Otter Tail Corp

. Income Taxes

The total income

tax expense differs from the amount computed by applying the federal income tax rate (

35%

2017,

2016

and

2015

) to net income before total income tax expense for the following reasons:

(in thousands)	2017			2016			2015
Tax Computed at Federal Statutory Rate – Continuing Operations	$	34,707		$	28,741		$	28,081
Increases (Decreases) in Tax from:
Federal P roduction Tax Credits (PTCs)		(7,527	)		(7,175	)		(6,962	)
State Income Taxes Net of Federal Income Tax Expense		4,341			2,848			4,945
Section 199 Domestic Production Activities Deduction		(1,471	)		(482	)		--
North Dakota Wind Tax Credit Amortization – Net of Federal Taxes		(850	)		(850	)		(850	)
Corporate-owned Life Insurance		(845	)		(680	)		(167	)
Excess Tax deduction - Equity Method Stock Awards		(751	)		--			--
Employee Stock Ownership Plan Dividend Deduction		(509	)		(537	)		(560	)
Allowance for Funds Used During Construction – Equity		(322	)		(280	)		(426	)
Investment Tax Credit Amortization		(164	)		(350	)		(571	)
Differences Reversing in Excess of Federal Rates		551			77			(1,143	)
Permanent and Other Differences		(1,873	)		(1,231	)		(705	)
Effect of TCJA Tax Rate Reduction on Value of Net Deferred Tax Assets		1,756			--			--
Total Income Tax Expense – Continuing Operations	$	27,043		$	20,081		$	21,642
Income Tax Expense – Discontinued Operations – U.S.		213			138			2,991
Income Tax Expense – Continuing and Discontinued Operations	$	27,256		$	20,219		$	24,633
Overall Effective Federal, State and Foreign Income Tax Rate		27.3	%		24.5	%		29.3	%
Income Tax Expense From Continuing Operations Includes the Following:
Current Federal Income Taxes	$	4,581		$	1,070		$	211
Current State Income Taxes		1,154			1,211			1
Deferred Federal Income Taxes		25,320			23,586			23,050
Deferred State Income Taxes		4,529			2,589			6,763
Federal PTCs		(7,527	)		(7,175	)		(6,962	)
North Dakota Wind Tax Credit Amortization – Net of Federal Taxes		(850	)		(850	)		(850	)
Investment Tax Credit Amortization		(164	)		(350	)		(571	)
Total	$	27,043		$	20,081		$	21,642
Total Income Before Income Taxes – Continuing and Discontinued Operations	$	99,695		$	82,540		$	83,978

The Company's deferred tax assets and liabilities were composed of the following on

December 31:

(in thousands)	2017			2016
Deferred Tax Assets
Federal PTCs	$	40,614		$	43,433
Regulatory Tax Liability		39,465			2,422
North Dakota Wind Tax Credits		32,962			32,962
Benefit Liabilities		32,328			44,381
Retirement Benefits Liabilities		31,894			38,390
Cost of Removal		21,800			31,636
Differences Related to Property		6,499			9,876
Net Operating Loss Carryforward		3,203			3,865
Vacation Accrual		1,844			2,725
Investment Tax Credits		515			818
Other		668			5,371
Total Deferred Tax Assets	$	211,792		$	215,879
Deferred Tax Liabilities
Differences Related to Property	$	(257,906	)	$	(371,761	)
Retirement Benefits Regulatory Asset		(31,894	)		(38,390	)
Excess Tax over Book Pension		(14,077	)		(15,509	)
North Dakota Wind Tax Credits		(4,112	)		(3,654	)
Impact of State Net Operating Losses on Federal Taxes		(673	)		(1,352	)
Other		(3,631	)		(11,804	)
Total Deferred Tax Liabilities	$	(312,293	)	$	(442,470	)
Deferred Income Taxes	$	(100,501	)	$	(226,591	)

Federal PTCs are

earned as wind energy is generated based on a per kwh rate prescribed in applicable federal statutes. OTP’s kwh generation from its wind turbines eligible for PTCs increased

4.4%

2017

compared with

2016.

North Dakota wind energy credits are based on dollars invested in qualifying facilities and are being recognized on a straight-line basis over

years.

Schedule of expiration of

tax credits and tax net operating losses available as of

December 31, 2017:

(in thousands)	Amount			2022-2031		2032-2037		2038-2043
United States
Federal Tax Credits	$	43,238	$	--	$	43,238	$	--
State Net Operating Losses		3,203		2,339		864		--
State Tax Credits		33,568		376		231		32,961

The following table summarizes the activity related to

the Company’s unrecognized tax benefits:

(in thousands)	2017			2016			2015
Balance on January 1	$	891		$	468		$	222
Increases Related to Tax Positions for Prior Years		28			406			236
Decreases Related to Tax Positions for Prior Years		(378	)		--			--
Increases Related to Tax Positions for Current Year		143			114			10
Uncertain Positions Resolved During Year		--			(97	)		--
Balance on December 31	$	684		$	891		$	468

The balance of unrecognized tax benefits as of

December 31,

201

would reduce the Company’s effective tax rate if recognized. The total amount of unrecognized tax benefits as of

December 31, 2017

not

expected to change significantly within the next

months. The Company classifies interest and penalties on tax uncertainties as components of the provision for income taxes in the Company’s consolidated statement of income. There was

amount accrued for interest on tax uncertainties as of

December 31, 2017.

The Company and its subsidiaries file a consolidated U.S. federal income tax return and various state income tax returns. As of

December 31,

201

with limited exceptions, the Company is

longer subject to examinations by taxing authorities for tax years prior to

2014

for federal and North Dakota state income taxes and for years prior to

2013

for Minnesota state income taxes.

TCJA

December 2017

the

TCJA was enacted. The TCJA includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the federal corporate income tax rate from

35%

21%

for tax years beginning after

December 31, 2017.

The

Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from

35%

21%

. The revaluation for OTP required the creation of a regulatory liability and an offsetting reduction in deferred tax liability. This regulatory liability will generally be amortized over the remaining life of the related assets. On a consolidated financial statement basis, the revaluation resulted in a

one

-time, non-cash, income tax expense of approximately

$1.8

million in

2017.

The impacts of the TCJA adjustments to deferred taxes and regulatory liabilities are provided in the reconciliation below:

(in thousands)	Deferred Tax Liability			Deferred Tax Regulatory Liability
Balance on January 1 , 2017	$	226,591		$	818
Change due to 2017 Accruals and Amortizations		20,012			376
TCJA Deferred Tax Valuation Adjustment		(109,072	)		109,072
Tax Effect on TCJA Deferred Tax Valuation Adjustment		(38,786	)		38,786
TCJA Adjustment to Income Tax Expense		1,756			--
Balance on December 31 , 2017	$	100,501		$	149,052

The

Company recognized the income tax effects of the TCJA in its

2017

consolidated financial statements in accordance with Staff Accounting Bulletin

No.

118,

which provides SEC staff guidance for the application of ASC Topic

740,

Income Taxes

, in the reporting period in which the TCJA was signed into law. Current estimates

may

be revised and are subject to change due, in part, to complexities and uncertainties associated with the TCJA. While the Company is able to make reasonable estimates of the impact of the TCJA for the reduction in the federal corporate tax rate, changes to bonus depreciation and consequences on the Company’s regulatory liabilities, the final impact of the TCJA

may

differ from these estimates due to, among other things, changes in the Company’s interpretations and assumptions and additional guidance that

may

be issued by the U.S. Internal Revenue Service, rate regulators or the FASB.