Income Taxes

12 Months Ended

Dec. 31, 2018

INCOME TAXES

The amounts provided for income taxes are as follows:



	Year Ended December 31,
	2018			2017			2016
Current:
U.S. Federal	$	27,962		$	28,271		$	29,185
State	11,225			3,458			7,407
	$	39,187		$	31,729		$	36,592
Deferred:
U.S. Federal	$	(12,524	)	$	(31,049	)	$	10,076
State	(5,111		)	(2,262		)	2,495
	(17,635		)	(33,311		)	12,571
Total	$	21,552		$	(1,582	)	$	49,163

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



	December 31, 2018			December 31, 2017
Deferred tax assets:
Employee benefit accruals	$	12,801		$	11,621
Impairment of investments	4,131			1,834
Impact of timing of settlement payments	20,551			14,367
Disallowed interest expense carryforward	1,619			—
Various U.S. state tax loss carryforwards	5,137			6,556
Other	1,966			1,110
	46,205			35,488
Less: Valuation allowance	(3,817		)	(3,664		)
Net deferred tax assets	$	42,388		$	31,824

Deferred tax liabilities:
Basis differences on non-consolidated entities	$	(7,752	)	$	(5,388	)
Basis differences on fixed and intangible assets	(35,854		)	(36,712		)
Capitalized interest expense	(6,532		)	(6,069		)
Basis differences on inventory	(11,497		)	(11,357		)
Basis differences on long-term investments	(16,496		)	(15,521		)
Impact of accounting for convertible debt	(385		)	(12,776		)
Basis differences on available for sale securities	(1,283		)	(2,802		)
	$	(79,799	)	$	(90,625	)

Net deferred tax liabilities	$	(37,411	)	$	(58,801	)

The Company files a consolidated U.S. income tax return that includes its more than 80%-owned U.S. subsidiaries. Vector Tobacco had tax-effected state and local net operating loss carryforwards of $5,137 and $6,556, respectively, at December 31, 2018 and 2017, expiring through tax year 2027. In addition, the Company established a new deferred tax asset related to the amount of interest expense the Company expects to be disallowed as a result of the Tax Act. The Company records 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 Company had a valuation allowance of $3,817 and $3,664 at December 31, 2018 and 2017, respectively. The valuation allowance at December 31, 2018 primarily relates to a reserve against the Company’s disallowed

interest expense carryforward and Vector Tobacco’s state and local net operating loss carryforwards. The valuation allowance at December 31, 2017 primarily relates to a reserve against Vector Tobacco’s state and local net operating loss carryforwards. The valuation allowance was increased in 2018 as compared to 2017, due to the Company’s expectation that none of the interest expense disallowed as a result of the Tax Act will be available for future use. The increase was partially offset by a reduction in valuation allowance recorded against state net operating loss carryforwards.

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 (“US GAAP”) and income tax laws.

On December 22, 2017, the Tax Act was enacted making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017 and limitation on interest expense deductions. Interest expense is limited to 30% of taxable income before interest, depreciation and amortization from 2019 to 2022 and then limited to 30% of taxable income before interest thereafter.

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act.

The Company completed its analysis of the impact of the Tax Act in the fourth quarter of 2018. Upon refinement of certain estimates from those computed as of December 31, 2017, the Company recorded an additional tax benefit of $2,691 during the year ended December 31, 2018. This amount relates to deductions received from pass through entities in 2017 that were greater than estimated as of December 31, 2017.

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,
	2018			2017			2016
Income before provision for income taxes	$	79,559		$	89,168		$	126,429
Federal income tax expense at statutory rate	16,707			31,209			44,250
Increases (decreases) resulting from:
State income taxes, net of federal income tax benefits	6,060			3,833			6,991
Impact of non-controlling interest	21			(2,162		)	(2,148		)
Non-deductible expenses	1,993			2,146			2,569
Impact of domestic production deduction	359			(2,960		)	(2,603		)
Impact of Tax Cuts and Jobs Act of 2017	(2,691		)	(28,845		)	—
Excess tax benefits on stock-based compensation	(778		)	(1,143		)	—
Tax credits	(127		)	(2,683		)	(359		)
Other	(545		)	(155		)	(1,202		)
Inclusion of tax liabilities from unincorporated entities	400			(47		)	1,126
Changes in valuation allowance, net of equity and tax audit adjustments	153			(775		)	539
Income tax expense (benefit)	$	21,552		$	(1,582	)	$	49,163

The Company’s income tax expense is principally attributable to the Company’s federal and state income taxes based on the Company’s earnings. The non-deductible expenses presented in the table above largely relate to the Company’s non-deductible executive compensation.

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



Balance at January 1, 2016	$	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
Additions based on tax positions related to prior years	208
Settlements	—
Expirations of the statute of limitations	(95		)
Balance at December 31, 2017	628
Additions based on tax positions related to prior years	26
Settlements	(100		)
Expirations of the statute of limitations	(163		)
Balance at December 31, 2018	$	391

In the event the unrecognized tax benefits of $391 at December 31, 2018 were recognized, such recognition would impact the annual effective tax rate. The Company classifies all tax-related interest and penalties as income tax expense.

It is reasonably possible the Company may recognize up to approximately $119 of unrecognized tax benefits over the next 12 months, primarily pertaining to expiring statutes of limitations on prior state and local income tax return positions. The Company files U.S. and state and local income tax returns in jurisdictions with varying statutes of limitations.