Income Taxes

12 Months Ended

Dec. 31, 2017

The federal and state and foreign income tax provision is summarized as follows:



Year Ended December 31,	2017			2016			2015
Current
Federal	$	154,776		$	158,411		$	159,774
State	11,645			10,500			7,756
Foreign	8,002			5,137			5,224
	174,423			174,048			172,754
Deferred
Federal	(26,350		)	788			(5,343		)
State	1,378			(168		)	1,414
Foreign	3,199			—			—
	(21,773		)	620			(3,929		)
Total income taxes	$	152,650		$	174,668		$	168,825

Annual tax provisions include amounts considered sufficient to pay assessments that may result from examination of prior year tax returns; however, the amount ultimately paid upon resolution of issues raised may differ materially from the amount accrued. The examination and the resolution process may last longer than one year.

The components of Income before income taxes are summarized as follows:



Year Ended December 31,	2017		2016		2015
Domestic	$	523,044	$	481,760	$	472,384
Foreign	33,995		26,725		28,096
	$	557,039	$	508,485	$	500,480

The effective income tax rate differs from the federal income tax statutory rate due to the following:



Year Ended December 31,	2017		2016		2015
Statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal tax benefit	1.3		1.3		1.6
Foreign tax expense and tax rate differential	(1.1	)	(0.8	)	(1.2	)
Tax benefit from stock option exercises	(3.9	)	—		—
Enactment of the Tax Cuts and Jobs Act:
Re-measurement of deferred tax liability	(4.9	)	—		—
One-time transition tax on repatriation of foreign earnings and withholding tax	2.6		—		—
Research and development tax credit	(0.9	)	(0.8	)	(0.6	)
Domestic Production Activities Deduction	(0.5	)	(0.6	)	(0.6	)
Settlement of state tax petition	—		—		(0.8	)
Other, net	(0.2	)	0.2		0.3
	27.4	%	34.3	%	33.7	%

The decrease in the Company's effective income tax rate in 2017 was primarily due to the adoption of ASU 2016-09 and the estimated impact of the Tax Cuts and Jobs Act (Tax Act). As required by ASU 2016-09, the Company no longer records excess tax benefits from stock option exercises as an increase to additional paid in capital, but records such excess tax benefits as a reduction of income tax expense in the reporting period in which the exercises occur.

The Tax Act was enacted on December 22, 2017 and included numerous changes to the current tax law including a permanent reduction in the corporate tax rate from 35.0 percent to 21.0 percent, as well as the imposition of a territorial rather than worldwide system which requires a one-time transition tax on the repatriation of previously deferred foreign earnings. The Company's estimate of the one-time transition tax as of December 31, 2017 was $11,544, of which $915 is expected to be paid within one year and $10,629 is included in Long-term income taxes payable on the accompanying Consolidated Balance Sheet.

Under the Tax Act, the undistributed earnings of the Company’s foreign subsidiaries are deemed repatriated. As a result, the Company has determined that a portion of these earnings are no longer indefinitely reinvested and therefore accrued foreign withholding taxes. The Company's foreign withholding tax was $3,199 and is included in Deferred income taxes on the accompanying Consolidated Balance Sheet as of December 31, 2017.

The impact to the Company's effective tax rate in 2017 from the Tax Act was a combination of a $27,153 tax benefit from the re-measurement of the Company's estimated net deferred tax liability as of December 31, 2017 based upon the new 21.0 percent corporate tax rate offset by expense of $14,743 from the preliminary estimate of the one-time transition tax relating to the impact of the deemed repatriation and withholding tax of the Company's previously undistributed foreign earnings. The net impact to the Company's tax rate in 2017 from the Tax Act was a net tax benefit of $12,410, or $0.08 diluted earnings per share.

The increase in the Company's tax rate for 2016 was primarily due to lower foreign income in jurisdictions with lower effective rates and the one-time reduction in 2015 due to a favorable settlement of a state tax petition.

The SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations when a 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 Act and allows the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company's preliminary estimate of the one-time transition tax and the remeasurement of deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the Tax Act, changes to certain estimates and amounts related to the earnings and profits of certain subsidiaries and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Tax Act may require further adjustments and changes in estimates. The final determination of the one-time transition tax and the remeasurement of the Company's deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the 2017 Tax Act in accordance with SAB 118.

