Income Taxes

12 Months Ended

Dec. 31, 2018

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



Year Ended December 31,	2018		2017			2016
Current
Federal	$	82,493	$	154,776		$	158,411
State	13,709		11,645			10,500
Foreign	8,405		8,002			5,137
	104,607		174,423			174,048
Deferred
Federal	2,550		(26,350		)	788
State	1,166		1,378			(168		)
Foreign	15		3,199			—
	3,731		(21,773		)	620
Total income taxes	$	108,338	$	152,650		$	174,668

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,	2018		2017		2016
Domestic	$	579,622	$	523,044	$	481,760
Foreign	34,584		33,995		26,725
	$	614,206	$	557,039	$	508,485

The Company's foreign income is primarily earned in Canada and the Republic of Ireland.

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



Year Ended December 31,	2018		2017		2016
Statutory rate	21.0	%	35.0	%	35.0	%
State taxes, net of federal tax benefit	1.9		1.3		1.3
Foreign tax expense and tax rate differential	(0.1	)	(1.1	)	(0.8	)
Tax benefit from stock option exercises	(3.8	)	(3.9	)	—
Enactment of the Tax Cuts and Jobs Act:
Re-measurement of deferred taxes	—		(4.9	)	—
One-time transition tax on repatriation of foreign earnings and withholding tax	(0.1	)	2.6		—
Research and development tax credit	(0.8	)	(0.9	)	(0.8	)
Domestic Production Activities Deduction	—		(0.5	)	(0.6	)
Foreign Derived Intangible Income Deduction	(0.2	)	—		—
Other, net	(0.3	)	(0.2	)	0.2
	17.6	%	27.4	%	34.3	%

The Company's effective income tax rate in 2018 included the new 21.0 percent corporate tax rate under the Tax Cut and Jobs Act (the Tax Act). The Tax Act also provided for a Foreign Derived Intangible Income (FDII) deduction. For 2018, the Company estimated a federal FDII benefit of $1,206. The Tax Act also repealed the Section 199 Deduction for businesses that perform domestic manufacturing and certain other production activities which had an unfavorable impact on the Company's tax rate in 2018.

The Company's effective income tax rate in 2017 included the adoption of ASU 2016-09 and the estimated impact of the 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 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 favorable impact to the Company's effective income tax rate in 2018 from the Tax Act related to the finalization of the estimated one-time transition tax. This adjustment to the one-time transition tax represents what the Company believes is its final liability under the changes from the Tax Act.

The Tax Act also imposed a territorial rather than worldwide system which requires a one-time transition tax on the repatriation of previously deferred foreign earnings. The Company's one-time transition tax as of the filing of the Company's 2017 Federal Tax Return was $10,711. After the Company made a payment of $1,000 and its estimated tax payments relating to its 2017 tax liability, the IRS issued guidance informing taxpayers that they may not receive a refund or credit of any portion of properly applied 2017 tax payments unless and until the amount of payments exceeds the entire unpaid 2017 repatriation tax liability, including all amounts to be paid in installments in subsequent years. In accordance with this guidance, the Company was required to apply $8,908 from an overpayment of federal taxes against the transition tax payable during 2018. The remaining amount payable related to the transition tax of $803 is included in Long-term income taxes payable on the accompanying Consolidated Balance Sheet.

Deferred income taxes for 2018 and 2017 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, 2018 and 2017 are as follows:



	2018			2017
Deferred Tax Assets:
Stock-based compensation expense	$	24,125		$	24,725
Foreign and state net operating loss carryforward and FTC	74,358			71,236
Basis differences in investments	4,118			4,191
Federal benefit of state tax deduction for uncertain tax positions	1,882			1,918
Revenue and expense recognized in different periods for financial reporting and income tax purposes	1,657			2,631
Other assets	1,049			273
Total deferred income tax assets	107,189			104,974
Less: valuation allowance	(72,316		)	(68,469		)
Net deferred income tax assets	$	34,873		$	36,505

Deferred Tax Liabilities:
Capitalized software currently deductible for tax purposes, net of amortization	$	(71,067	)	$	(70,575	)
Difference in financial reporting and income tax depreciation methods	(6,545		)	(3,182		)
Difference between book and tax basis of other assets	(4,429		)	(3,549		)
Goodwill and other intangibles	(1,823		)	(1,001		)
Foreign Dividend Withholding Tax	(312		)	(3,199		)
Capitalized contract costs	(5,490		)	—
Other liabilities	(960		)	(704		)
Total deferred income tax liabilities	$	(90,626	)	$	(82,210	)
Net deferred income tax liabilities	$	(55,753	)	$	(45,705	)

The valuation allowances against deferred tax assets at December 31, 2018 and 2017 are related to state net operating losses from certain domestic subsidiaries, foreign net operating losses from certain foreign subsidiaries and The Tax Act restriction of use of the foreign tax credit placed by The Tax Act. 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, 2018 was $14,367, of which $13,774 would affect the effective tax rate if the Company were to recognize the tax benefit. The gross amount of uncertain tax liability of $3,131 is expected to be paid within one year is netted against the current payable account while the remaining amount of $12,525 is included in Other long-term liabilities on the accompanying Consolidated Balance Sheets. During the year ended December 31, 2018, the Company recognized $2,621 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 2015 and is no longer subject to state, local or foreign income tax examinations by authorities for years before 2014.

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



	2018			2017			2016
Balance as of January 1	$	14,480		$	17,287		$	14,517
Tax positions related to current year:
Gross additions	2,446			3,180			3,756
Tax positions related to prior years:
Gross additions	340			211			1,762
Settlements	(278		)	(352		)	(378		)
Lapses on statute of limitations	(2,621		)	(5,846		)	(2,370		)
Balance as of December 31	$	14,367		$	14,480		$	17,287

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 $1,289, $1,175 and $1,227 in liabilities for tax-related interest and penalties in 2018, 2017 and 2016, respectively.

The Company estimates it will recognize $3,131 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.