17. INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted rates expected to be applicable to taxable income in the years those temporary differences are recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income during the period that includes the enactment date. The Tax Cuts and Jobs Act was enacted on December 22, 2017 and was effective January 1, 2018. Due to the significance of the legislation, the SEC issued Staff Accounting Bulletin 118 (SAB 118), which provides for a measurement period to complete the accounting for certain elements of the tax reform. We have completed the analysis of the legislation and its impact to the financial statements. The company has determined that the deductibility of certain officer compensation is now limited under the new legislation. The tax impact of $0.7 million for the amount that is not expected to be realized has been recorded to tax expense. This adjustment had an immaterial impact to the effective tax rate.

Green Plains Partners is a limited partnership, which is treated as a flow-through entity for federal income tax purposes and is not subject to federal income taxes. As a result, the consolidated financial statements do not reflect such income taxes on pre-tax income or loss attributable to the noncontrolling interest in the partnership.

Income tax expense (benefit) consists of the following (in thousands):



	Year Ended December 31,
	2018		2017		2016
Current	$	7,758	$	(43,705)	$	2,950
Deferred		(24,484)		(81,077)		4,910
Total	$	(16,726)	$	(124,782)	$	7,860

The reduced benefit in 2018 compared to 2017 is primarily due to the company’s recognition of tax benefits related to enactment of the Tax Cuts and Jobs Act and for the completion of a multi-year study for Research and Development credits, or R&D Credits in 2017.

During the years ended December 31, 2018 and 2017, the company recognized a net income tax benefit of $19.6 million and $48.1 million, respectively, for federal and state R&D Credits. In addition, $2.3 million and $9.2 million, net, in refundable credits not dependent upon taxable income was recorded as a reduction of cost of goods sold during the years ended December 31, 2018 and 2017, respectively. R&D Credits recorded during 2017 related to tax years 2013 to 2016 as well as an estimated year-to-date tax benefit for federal and state R&D Credits for the 2017 tax year.

Differences between income tax expense at the statutory federal income tax rate and as presented on the consolidated statements of income are summarized as follows (in thousands):



		Year Ended December 31,
	2018		2017		2016
Tax expense at federal statutory rate	$	4,202	$	(15,103)	$	13,423
State income tax expense, net of federal benefit		981		(915)		323
Nondeductible compensation		921		222		185
Noncontrolling interests		(4,370)		(7,199)		(6,940)
Unrecognized tax benefits		15,148		25,720		-
R&D credits		(34,979)		(74,033)		-
Disposition of subsidiary		(1,022)		-		-
Tax Cuts and Jobs Act impact		278		(54,485)		-
Stock compensation		993		-		-
Audit adjustments		559		-		-
Amended return adjustments		374		-		-
Other		189		1,011		869
Income tax expense (benefit)	$	(16,726)	$	(124,782)	$	7,860

Significant components of deferred tax assets and liabilities are as follows (in thousands):



	December 31,
	2018		2017
Deferred tax assets:
Net operating loss carryforwards - Federal	$	-	$	12,767
Net operating loss carryforwards - State		4,004		5,291
Tax credit carryforwards - Federal		47,956		30,783
Tax credit carryforwards - State		9,369		5,342
Derivative financial instruments		-		2,592
Deferred revenue		2,236		919
Interest expense carryforward		2,048		-
Investment in partnerships		50,009		55,956
Inventory valuation		3,603		1,944
Stock-based compensation		1,458		2,468
Accrued expenses		5,439		5,541
Capital leases		2,516		2,426
Other		43		47
Total deferred tax assets		128,681		126,076

Deferred tax liabilities:
Convertible debt		(7,508)		(8,350)
Fixed assets		(118,330)		(149,746)
Derivative financial instruments		(1,573)		-
Organizational and start-up costs		(3,980)		(20,947)
Total deferred tax liabilities		(131,391)		(179,043)
Valuation allowance		(7,413)		(3,834)
Deferred income taxes	$	(10,123)	$	(56,801)

At December 31, 2018, the company has federal R&D credits of $48.0 million which will begin to expire in 2033. The company also has $9.4 million of state credits which will expire beginning in 2021.

The company has state net operating losses of $4.0 million which will begin to expire in 2022.

The company maintains a valuation allowance for its net deferred tax assets due to uncertainty that it will realize these assets in the future. The deferred tax valuation allowance of $7.4 million as of December 31, 2018, relates to state tax credits that are not expected to be realized prior to expiration starting in 2021. The deferred tax valuation allowance as of December 31, 2017 was $3.8 million. The increase in the deferred tax valuation allowance was primarily due to state R&D credits generated that are not expected to be realized prior to expiration. Management considers whether it is more likely than not that some or all of the deferred tax assets will be realized, which is dependent on the generation of future taxable income and other tax attributes during the periods those temporary differences become deductible. Scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies are considered to make this assessment.

The company’s federal and state returns for the tax years ended December 31, 2014, and later are still subject to audit. A reconciliation of unrecognized tax benefits is as follows (in thousands):



Unrecognized Tax Benefits
Balance at January 1, 2018	$	25,976
Additions for prior year tax positions		5,980
Additions for current year tax positions		20,922
Settlements of prior year tax positions		(1,149)
Reductions for prior year tax positions		(171)
Balance at December 31, 2018	$	51,558

Recognition of these tax benefits would favorably impact the company’s effective tax rate. Unrecognized tax benefits of $51.6 million include $40.8 million recorded as a reduction of the deferred asset associated with the federal tax credit carryforwards. Interest and penalties associated with uncertain tax positions are accrued as part of income taxes payable.