Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

The amounts provided for income taxes were as follows:



	Year Ended December 31,
	2019			2018			2017
Current:
U.S. Federal	$	33,379		$	27,962		$	28,271
State	10,632			11,225			3,458
	$	44,011		$	39,187		$	31,729
Deferred:
U.S. Federal	$	(7,209	)	$	(12,524	)	$	(31,049	)
State	(3,989		)	(5,111		)	(2,262		)
	(11,198		)	(17,635		)	(33,311		)
Total	$	32,813		$	21,552		$	(1,582	)

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



	December 31, 2019			December 31, 2018
Deferred tax assets:
Employee benefit accruals	$	11,709		$	12,801
Impairment of investments	9,772			4,131
Impact of timing of settlement payments	19,313			20,551
Disallowed interest expense carryforward	—			1,619
Various U.S. state tax loss carryforwards	4,296			5,137
Operating lease liabilities	3,679			—
Other	2,274			1,966
	51,043			46,205
Less: Valuation allowance	(1,292		)	(3,817		)
Net deferred tax assets	$	49,751		$	42,388

Deferred tax liabilities:
Basis differences on non-consolidated entities ⁽¹⁾	$	(7,990	)	$	(7,752	)
Basis differences on fixed and intangible assets	(35,082		)	(35,854		)
Capitalized interest expense ⁽¹⁾	—			(6,532		)
Basis differences on inventory	(10,645		)	(11,497		)
Basis differences on long-term investments	(22,424		)	(16,496		)
Impact of accounting for convertible debt	(813		)	(385		)
Basis differences on available for sale securities	(3,219		)	(1,283		)
Operating lease right of use assets	(3,273		)	—
	$	(83,446	)	$	(79,799	)

Net deferred tax liabilities	$	(33,695	)	$	(37,411	)

_____________________________


⁽¹⁾	The Company reclassified its capitalized interest expense to its basis differences on non-consolidated entities during the year ended December 31, 2019.

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 $4,296 and $5,137 at December 31, 2019 and 2018,

respectively, expiring through tax year 2027. 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 $1,292 and $3,817 at December 31, 2019 and 2018, respectively. The valuation allowance at December 31, 2019 primarily relates to Vector Tobacco’s state and local net operating loss carryforwards. 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 was decreased in 2019 as compared to 2018, due to the removal of the valuation allowance related to the Company’s disallowed interest expense.

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 U.S. GAAP and income tax laws.

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,
	2019			2018			2017
Income before provision for income taxes	$	133,828		$	79,559		$	89,168
Federal income tax expense at statutory rate	28,104			16,707			31,209
Increases (decreases) resulting from:
State income taxes, net of federal income tax benefits	6,430			6,060			3,833
Impact of non-controlling interest	(9		)	21			(2,162		)
Non-deductible expenses	1,385			1,993			2,146
Impact of domestic production deduction	—			359			(2,960		)
Impact of Tax Cuts and Jobs Act of 2017	—			(2,691		)	(28,845		)
Excess tax benefits on stock-based compensation	(1,488		)	(778		)	(1,143		)
Tax credits	(166		)	(127		)	(2,683		)
Other	791			(545		)	(155		)
Inclusion of tax liabilities from unincorporated entities	291			400			(47		)
Changes in valuation allowance, net of equity and tax audit adjustments	(2,525		)	153			(775		)
Income tax expense (benefit)	$	32,813		$	21,552		$	(1,582	)

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, 2017	$	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
Additions based on tax positions related to prior years	1,586
Settlements	—
Expirations of the statute of limitations	(330		)
Balance at December 31, 2019	$	1,647

In the event the unrecognized tax benefits of $1,647 at December 31, 2019 were recognized, such recognition would impact the 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 $51 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.