.S. global intangible low-taxed income |  |  | 6.2 |  |  |  | 0.3 |  |  |  | — |
U.S. transition tax |  |  | 1.9 |  |  |  | (10.5 | ) |  |  | 28.7 |
State income taxes, net of federal tax benefit |  |  | 0.5 |  |  |  | 0.1 |  |  |  | (0.4 | )
Foreign tax credits |  |  | (5.9 | ) |  |  | (2.2 | ) |  |  | (2.2 | )
Uncertain tax positions |  |  | (4.3 | ) |  |  | 1.0 |  |  |  | 1.7 |
Foreign taxes |  |  | (4.0 | ) |  |  | (2.0 | ) |  |  | (16.3 | )
U.S. foreign derived intangible income |  |  | (2.6 | ) |  |  | (1.8 | ) |  |  | — |
U.S. research and development credit |  |  | (1.8 | ) |  |  | (2.2 | ) |  |  | (1.6 | )
Equity compensation |  |  | (0.7 | ) |  |  | (1.2 | ) |  |  | (0.8 | )
Impact of rate change on deferred taxes |  |  | — |  |  |  | 0.3 |  |  |  | 6.9 |
Domestic production activities deduction |  |  | — |  |  |  | — |  |  |  | (0.3 | )
Other, net |  |  | 0.8 |  |  |  | 0.6 |  |  |  | 0.2 |
|  |  | 11.1 | % |  |  | 3.4 | % |  |  | 50.9 | %
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, 2019, 2018 and 2017 were $15.1 million or $ 0.08 per diluted share, $ 11.9 million or $0.06 per diluted share and $24.8 million or $0.12 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, 2019 and 2018 were as follows:
|  | 2019 |  |  | 2018 |
|  | (in thousands) |
Deferred tax assets |  |  |  |  |  |  |  |
Tax credits |  | $ | 79,480 |  |  | $ | 69,091 |
Accruals |  |  | 25,424 |  |  |  | 23,449 |
Pension liabilities |  |  | 24,459 |  |  |  | 20,826 |
Inventory valuations |  |  | 18,572 |  |  |  | 18,514 |
Deferred revenue |  |  | 7,622 |  |  |  | 9,130 |
Equity compensation |  |  | 7,042 |  |  |  | 7,190 |
Vacation accrual |  |  | 4,768 |  |  |  | 4,772 |
Investment impairment |  |  | 3,292 |  |  |  | — |
Net operating loss carryforwards |  |  | 2,705 |  |  |  | 3,658 |
Marketable s ecurities |  |  | — |  |  |  | 962 |
Other |  |  | 1,472 |  |  |  | 685 |
Gross deferred tax assets |  |  | 174,836 |  |  |  | 158,277 |
Less: valuation allowance |  |  | (77,177 | ) |  |  | (69,852 | )
Total deferred tax assets |  | $ | 97,659 |  |  | $ | 88,425 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Depreciation |  | $ | (18,238 | ) |  | $ | (14,028 | )
Intangible assets |  |  | (16,705 | ) |  |  | (24,211 | )
Marketable securities |  |  | (1,601 | ) |  |  | — |
Total deferred tax liabilities |  | $ | (36,544 | ) |  | $ | (38,239 | )
Net deferred assets |  | $ | 61,115 |  |  | $ | 50,186 |
As of December 31, 2019 and 2018, Teradyne evaluated the likelihood that it would realize 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, 2019 and 2018, Teradyne maintained a valuation allowance for certain deferred tax assets of $77.2 million and $69.9 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, 2019, Teradyne had operating loss carryforwards that expire in the following years:
|  | State Operating Loss Carryforwards |  |  | Federal Operating Loss Carryforwards |  |  | Foreign Operating Loss Carryforwards |
|  |  |  |  | ( in t housands ) |  |  |  |
2020 |  | $ | 269 |  |  | $ | — |  |  | $ | — |
2021 |  |  | 2,141 |  |  |  | — |  |  |  | — |
2022 |  |  | 4,934 |  |  |  | — |  |  |  | — |
2023 |  |  | 4,342 |  |  |  | — |  |  |  | — |
2024 |  |  | 1,498 |  |  |  | — |  |  |  | — |
2025-2029 |  |  | 7,673 |  |  |  | — |  |  |  | — |
2030-2034 |  |  | 4,329 |  |  |  | — |  |  |  | 15 |
Beyond 2034 |  |  | 2,185 |  |  |  | 554 |  |  |  | 74 |
Non-expiring |  |  | 1,357 |  |  |  | — |  |  |  | 4,207 |
Total |  | $ | 28,728 |  |  | $ | 554 |  |  | $ | 4,296 |
Teradyne has approximately $108.4 million of tax credit carryforwards including federal business tax credits of approximately $2.1 million which expire in 2028 and 2029 , and state tax credits of $106.3 million, of which $59.7 million do not expire and the remainder expires in the years 2020 through 2039. Teradyne’s gross unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017 were as follows:
|  | 2019 |  |  | 2018 |  |  | 2017 |
|  | (in thousands) |
Beginning balance, as of January 1 |  | $ | 43,395 |  |  | $ | 36,263 |  |  | $ | 38,958 |
Additions: |  |  |  |  |  |  |  |  |  |  |  |
Tax positions for current year |  |  | 1,322 |  |  |  | 4,716 |  |  |  | 8,208 |
Tax positions for prior years |  |  | 8,043 |  |  |  | 2,626 |  |  |  | 199 |
Reductions: |  |  |  |  |  |  |  |  |  |  |  |
Tax positions for prior years |  |  | (31,397 | ) |  |  | (153 | ) |  |  | (10,573 | )
Expiration of statutes |  |  | (183 | ) |  |  | (57 | ) |  |  | (325 | )
Settlements with tax authorities |  |  | — |  |  |  | — |  |  |  | (204 | )
Ending balance as of December 31 |  | $ | 21,180 |  |  | $ | 43,395 |  |  | $ | 36,263 |
Current year additions relate to federal and state research credits. Prior year additions primarily relate to stock-based compensation . Prior year reductions are primarily composed of federal and state reserves related to transfer pricing and research credits and resulted from the completion of the 2015 U.S. federal audit in the first quarter of 2019. Of the $21.2 million of unrecognized tax benefits as of December 31, 2019, $12.7 million would impact the consolidated income tax rate if ultimately recognized. The remaining $8.5 million would impact deferred taxes if recognized. Teradyne does not anticipate a material change in the balance of unrecognized tax benefits as of December 31, 2019 in the next twelve months . 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, 2019 and 2018 amounted to $1.4 million and $0.3 million, respectively. For the years ended December 31, 2019, 2018 and 2017, expense of $1.1 million, expense 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, 2019, all material state and local income tax matters have been concluded through 2013, all material federal income tax matters have been concluded through 2015 and all material foreign income tax matters have been concluded through 2011 . 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, 2019, 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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