15.  INCOME TAXES



Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted rates expected to be applicable to taxable income in the years those temporary differences are recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income during the period that includes the enactment date. The Tax Cuts and Jobs Act was enacted on December 22, 2017 and is effective January 1, 2018.  The Act reduced the federal tax rate to 21%.  The company revalued its deferred liabilities at the new rate, resulting in a tax benefit of $52.8 million recorded during the fourth quarter of 2017. Due to the significance of the legislation, the SEC issued Staff Accounting Bulletin 118 (SAB 118), which provides for a measurement period to complete the accounting for certain elements of the tax reform.  The company is still analyzing certain other provisions of the legislation and its impact to income taxes in the future, including interest expense deduction limitation to 30% of adjusted taxable income, use of AMT credit carryforwards, limitation of net operating loss carryforwards to 80% of taxable income, immediate expensing of capital assets acquired after September 27, 2017, and deducibility of officer compensation. Any subsequent adjustments will be recorded as tax expense during the period in which the analysis is complete. 



Green Plains Partners is a limited partnership, which is treated as a flow-through entity for federal income tax purposes and is not subject to federal income taxes. As a result, the consolidated financial statements do not reflect such income taxes on pre-tax income or loss attributable to the noncontrolling interest in the partnership.

Income tax expense (benefit) consists of the following (in thousands):





The variation in tax expense was due primarily to the company’s recognition of tax benefits related to research and development credits, or R&D Credits, and revaluing deferred balances to reflect the reduced tax rate per the Tax Cuts and Jobs Act. A study was conducted to determine whether certain activities the company performs qualify for the R&D Credit allowed by the Internal Revenue Code Section 41. As a result of this study, the company concluded these activities do qualify for the credit and determined it was appropriate to claim the benefit of these credits for all open tax years.



During the year ended December 31, 2017, the company recognized a net income tax benefit of $48.1 million for federal and state R&D Credits relating to tax years 2013 to 2016 as well as an estimated year-to-date tax benefit for federal and state R&D Credits for the 2017 tax year. Of this amount, a net benefit of $16.4 million is expected for previously filed tax returns, recorded as a $28.8 million non-current asset and a $12.4 million tax liability.  The remaining $31.7 million is expected to offset future income tax and is recorded as a deferred tax asset.  In addition, $9.2 million, net, in refundable credits not dependent upon taxable income was recorded as a reduction of cost of goods sold in the current year.



Differences between income tax expense at the statutory federal income tax rate and as presented on the consolidated statements of income are summarized as follows (in thousands):









Significant components of deferred tax assets and liabilities are as follows (in thousands):





The company maintains a valuation allowance for its net deferred tax assets due to uncertainty that it will realize these assets in the future. The deferred tax valuation allowance of $3.8 million as of December 31, 2017, relates to Iowa and Indiana tax credits that are not expected to be realized prior to expiration. Management considers whether it is more likely than not that some or all of the deferred tax assets will be realized, which is dependent on the generation of future taxable income and other tax attributes during the periods those temporary differences become deductible. Scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies are considered to make this assessment.



The company’s federal and state returns for the tax years ended December 31, 2014, and later are still subject to audit. A reconciliation of unrecognized tax benefits is as follows (in thousands):





Recognition of these tax benefits would favorably impact the company’s effective tax rate. Unrecognized tax benefits of $26.0 million include $24.5 million recorded as a reduction of the deferred asset associated with the federal tax credit carryforwards. Interest and penalties associated with uncertain tax positions are accrued as part of income taxes payable.