Income Taxes

The source of earnings before income taxes and equity earnings consisted of the following:



(Amounts in millions)	2018		2017		2016
United States	$	735.4	$	645.5	$	644.0
Foreign	174.5		176.4		157.4
Total	$	909.9	$	821.9	$	801.4

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



(Amounts in millions)	2018			2017		2016
Current:
Federal	$	117.9		$	166.9	$	175.9
Foreign	52.4			41.1		39.9
State	30.4			30.6		27.2
Total current	200.7			238.6		243.0
Deferred:
Federal	18.7			8.7		6.3
Foreign	(8.4		)	2.9		(6.7		)
State	3.4			0.7		1.7
Total deferred	13.7			12.3		1.3
Total income tax provision	$	214.4		$	250.9	$	244.3

The following is a reconciliation of the statutory federal income tax rate to Snap-on’s effective tax rate:



	2018	2017	2016
Statutory federal income tax rate	21.0%	35.0%	35.0%
Increase (decrease) in tax rate resulting from:
State income taxes, net of federal benefit	2.9	2.4	2.4
Noncontrolling interests	(0.4)	(0.6)	(0.6)
Repatriation of foreign earnings	(0.1)	(1.2)	(0.1)
Change in valuation allowance for deferred tax assets	0.3	0.1	(1.0)
Adjustments to tax accruals and reserves	(0.2)	(0.3)	0.3
Foreign rate differences	0.4	(2.4)	(2.1)
Domestic production activities deduction	—	(2.1)	(1.9)
Excess tax benefits related to equity compensation	(0.8)	(1.4)	(1.8)
U.S. tax reform, net impact	0.4	0.9	—
Other	0.1	0.1	0.3
Effective tax rate	23.6%	30.5%	30.5%

Snap-on’s effective income tax rate on earnings attributable to Snap-on Incorporated was 24.0% in 2018, 31.1% in 2017, and 31.0% in 2016. The effective tax rate for 2018 reflects the reduction of the U.S. federal corporate income tax rate from 35% to 21%. It also includes an additional non-recurring net tax cost attributable to the prior year’s U.S. tax reform changes. The effective tax rate for 2017 included the one-time net tax costs associated with the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law in the fourth quarter of 2017, as well as tax benefits associated with certain legal charges. The effective tax rate for 2016 included tax benefits from the reversal of deferred tax asset valuation allowances that are now expected to be realized in future years, as well as tax benefits associated with the January 3, 2016 adoption of ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting; these tax benefits were partially offset by tax contingency reserves established for certain non-U.S. tax audits.

On December 22, 2017, the U.S. government passed the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (i) reducing the future U.S. federal corporate tax rate from 35 percent to 21 percent; (ii) requiring companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries; and (iii) bonus depreciation that will allow for full expensing of qualified property.

The Tax Act also established new tax laws that affected 2018, including, but not limited to: (i) the reduction of the U.S. federal corporate tax rate discussed above; (ii) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (iii) a new provision designed to tax global intangible low-taxed income (“GILTI”); (iv) the repeal of the domestic production activity deductions; (v) limitations on the deductibility of certain executive compensation; (vi) limitations on the use of foreign tax credits to reduce the U.S. income tax liability; and (vii) a new provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income (“FDII”).

The Securities and Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on accounting for the tax effects of the Tax Act, for the company’s year ended December 30, 2017. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the related accounting under ASC 740, Accounting for Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under Accounting Standards Codification (“ASC”) 740 is complete. To the extent that a company’s accounting for a certain income tax effect of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

The company’s accounting for certain elements of the Tax Act was incomplete as of December 30, 2017. However, the company was able to make reasonable estimates of the effects and, therefore, recorded provisional estimates for these items. In connection with its initial analysis of the impact of the Tax Act, the company recorded a provisional discrete net tax expense of $7.0 million in the fiscal year ended December 30, 2017. This provisional estimate consists of a net expense of $13.7 million for the one-time transition tax and a net benefit of $6.7 million related to revaluation of deferred tax assets and liabilities, caused by the new lower corporate tax rate. To determine the transition tax, the company must determine the amount of post-1986 accumulated earnings and profits of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. While the company was able to make a reasonable estimate of the transition tax for 2017, it continued to gather additional information to more precisely compute the final amount reported on its 2017 U.S. federal tax return which was filed in October 2018. The actual transition tax was $8.3 million greater than the company’s initial estimate and was included in income tax expense for 2018. Likewise, while the company was able to make a reasonable estimate of the impact of the reduction to the corporate tax rate, it was affected by other analyses related to the Tax Act, including, but not limited to, the state tax effect of adjustments made to federal temporary differences. During 2018, the company recorded additional net tax benefits of $4.4 million attributable to pension contributions made in 2018 that were deductible for 2017 at the higher 35% federal tax rate and other changes to the 2017 tax provision related to the Tax Act and subsequently-issued tax guidance. Due to the complexity of the new GILTI tax rules, the company continued to evaluate this provision of the Tax Act and the application of ASC 740 throughout 2018. Under GAAP, the company is allowed to make an accounting policy choice to either: (i) treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”); or (ii) factor in such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The company selected to apply the “period cost method” to account for the new GILTI tax, and treated it as a current-period expense for 2018. The company will continue to analyze the full effects of the Tax Act on its financial statements in 2019 as additional guidance is issued and interpretations evolve.

