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,
	2016		2015			2014
Current:
U.S. Federal	$	29,185	$	40,542		$	8,809
State	7,407		13,886			2,416
	$	36,592	$	54,428		$	11,225
Deferred:
U.S. Federal	$	10,076	$	(9,943	)	$	16,484
State	2,495		(3,252		)	5,456
	12,571		(13,195		)	21,940
Total	$	49,163	$	41,233		$	33,165

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



	December 31, 2016			December 31, 2015
Deferred tax assets:
Employee benefit accruals	$	17,335		$	16,201
Impairment of investments	1,534			4,332
Impact of timing of settlement payments	28,266			39,840
Various U.S. state tax loss carryforwards	6,551			6,713
Other	2,803			—
	56,489			67,086
Less: Valuation allowance	(4,439		)	(3,900		)
Net deferred tax assets	$	52,050		$	63,186

Deferred tax liabilities:
Excess of tax basis over book-basis non-consolidated entities	$	(7,494	)	$	(7,292	)
Book/tax differences on fixed and Intangible assets	(54,776		)	(52,598		)
Capitalized interest expense	(8,673		)	(4,080		)
Book/tax differences on inventory	(16,143		)	(16,891		)
Book/tax differences on long-term investments	(23,937		)	(29,701		)
Impact of accounting for convertible debt	(27,362		)	(30,494		)
Book/tax differences on available for sale securities	(6,750		)	—
Other	—			(1,559		)
	$	(145,135	)	$	(142,615	)

Net deferred tax liabilities	$	(93,085	)	$	(79,429	)

Vector Tobacco had tax effected state and local net operating loss carryforwards of $6,551 and $6,713, respectively, at December 31, 2016 and 2015, 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 $4,439 and $3,900 at December 31, 2016 and 2015, respectively, consisted primarily of a reserve against Vector Tobacco’s state and local net operating loss carryforwards. The valuation allowance was decreased in 2016 and 2015, 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 2016, 2015 and 2014 due to the nature of the items in current and deferred tax liabilities. The deferred tax expense in 2016 results primarily from the recognition of temporary differences (related to litigation accruals) at the Tobacco segment and from the capitalization of interest expense on the Company's equity method real estate investments. The deferred tax expense in 2015 results primarily from the capitalization of interest expense on the Company's equity method real estate investments. The deferred tax expense in 2014 results primarily from the recognition of temporary differences (related to litigation accruals) 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,
	2016			2015			2014
Income before income taxes	$	126,429		$	107,705		$	82,279
Federal income tax expense at statutory rate	44,250			37,697			28,798
Increases (decreases) resulting from:
State income taxes, net of federal income tax benefits	6,991			6,862			4,804
Impact of non-controlling interest	(2,148		)	(2,516		)	(4,290		)
Non-deductible expenses	2,569			2,941			2,581
Impact of domestic production deduction	(2,603		)	(3,436		)	(248		)
Tax credits	(359		)	(265		)	(275		)
Other	(1,202		)	152			—
Inclusion of tax liabilities from unincorporated entities	1,126			831			1,374
Changes in valuation allowance, net of equity and tax audit adjustments	539			(1,033		)	421
Income tax expense	$	49,163		$	41,233		$	33,165

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



Balance at January 1, 2014	$	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
Additions based on tax positions related to prior years	265
Settlements	(132		)
Expirations of the statute of limitations	(354		)
Balance at December 31, 2015	1,523
Additions based on tax positions related to prior years	72
Settlements	(119		)
Expirations of the statute of limitations	(961		)
Balance at December 31, 2016	$	515

In the event the unrecognized tax benefits of $515 and $1,523 at December 31, 2016 and 2015, respectively, were recognized, such recognition would impact the annual effective tax rates. During 2016, the accrual for potential penalties and interest related to these unrecognized tax benefits was decreased by $74, and in total, as of December 31, 2016, a liability for potential penalties and interest of $145 has been recorded. During 2015, the accrual for potential penalties and interest related to these unrecognized tax benefits was decreased by $28, and in total, as of December 31, 2015, a liability for potential penalties and interest of $219 has been recorded.

It is reasonably possible the Company may recognize up to approximately $170 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.