INCOME TAXES

The Company files a consolidated U.S. income tax return that includes its more than 80%-owned U.S. subsidiaries. The amounts provided for income taxes are as follows:



	Year Ended December 31,
	2014		2013			2012
Current:
U.S. Federal	$	8,809	$	20,808		$	24,246
State	2,416		3,521			6,185
	$	11,225	$	24,329		$	30,431
Deferred:
U.S. Federal	$	16,557	$	596		$	(5,779	)
State	5,469		(130		)	(1,557		)
	22,026		466			(7,336		)
Total	$	33,251	$	24,795		$	23,095

The tax effect of temporary differences which give rise to a significant portion of deferred tax assets and liabilities are as follows:



	December 31, 2014					December 31, 2013
	Deferred Tax Assets			Deferred Tax Liabilities		Deferred Tax Assets			Deferred Tax Liabilities
Excess of tax basis over book-basis non-consolidated entities	$	6,721		$	12,911	$	4,434		$	3,582
Employee benefit accruals	20,768			9,090		19,539			9,378
Book/tax differences on fixed and Intangible assets	—			52,972		—			48,086
Book/tax differences on inventory	—			20,062		—			19,213
Book/tax differences on long-term investments	—			32,756		—			30,898
Impact of accounting on convertible debt	5,360			36,393		9,202			44,823
Impact of timing of settlement payments	33,485			—		56,551			—
Various U.S. state tax loss carryforwards	8,339			—		10,010			—
Other	10,581			39,126		8,231			27,404
Valuation allowance	(4,933		)	—		(6,014		)	—
	$	80,321		$	203,310	$	101,953		$	183,384

Vector Tobacco had tax effected state and local net operating loss carryforwards of $8,339 and $10,010, respectively at December 31, 2014 and 2013, expiring through tax year 2027. The Company provides a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The valuation allowance of $4,933 and $6,014 at December 31, 2014 and 2013, respectively, consisted primarily of a reserve against Vector Tobacco’s state and local net operating loss carryforwards. The valuation allowance was increased in 2014 and reduced in 2013, respectively, as a result of changes in estimates in Vector Tobacco’s ability to utilize state tax net operating losses in future years because of changes in state tax apportionment and projected taxable income.

The consolidated balance sheets of the Company include deferred income tax assets and liabilities, which represent temporary differences in the application of accounting rules established by generally accepted accounting principles and income tax laws.

Deferred federal income tax expense differs in 2014, 2013 and 2012 due to the nature of the items in current and deferred tax liabilities. The deferred tax expense in 2014 results primarily from the recognition of temporary differences (related to litigation accruals) at the Tobacco segment. The deferred tax expense in 2013 results primarily from the utilitization of state tax net operating losses. The deferred tax benefit in 2012 results primarily from the non-cash interest charges associated with the Company’s convertible debt partially offset by the recognition of temporary differences (related to depreciation and amortization) at the Tobacco segment.

Differences between the amounts provided for income taxes and amounts computed at the federal statutory tax rate are summarized as follows:



	Year Ended December 31,
	2014			2013			2012
Income before income taxes	$	82,487		$	63,487		$	53,717
Federal income tax expense at statutory rate	28,871			22,221			18,801
Increases (decreases) resulting from:
State income taxes, net of federal income tax benefits	4,817			2,204			3,009
Impact of non-controlling interest	(4,290		)	88			—
Non-deductible expenses	2,581			2,698			3,311
Impact of domestic production deduction	(248		)	(1,889		)	(2,026		)
Tax credits	(275		)	(433		)	—
Inclusion of tax liabilities from unincorporated entities	1,374			—			—
Changes in valuation allowance, net of equity and tax audit adjustments	421			(94		)	—
Income tax expense	$	33,251		$	24,795		$	23,095

The following table summarizes the activity related to the unrecognized tax benefits:



Balance at January 1, 2012	$	6,597
Additions based on tax positions related to prior years	588
Expirations of the statute of limitations	(916		)
Balance at December 31, 2012	6,269
Additions based on tax positions related to prior years	179
Settlements	(250		)
Expirations of the statute of limitations	(3,076		)
Balance at December 31, 2013	3,122
Additions based on tax positions related to prior years	318
Settlements	(442		)
Expirations of the statute of limitations	(1,254		)
Balance at December 31, 2014	$	1,744

In the event the unrecognized tax benefits of $1,744 and $3,122 at December 31, 2014 and 2013, respectively, were recognized, such recognition would impact the annual effective tax rates. During 2014, the accrual for potential penalties and interest related to these unrecognized tax benefits was decreased by $529, and in total, as of December 31, 2014, a liability for potential penalties and interest of $247 has been recorded. During 2013, the accrual for potential penalties and interest related to these unrecognized tax benefits was decreased by $877, and in total, as of December 31, 2013, a liability for potential penalties and interest of $776 has been recorded.

It is reasonably possible the Company may recognize up to approximately $553 of currently unrecognized tax benefits over the next 12 months, pertaining primarily to expiration of statutes of limitations of positions reported on state and local income tax returns. The Company files U.S. and state and local income tax returns in jurisdictions with varying statutes of limitations.

In 2013, the Internal Revenue Service concluded an audit of the Company’s income tax return for the year ended December 31, 2009. There was no material impact on the Company’s consolidated financial statements as a result of the audit.