Note 4. Income Taxes

The company files a consolidated federal income tax return. The current and deferred federal and state income tax expense (benefit) for the years ended December 31 is as follows (in thousands):



	2017		2016		2015
Current income tax expense	$	269,387	$	153,176	$	6,391
Deferred income tax expense (benefit)		(139,948)		50,951		(103,338)
Total income tax expense (benefit)	$	129,439	$	204,127	$	(96,947)

A reconciliation of the statutory rates to the actual effective tax rates for the years ended December 31 are as follows:


	2017			2016			2015
Statutory federal tax rate		35.0	%		35.0	%		35.0	%
Impact from Tax Reform		(19.3)			-			-
State income taxes, net of federal benefit		1.4			2.6			6.3
Domestic manufacturing deduction		(2.6)			(2.5)			-
Noncontrolling interests		0.3			1.4			(2.1)
Tax benefit of equity compensation		(1.1)			(1.0)			0.4
Other permanent differences		0.1			0.7			0.4
Effective tax rate		13.8	%		36.2	%		40.0	%

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (the “TCJA Act”) which, among other provisions, reduces the corporate income tax rate from 35% to 21%, effective January 1, 2018. The TCJA Act also includes a one-time transition tax related to cumulative foreign earnings, as the United States transitions from a worldwide tax system to a territorial tax system. During the fourth quarter of 2017, the company recorded a $180.6 million net tax benefit to reflect the impacts of the TCJA Act, including a $182.5 million tax benefit to revalue its net deferred tax assets and liabilities as of December 31, 2017, using the newly enacted rate, partially offset by tax expense of $1.9 million related to the transition tax on cumulative foreign earnings. While the company believes the $180.6 million tax benefit is a reasonable estimate of the impact of the TCJA Act, additional guidance and clarifications of the TCJA Act are expected to be provided in the future. Although the company does not anticipate any material adjustments, future tax expense or benefit related to the TCJA Act may need to be recorded as additional guidance and clarifications of the TCJA Act are provided. Once the company finalizes certain tax positions when it files its 2017 US tax return, it will conclude whether any further adjustments are necessary and record the amounts as a component of tax expense (benefit) in the reporting period in which such adjustments are determined, which will be no later than the fourth quarter 2018.

Note 4. Income Taxes (Continued)

Significant components of the company’s deferred tax assets and liabilities at December 31 are as follows (in thousands):



	2017		2016
Deferred tax assets
Accrued expenses and allowances	$	16,322	$	24,986
Inventories		4,109		11,805
Net operating loss carryforwards		33,693		48,920
Intangible assets		-		14,779
Other		8,074		8,491
		62,198		108,981
Less: valuation allowance		(20,714)		(33,427)
Total net deferred tax assets		41,484		75,554

Deferred tax liabilities
Property, plant and equipment		(344,511)		(519,977)
Intangible assets		(1,292)		-
Other		(1,630)		(3,952)
Total deferred tax liabilities		(347,433)		(523,929)
Net deferred tax liability	$	(305,949)	$	(448,375)

Certain wholly-owned and controlled subsidiaries of the company file separate federal and state income tax returns. These subsidiaries have generated federal net operating loss carryforwards of $93.2 million which expire in 2032 to 2037, and state net operating loss carryforwards which principally expire in the years 2025 to 2037. Management has considered the scheduled reversal of the deferred tax liabilities, historical taxable losses, projected taxable income and tax planning strategies in determining that it is more likely than not that some of the deferred tax assets relating to the tax loss carryforwards of the subsidiaries will not be realized. Based on these evaluations, valuation allowances of $20.7 million and $33.4 million have been recorded as of December 31, 2017, and 2016, respectively. The $12.7 million decrease in valuation allowance in the year ended December 31, 2017, primarily relates to the change in future value due to the TCJA Act and the release of a valuation allowance in the amount of $4.3 million for certain state net operating loss carryforwards.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	2017		2016		2015
Balance at January 1	$	19,107	$	15,991	$	17,338
Increases related to current year tax positions		300		300		-
Increases related to prior year tax positions		271		5,452		81
Decreases related to prior year tax positions		(863)		(535)		(719)
Settlements with taxing authorities		(2,066)		(2,101)		(70)
Lapses in statute of limitations		-		-		(639)
Balance at December 31	$	16,749	$	19,107	$	15,991

Included in the balance of unrecognized tax benefits at December 31, 2017, are potential benefits of $12.5 million that, if recognized, would affect the effective tax rate. The company recognizes interest and penalties related to its tax contingencies on a net-of-tax basis in income tax expense. During the year ended December 31, 2017, the company recognized expense from the increase of interest expense of $85,000, net of tax. In addition to the unrecognized tax benefits in the table above, the company had $4.8 million accrued for the payment of interest and penalties at December 31, 2017.

Note 4. Income Taxes (Continued)

The company files income tax returns in the United States federal jurisdiction as well as income tax returns in various state jurisdictions. The company is subject to examination and proposed adjustments by the IRS for the calendar year 2010 and thereafter. At this time the company does not believe there will be any significant examination adjustments that would result in a material change to the company’s financial position, results of operations or cash flows. It is reasonably possible that the amount of unrecognized tax benefits could change in the next twelve months as a result of these federal income tax audits, and other state income tax audits. Based on the current audits in process, the payment of taxes as a result of audit settlements could be in an amount from zero to $3.3 million by the end of 2018. With the exception of the 2010 and 2011 federal returns, the company is no longer subject to federal, state and local income tax examinations by tax authorities for years ended before 2012.