NATIONAL PRESTO INDUSTRIES INC

H. INCOME TAXES:

The following table summarizes the provision for income taxes from continuing operations:



	For Years Ended December 31 (in thousands)
	2017		2016		2015
Current:
Federal	$	24,200	$	14,391	$	21,346
State		1,772		656		412
		25,972		15,047		21,758
Deferred:
Federal		(4,008)		5,799		(989)
State		7		561		(9)
		(4,001)		6,360		(998)
Total tax provision	$	21,971	$	21,407	$	20,760

The effective rate of the provision for income taxes on earnings from continuing operations before income taxes as shown in the Consolidated Statements of Comprehensive Income differs from the applicable statutory federal income tax rate for the following reasons:



	Percent of Pre-tax Income
	2017	2016	2015
Statutory rate	35.0%	35.0%	35.0%
State tax, net of federal benefit	1.8%	1.2%	0.4%
Tax exempt interest and dividends	(0.7%)	(0.2%)	0.0%
Other	(2.4%)	(2.2%)	(2.4%)
Effective rate	33.7%	33.8%	33.0%

Deferred tax assets and liabilities are recorded based on the differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes. The tax effects of the cumulative temporary differences resulting in deferred tax assets and liabilities are as follows at December 31:



	(In thousands)
	2017		2016
Deferred tax assets
Insurance (primarily product liability)	$	1,023	$	1,594
Inventory		654		628
Vacation		596		893
Doubtful accounts		447		2,878
Environmental		275		320
Deferred compensation		253		338
Other		72		110
Total deferred tax assets		3,320		6,761

Deferred tax liabilities
Goodwill and other intangibles		1,112		1,698
Deferred revenue		875		-
Depreciation		338		8,067
Total deferred tax liabilities		2,325		9,765

Net deferred tax assets (liabilities)	$	995	$	(3,004)

In December 2017, the United States enacted changes to its tax laws, which included a reduction of the corporate income tax rate from 35% to 21%, beginning in 2018. The reduction in the tax rate resulted in a revaluation of the Company’s deferred tax assets and liabilities held at December 31, 2017, causing an increase in its 2017 income tax provision of $534,000. The Company believes its accounting assessment for the impact of the enacted changes to the United States tax laws is complete.

The Company establishes tax reserves in accordance with FASB ASC 740, Income Taxes. As of December 31, 2017, the carrying amount of the Company’s gross unrecognized tax benefits was $459,000 which, if recognized, would affect the Company’s effective income tax rate.

The following is a reconciliation of the Company’s unrecognized tax benefits for the years ended December 31, 2017 and 2016:



	(In thousands)
	2017		2016
Balance at January 1	$	288	$	312
Increases for tax positions taken related to the current year		128		80
Increases for tax positions taken related to prior years		66		-
Decreases for tax positions taken related to prior years		-		(8)
Lapse of statute of limitations		(23)		-
Settlements		-		(96)
Balance at December 31	$	459	$	288

It is the Company’s practice to include tax related interest expense, interest income, and penalties in tax expense. For the year ended December 31, 2015, $482,000 of interest income associated with tax refunds is included in tax expense. During the years ended December 31, 2017, 2016 and 2015, the Company accrued approximately $17,000, $15,000 and $13,000 in interest expense, respectively.

The Company is subject to U.S. federal income tax as well as income taxes of multiple states. During June of 2016, the Internal Revenue Service completed its audits of the tax years 2012 and 2013. As a result of the audits, the tax amortization period of certain intangible assets was shortened. During January of 2015, the state of Wisconsin completed its audits of the tax years 2009 through 2012. For all states in which it does business, the Company is subject to state audit statutes.