Income Taxes

The Company’s income before income taxes consisted of the following:



	Years ended
	September 29, 2018			September 30, 2017		September 24, 2016
Domestic	$	(581.9	)	$	1,105.8	$	310.7
Foreign	163.3			124.7		104.6
	$	(418.6	)	$	1,230.5	$	415.3

The (benefit) provision for income taxes contained the following components:



	Years ended
	September 29, 2018			September 30, 2017			September 24, 2016
Federal:
Current	$	137.1		$	701.1		$	209.0
Deferred	(461.9		)	(276.9		)	(122.7		)
	(324.8		)	424.2			86.3
State:
Current	11.0			53.1			16.6
Deferred	(11.3		)	(15.9		)	(22.7		)
	(0.3		)	37.2			(6.1		)
Foreign:
Current	21.9			13.9			14.7
Deferred	(4.1		)	(0.3		)	(10.4		)
	17.8			13.6			4.3
	$	(307.3	)	$	475.0		$	84.5

The income tax (benefit) provision differed from the tax (benefit) provision computed at the U.S. federal statutory rate due to the following:



	Years ended
	September 29, 2018		September 30, 2017		September 24, 2016
Income tax (benefit) provision at federal statutory rate	(24.5	)%	35.0	%	35.0	%
Increase (decrease) in tax resulting from:
Domestic production activities deduction	(3.1	)	(1.7	)	(5.0	)
State income taxes, net of federal benefit	0.7		2.3		2.0
Non-deductible goodwill	39.4		9.2		—
Tax credits	(1.9	)	(0.8	)	(3.2	)
Tax reform	(82.7	)	—		—
Unrecognized tax benefits	1.8		(1.4	)	2.4
Compensation	0.3		(0.5	)	0.1
Foreign rate differential	(5.2	)	(2.6	)	(6.1	)
Change in deferred tax rate	1.2		0.2		(1.8	)
Change in valuation allowance	(0.5	)	(1.5	)	(3.4	)
Other	1.1		0.4		0.3
	(73.4	)%	38.6	%	20.3	%

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the "Act"), which significantly revised the U.S. system of corporate taxation by, among other things, lowering the U.S. corporate income tax rate from 35% to 21%, implementing a new international tax system, broadening the tax base and imposing a tax on deemed repatriated earnings of foreign subsidiaries. The decrease in the U.S. federal corporate tax rate from 35% to 21% resulted in a blended statutory rate of 24.5% for the Company’s fiscal year 2018. The Company’s effective tax rate in fiscal 2018, applied to an overall pre-tax loss, resulting in a benefit, is higher than the statutory rate primarily due to the favorable impact of the Act, which required the Company to remeasure its U.S. net deferred tax liabilities at a lower rate, partially offset by the unfavorable impact of the Medical Aesthetic goodwill impairment charge, substantially all of which is non-deductible.

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing SEC registrants to consider the impact of the Act as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, the Company recorded an estimated net income tax benefit of $346.2 million, representing the Company’s best estimate based on its interpretation of the Act. The $346.2 million income tax benefit is primarily related to the remeasurement of deferred tax assets and liabilities based on the tax rates at which they are expected to reverse in the future partially offset by additional tax expense pertaining to the deductibility of certain executive compensation pursuant to the Act. In the fourth quarter, the Company reduced the benefit related to the Act by $8.3 million primarily due to the impact of guidance issued during the quarter affecting the deductibility of certain executive compensation pursuant to the Act and the remeasurement of certain deferred tax assets and liabilities based on the tax rates at which they are expected to reverse in the future. The Company is still accumulating data regarding certain provisional tax estimates in order to finalize the underlying calculations and the U.S. Treasury is expected to issue further guidance on the application of certain provisions of the Act, which could further impact the effect of the Act on the Company’s financial statements.

The Company's effective tax rate in fiscal 2017 was higher than the statutory rate primarily due to non-deductible goodwill related to the sale of the Blood Screening business, partially offset by the release of valuation allowances for capital losses utilized against the capital gain generated on the sale of the Blood Screening business, earnings in jurisdictions subject to lower tax rates, the domestic production activities deduction benefit, the release of reserves for uncertain tax positions due to statutes of limitations expirations and audit settlements, stock compensation benefits, and federal and state tax credits.

The Company's effective tax rate in fiscal 2016 was lower than the statutory rate primarily due to earnings in jurisdictions subject to lower tax rates, the domestic production activities deduction benefit, and a change in the valuation allowance related to the sale of a marketable security with a higher tax than book basis.

The Company uses the asset and liability method to account for income taxes in accordance with ASC 740, Income Taxes. Under this method, deferred income taxes are recognized for the future tax consequences of differences between the tax and financial accounting bases of assets and liabilities at each reporting period. Deferred income taxes are based on enacted tax laws and statutory tax rates applicable to the period in which these differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.

