APAM is subject to U.S. federal, state and local income taxation on APAM’s allocable portion of Holdings’ income, as well as foreign income taxes payable by Holdings’ subsidiaries. Components of the provision for income taxes consist of the following:


	For the Years Ended December 31,
	2019		2018		2017
Current:
Federal	$	13,609	$	18,247	$	21,960
State and local	6,315		3,993		2,663
Foreign	529		495		469
Total	20,453		22,735		25,092
Deferred:
Federal	22,310		22,218		396,502
State and local	(14,954)		2,645		(1,086)
Total	7,356		24,863		395,416
Income tax expense	$	27,809	$	47,598	$	420,508

The provision for income taxes differs from the amount of income tax computed by applying the applicable U.S. statutory federal income tax rate to income before provision for income taxes as follows:


	Years Ended December 31,
	2019		2018		2017
U.S. federal statutory rate	21.0	%	21.0	%	35.0	%
State and local taxes, net of federal tax effect	2.8		2.1		0.9
Non-deductible share-based compensation	—		—		0.5
Rate benefit from the flow through entity	(6.7)		(6.7)		(6.2)
Tax Reform - change in federal corporate tax rate	—		—		43.9
Change in state tax rate	(6.8)		—		—
Unrecognized tax benefits	0.6		—		—
Other	(0.6)		(0.6)		(0.5)
Effective tax rate	10.3	%	15.8	%	73.6	%

The effective tax rate includes a rate benefit attributable to the fact that, for the years ended December 31, 2019, 2018 and 2017, approximately 31%, 33% and 38%, respectively, of Artisan Partners Holdings’ taxable earnings were attributable to other partners and not subject to corporate-level taxes. The effective tax rate was also reduced in the year ended December 31, 2019, due to the remeasurement of existing deferred tax assets resulting from an increase in Artisan's state deferred income tax rates. The effective tax rate was also lower than the statutory rate due to dividends paid on unvested restricted share-based awards, net of higher tax expense related to the vesting of restricted share-based awards.

The Tax Cuts and Jobs Act (“Tax Reform”) was enacted in December 2017. As a result of Tax Reform, existing deferred tax assets were remeasured to reflect the reduction in the enacted U.S. federal corporate tax rate. The tax rate used to measure deferred tax assets changed from 37.0% to 23.5% as of December 31, 2017, which resulted in a reduction to deferred tax assets of $352.0 million with a corresponding increase to the provision for income taxes for the year ended December 31, 2017.

In connection with the IPO, APAM entered into two tax receivable agreements (“TRAs”). The first TRA, generally provides for the payment by APAM to a private equity fund (the “Pre-H&F Corp Merger Shareholder”) or its assignees of 85% of the applicable cash savings, if any, of U.S. federal, state and local income taxes that APAM actually realizes (or is deemed to realize in certain circumstances) as a result of (i) the tax attributes of the preferred units APAM acquired in the merger of a wholly-owned subsidiary of the Pre-H&F Corp Merger Shareholder into APAM in March 2013, (ii) net operating losses available as a result of the merger and (iii) tax benefits related to imputed interest.

The second TRA generally provides for the payment by APAM to current or former limited partners of Holdings or their assignees of 85% of the applicable cash savings, if any, of U.S. federal, state and local income taxes that APAM actually realizes (or is deemed to realize in certain circumstances) as a result of (i) certain tax attributes of their partnership units sold to APAM or exchanged (for shares of Class A common stock, convertible preferred stock or other consideration) and that are created as a result of such sales or exchanges and payments under the TRAs and (ii) tax benefits related to imputed interest. Under both agreements, APAM generally will retain the benefit of the remaining 15% of the applicable tax savings.

For purposes of the TRAs, cash savings of income taxes are calculated by comparing APAM’s actual income tax liability to the amount it would have been required to pay had it not been able to utilize any of the tax benefits subject to the TRAs, unless certain assumptions apply. The TRAs will continue in effect until all such tax benefits have been utilized or expired, unless APAM exercises its right to terminate the agreements or payments under the agreements are accelerated in the event that APAM materially breaches any of its material obligations under the agreements.