Temporary differences that give rise to the net deferred income tax asset as of 2018, 2017 and 2016 year end are as follows:



(Amounts in millions)	2018			2017			2016
Long-term deferred income tax assets (liabilities):
Inventories	$	33.6		$	28.8		$	33.3
Accruals not currently deductible	72.9			61.7			77.7
Tax credit carryforward	1.8			2.1			15.1
Employee benefits	56.5			56.8			108.1
Net operating losses	40.9			44.0			42.8
Depreciation and amortization	(167.5		)	(161.3		)	(209.8		)
Valuation allowance	(25.1		)	(25.2		)	(21.7		)
Equity-based compensation	16.6			17.1			24.3
Undistributed non-U.S. earnings	(6.0		)	—			—
Cash flow hedge	—			(0.3		)	(5.5		)
Other	(0.4		)	(0.1		)	(4.6		)
Net deferred income tax asset	$	23.3		$	23.6		$	59.7

As of 2018 year end, Snap-on had tax net operating loss carryforwards totaling $224.8 million as follows:



(Amounts in millions)	State		Federal		Foreign		Total
Year of expiration:
2019-2023	$	0.2	$	—	$	52.5	$	52.7
2024-2028	0.1		—		38.9		39.0
2029-2033	90.6		—		6.8		97.4
2034-2038	—		—		—		—
Indefinite	—		—		35.7		35.7
Total net operating loss carryforwards	$	90.9	$	—	$	133.9	$	224.8

A valuation allowance totaling $25.1 million, $25.2 million and $21.7 million as of 2018, 2017 and 2016 year end, respectively, has been established for deferred income tax assets primarily related to certain subsidiary loss carryforwards that may not be realized. Realization of the net deferred income tax assets is dependent on generating sufficient taxable income prior to their expiration. Although realization is not assured, management believes it is more-likely-than-not that the net deferred income tax assets will be realized. The amount of the net deferred income tax assets considered realizable, however, could change in the near term if estimates of future taxable income during the carryforward period fluctuate.

The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for 2018, 2017 and 2016:



(Amounts in millions)	2018			2017			2016
Unrecognized tax benefits at beginning of year	$	7.7		$	9.4		$	7.2
Gross increases – tax positions in prior periods	1.3			1.4			2.5
Gross decreases – tax positions in prior periods	(0.1		)	—			(0.3		)
Gross increases – tax positions in the current period	2.8			1.0			0.5
Settlements with taxing authorities	—			(3.6		)	—
Lapsing of statutes of limitations	(0.6		)	(0.5		)	(0.5		)
Unrecognized tax benefits at end of year	$	11.1		$	7.7		$	9.4

The unrecognized tax benefits of $11.1 million, $7.7 million and $9.4 million as of 2018, 2017 and 2016 year end, respectively, would impact the effective income tax rate if recognized. As of December 29, 2018, unrecognized tax benefits of $1.7 million and $9.4 million were included in “Deferred income tax assets” and “Other long-term liabilities,” respectively, on the accompanying Consolidated Balance Sheets. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. As of 2018, 2017 and 2016 year end, the company had provided for $0.8 million, $0.6 million and $0.9 million, respectively, of accrued interest and penalties related to unrecognized tax benefits. During 2018, the company increased the reserve attributable to interest and penalties associated with unrecognized tax benefits by a net $0.2 million. As of December 29, 2018, $0.8 million of accrued interest and penalties were included in “Other long-term liabilities” on the accompanying Consolidated Balance Sheets.

Snap-on and its subsidiaries file income tax returns in the United States and in various state, local and foreign jurisdictions. It is reasonably possible that certain unrecognized tax benefits may either be settled with taxing authorities or the statutes of limitations for such items may lapse within the next 12 months, causing Snap-on’s gross unrecognized tax benefits to decrease by a range of zero to $2.4 million. Over the next 12 months, Snap-on anticipates taking certain tax positions on various tax returns for which the related tax benefit does not meet the recognition threshold. Accordingly, Snap-on’s gross unrecognized tax benefits may increase by a range of zero to $1.0 million over the next 12 months for uncertain tax positions expected to be taken in future tax filings.

With few exceptions, Snap-on is no longer subject to U.S. federal and state/local income tax examinations by tax authorities for years prior to 2013, and Snap-on is no longer subject to non-U.S. income tax examinations by tax authorities for years prior to 2012.

In general, it is Snap-on’s practice and intention to reinvest certain earnings of its non-U.S. subsidiaries in those operations. As of 2018 year end, the company has not made a provision for incremental U.S. income taxes or additional foreign withholding taxes on approximately $205.6 million of such undistributed earnings that is deemed indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable. As a result of the Tax Act, which subjected the majority of the company’s undistributed foreign earnings to taxation for the 2017 tax year, the company can now repatriate non-U.S. cash in a tax efficient manner. Accordingly, the company has reversed its prior assertion concerning the indefinite reinvestment of the majority of its undistributed foreign earnings and has recorded a deferred tax liability for the incremental tax costs associated with the future repatriation of such earnings.