Deferred income taxes for 2017, 2016 and 2015 reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Significant components of our deferred tax assets and liabilities at December 31, 2017 and 2016 are as follows:



	2017			2016
Deferred Tax Assets:
Stock-based compensation expense	$	24,725		$	33,459
Foreign and state net operating loss carryforward	71,236			20,049
Basis differences in investments	4,191			6,165
Federal benefit of state tax deduction for uncertain tax positions	1,918			3,647
Revenue and expense recognized in different periods for financial reporting and income tax purposes	2,631			5,022
Other assets	273			813
Total deferred income tax assets	104,974			69,155
Less: valuation allowance	(68,469		)	(17,922		)
Net deferred income tax assets	$	36,505		$	51,233

Deferred Tax Liabilities:
Capitalized software currently deductible for tax purposes, net of amortization	$	(70,575	)	$	(107,897	)
Difference in financial reporting and income tax depreciation methods	(3,182		)	(5,190		)
Difference between book and tax basis of other assets	(3,549		)	(4,597		)
Goodwill and other intangibles	(1,001		)	—
Foreign Dividend Withholding Tax	(3,199		)	—
Other liabilities	(704		)	(1,115		)
Total deferred income tax liabilities	$	(82,210	)	$	(118,799	)
Net deferred income tax liabilities	$	(45,705	)	$	(67,566	)

The valuation allowances against deferred tax assets at December 31, 2017 and 2016 are related to state net operating losses from certain domestic subsidiaries as well as foreign net operating losses from certain foreign subsidiaries. Certain state and foreign tax statutes significantly limit the utilization of net operating losses for domestic and foreign subsidiaries. Furthermore, these net operating losses cannot be used to offset the net income of other subsidiaries.

The Company recognizes uncertain tax positions in accordance with the applicable accounting guidance and adjusts these liabilities when management’s judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. The Company’s total unrecognized tax benefit, not including interest and penalties, as of December 31, 2017 was $14,480, of which $13,737 would affect the effective tax rate if the Company were to recognize the tax benefit. The gross amount of uncertain tax liability of $3,275 which is expected to be paid within one year is netted against the current payable account while the remaining amount of $12,380 is included in Other long-term liabilities on the accompanying Consolidated Balance Sheets. During the year ended December 31, 2017, the Company recognized $5,846 of previously unrecognized tax benefits relating to the lapse of the statute of limitation.

The Company files a consolidated federal income tax return and separate income tax returns with various states. Certain subsidiaries of the Company file tax returns in foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examination for years before 2014 and is no longer subject to state, local or foreign income tax examinations by authorities for years before 2010.

A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:



	2017			2016			2015
Balance as of January 1	$	17,287		$	14,517		$	14,018
Tax positions related to current year:
Gross additions	3,180			3,756			1,954
Tax positions related to prior years:
Gross additions	211			1,762			297
Settlements	(352		)	(378		)	—
Lapses on statute of limitations	(5,846		)	(2,370		)	(1,752		)
Balance as of December 31	$	14,480		$	17,287		$	14,517

The above reconciliation of the gross unrecognized tax benefit will differ from the amount which would affect the effective tax rate because of the recognition of the federal and state tax benefits.

The Company classifies all interest and penalties as income tax expense. The Company has recorded $1,175, $1,227 and $1,391 in liabilities for tax-related interest and penalties in 2017, 2016 and 2015, respectively.

The Company estimates it will recognize $3,275 of unrecognized tax benefits within the next twelve months due to lapses on the statute of limitation.

The Company includes its direct and indirect subsidiaries in its U.S. consolidated federal income tax return. The Company’s tax sharing allocation agreement provides that any subsidiary having taxable income will pay a tax liability equivalent to what that subsidiary would have paid if it filed a separate income tax return. If the separately calculated federal income tax provision for any subsidiary results in a tax loss, the current benefit resulting from such loss, to the extent utilizable on a separate return basis, is accrued and paid to that subsidiary.