The actual increase in tax basis, as well as the amount and timing of any payments under these agreements, will vary depending upon a number of factors, including the timing of sales or exchanges by the holders of limited partnership units, the price of the Class A common stock at the time of such sales or exchanges, whether such sales or exchanges are taxable, the amount and timing of the taxable income APAM generates in the future and the tax rate then applicable and the portion of APAM’s payments under the TRAs constituting imputed interest or depreciable basis or amortizable basis.

Payments under the TRAs, if any, will be made pro rata among all TRA counterparties entitled to payments on an annual basis to the extent APAM has sufficient taxable income to utilize the increased depreciation and amortization charges and imputed interest deductions. Artisan expects to make one or more payments under the TRAs, to the extent they are required, prior to or within 125 days after APAM’s U.S. federal income tax return is filed for each fiscal year. Interest on the TRA payments will accrue at a rate equal to one-year LIBOR plus 100 basis points from the due date (without extension) of such tax return until such payments are made.

Amounts payable under tax receivable agreements are estimates which may be impacted by factors, including but not limited to, expected tax rates, projected taxable income, and projected ownership levels and are subject to change. Changes in the estimates of amounts payable under tax receivable agreements are recorded as non-operating income (loss) in the Consolidated Statements of Operations.

The change in the Company’s deferred tax assets related to the tax benefits described above and the change in corresponding amounts payable under the TRAs for the years ended December 31, 2019 and 2018 is summarized as follows:


	Deferred Tax Asset - Amortizable Basis		Amounts Payable Under Tax Receivable Agreements
December 31, 2017	$	410,690	$	385,413
2018 Follow-On Offering	7,687		6,534
2018 Holdings Common Unit Exchanges	16,199		13,770
Amortization	(29,851)		—
Payments under TRAs⁽¹⁾	—		(36,111)
Change in estimate	(10)		(251)
December 31, 2018	$	404,715	$	369,355

2019 Holdings Common Unit Exchanges	13,424		11,410
Amortization	(31,872)		—
Payments under TRAs⁽¹⁾	—		(24,998)

Change in estimate	21,873		19,557
December 31, 2019	$	408,140	$	375,324
⁽¹⁾ Interest payments of $78 thousand and $115 thousand were paid in addition to these TRA payments for the years ended December 31, 2019 and 2018, respectively.


	As of December 31, 2019		As of December 31, 2018
Deferred tax assets:
Amortizable basis ⁽¹⁾	$	408,140	$	404,715
Other ⁽²⁾	27,757		24,413
Total deferred tax assets	435,897		429,128
Less: valuation allowance ⁽³⁾	—		—
Net deferred tax assets	$	435,897	$	429,128
⁽¹⁾ Represents the unamortized step-up of tax basis and other tax attributes from the merger and partnership unit sales and exchanges described above. These future tax benefits are subject to the TRA agreements.
⁽²⁾ Represents the net deferred tax assets associated with the merger described above and other miscellaneous deferred tax assets. These future tax benefits are not subject to the TRA agreements.
⁽³⁾ Artisan assessed whether the deferred tax assets would be realizable and determined based on its history of taxable income that the benefits would more likely than not be realized. Accordingly, no valuation allowance is required.

Accounting standards establish a minimum threshold for recognizing, and a process for measuring, the benefits of income tax return positions in financial statements. The change in the Company’s gross unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017 is summarized as follows:


	For the Years Ended December 31,
	2019		2018		2017
Balance at beginning of year	$	—	$	—	$	—
Additions for tax positions of prior years	1,667		—		—
Reductions for tax positions of prior years	—		—		—
Tax positions related to the current year	—		—		—
Settlements with taxing authorities	—		—		—
Expirations of statute of limitations	—		—		—
Balance at End of Year	$	1,667	$	—	$	—

If recognized, $1.6 million of the benefits would favorably impact the effective tax rate in future periods. The total amount of unrecognized tax benefits is currently not expected to significantly increase or decrease within the next twelve months.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. Accrued interest on uncertain tax positions was $0.3 million as of December 31, 2019, and is excluded from the unrecognized tax benefits total above. The gross unrecognized tax benefit is recorded within accounts payable, accrued expenses, and other in the Company's Consolidated Statements of Financial Condition.

In the normal course of business, Artisan is subject to examination by federal and certain state, local and foreign tax regulators. As of December 31, 2019, U.S. federal income tax returns for the years 2016 through 2018 are open and therefore subject to examination. State, local and foreign income tax returns filed are generally subject to examination from 2015 to 2018.