The Company’s significant deferred tax assets and liabilities were as follows:



	September 29, 2018			September 30, 2017
Deferred tax assets
Net operating loss carryforwards	$	30.9		$	50.1
Capital losses	6.5			7.1
Non-deductible accruals	30.7			50.6
Non-deductible reserves	22.1			30.0
Stock-based compensation	24.0			39.3
Research and other credits	13.3			13.6
Nonqualified deferred compensation plan	12.3			16.4
Other temporary differences	11.5			16.5
	151.3			223.6
Less: valuation allowance	(25.5		)	(28.2		)
	$	125.8		$	195.4
Deferred tax liabilities
Depreciation and amortization	$	(606.6	)	$	(1,071.5	)
Debt discounts and deferrals	(4.5		)	(88.4		)
	$	(611.1	)	$	(1,159.9	)
	$	(485.3	)	$	(964.5	)

Under ASC 740, the Company can only recognize a deferred tax asset for the future benefit to the extent that it is “more likely than not” that these assets will be realized. After considering all available positive and negative evidence, the Company established a valuation allowance against specifically identified deferred tax assets because it is more-likely-than-not that these assets will not be realized. In making this determination, the Company considered numerous factors including historical profitability, estimated future taxable income and the character of such income. The valuation allowance decreased $2.7 million in fiscal 2018 from fiscal 2017 primarily due to tax reform and attribute expiration and utilization.

At September 29, 2018, the Company had $9.8 million, $46.9 million, and $35.9 million in gross federal, state, and foreign net operating losses, respectively, and $4.6 million, $9.4 million, and $1.2 million in federal, state, and foreign credit carryforwards, respectively. These losses and credits expire between 2019 and 2038, except for $34.5 million in losses and $2.0 million in credits that have unlimited carryforward periods. The federal, state, and foreign net operating losses exclude $4.5 million, $85.1 million, and $46.4 million, respectively, in net operating losses, that the Company expects will expire unutilized.

At September 29, 2018, the Company had $89.5 million in gross unrecognized tax benefits excluding interest, of which $79.0 million, if recognized, would reduce the Company's effective tax rate. At September 30, 2017, the Company had $90.3 million in gross unrecognized tax benefits excluding interest, of which $70.3 million, if recognized, would have reduced the Company's effective tax rate. The gross unrecognized tax benefits decreased by $0.8 million from fiscal 2017, of which $10.4 million was the reversal in fiscal 2018 of reserves for uncertain tax positions related to the convertible debt exchange that occurred in fiscal 2013 and $9.6 million was the net expense recorded to the income tax provision primarily from current year tax positions partially offset by audit settlements and the expiration of statutes of limitations. In the next twelve months it is reasonably possible that the Company will reduce its gross unrecognized tax benefits by up to $4.8 million due to expiring statutes of limitations.

The Company’s unrecognized income tax benefits activity for fiscal 2018 and 2017 was as follows:



	2018			2017
Balance at beginning of fiscal year	$	90.3		$	163.6
Tax positions related to current year:
Additions	9.0			21.8
Reductions	—			—
Tax positions related to prior years:
Additions related to change in estimate	6.6			1.1
Reductions	(15.4		)	(77.3		)
Payments	—			(1.6		)
Lapses in statutes of limitations	(1.4		)	(19.9		)
Acquired tax positions:
Additions related to reserves acquired from acquisitions	0.4			2.6
Balance as of the end of the fiscal year	$	89.5		$	90.3

The Company’s policy is to include accrued interest and penalties related to unrecognized tax benefits and income tax liabilities, when applicable, in income tax expense. As of September 29, 2018 and September 30, 2017, gross accrued interest was $9.0 million and $5.3 million, respectively. At September 29, 2018, no significant penalties have been accrued.

The Company and its subsidiaries are subject to various federal, state, and foreign income taxes. The Company is undergoing a tax examination in the United Kingdom (fiscal year 2016). The Company’s U.S. Federal income tax returns are generally no longer subject to examination prior to tax year 2015; however, one federal income tax examination is ongoing for Cynosure Inc. and subsidiaries (fiscal years 2015-2017). State income tax returns are generally no longer subject to examination prior to fiscal year 2014. The Company is undergoing tax examinations in Massachusetts (fiscal years 2014-2015) and New York (fiscal years 2013-2015).

During fiscal 2017, the Internal Revenue Service completed its audit for fiscal years 2013 and 2014. The Company made a cash payment of $1.7 million and recorded an income tax benefit of $10.9 million, including interest, related to the reversal of unrecognized tax benefits.

Transition Tax