H&E Equipment Services, Inc.

(12)	Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among other changes, the Act reduced the corporate federal income tax rate from 35% to 21%. As a result of the rate change, we recorded a one-time decrease in income tax expense of $66.9 million from the re-measurement of our deferred tax assets and liabilities which is reflected in the tables below.

Our income tax provision (benefit) for the years ended December 31, 2017, 2016 and 2015, consists of the following (amounts in thousands):

	Current		Deferred			Total
Year ended December 31, 2017:
U.S. Federal	$	—	$	(54,241	)	$	(54,241	)
State		220		3,707			3,927
	$	220	$	(50,534	)	$	(50,314	)
Year ended December 31, 2016:
U.S. Federal	$	—	$	21,516		$	21,516
State		280		62			342
	$	280	$	21,578		$	21,858
Year ended December 31, 2015:
U.S. Federal	$	85	$	25,206		$	25,291
State		634		5,446			6,080
	$	719	$	30,652		$	31,371

Significant components of our deferred income tax assets and liabilities as of December 31 are as follows (amounts in thousands):

	2017			2016
Deferred tax assets:
Accounts receivable	$	929		$	1,415
Inventories		239			347
Net operating losses		18,165			25,117
AMT and tax credits		3,565			3,522
Sec 263A costs		544			599
Accrued liabilities		2,767			4,238
Deferred compensation		1,132			1,001
Accrued interest		365			533
Stock-based compensation		181			283
Goodwill and intangible assets		—			58
Other assets		531			414
		28,418			37,527
Valuation allowance		(732	)		(207	)
		27,686			37,320
Deferred tax liabilities:
Property and equipment		(152,235	)		(213,537	)
Investments		(1,066	)		(1,618	)
Goodwill and intangible assets		(804	)		—
		(154,105	)		(215,155	)
Net deferred tax liabilities	$	(126,419	)	$	(177,835	)

The reconciliation between income taxes computed using the statutory federal income tax rate of 35% to the actual income tax expense (benefit) is below for the years ended December 31 (amounts in thousands):

	2017			2016			2015
Computed tax at statutory rates	$	20,770		$	20,660		$	26,487
Permanent items - other		911			904			953
Permanent items - excess of tax deductible goodwill		(2,130	)		—			—
State income tax, net of federal tax effect		2,563			2,115			3,892
Change in valuation allowance		397			207			—
Change in uncertain tax positions		(5,960	)		66			39
Other - change in deferred state rate		—			(2,094	)		0
Impact of the Act federal rate change		(66,865	)		—			—
	$	(50,314	)	$	21,858		$	31,371

At December 31, 2017, we had available federal net operating loss carry forwards of approximately $83.4 million, which expire in varying amounts from 2030 through 2036. We also had federal alternative minimum tax credit carry forwards at December 31, 2017 of approximately $3.0 million which do not expire and $0.3 million general business credit carry forwards that expire in varying amounts from 2026 and 2036, and state income tax credits of $0.2 million that expire in varying amounts beginning in 2018. The federal and state net operating loss carryforwards in the income tax returns filed included unrecognized tax benefits taken in prior years. These net operating losses for which a deferred tax asset is recognized for financial statement purposes in accordance with ASC 740 are presented net of these unrecognized tax benefits.

Management has concluded that it is more likely than not that the federal deferred tax assets are fully realizable through future reversals of existing taxable temporary differences and future taxable income. Therefore, a valuation allowance is not required to reduce those deferred tax assets as of December 31, 2017. However, for the year ended December 31, 2017, we increased our valuation allowance by $0.4 million for certain state net operating losses expiring soon that may not be utilized.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands):

	2017			2016
Gross unrecognized tax benefits at January 1	$	6,119		$	6,035
Increases in tax positions taken in prior years		22			26
Decreases in tax positions taken in prior years		(22	)		—
Increases in tax positions taken in current year		—			105
Decreases for tax positions taken in current year		—			—
Settlements with taxing authorities		—			—
Lapse in statute of limitations		(6,013	)		(47	)
Gross unrecognized tax benefits at December 31	$	106		$	6,119

The reserves established for the gross amount of unrecognized tax benefits as of December 31, 2017 includes approximately $0.1 million of net unrecognized tax benefits that, if recognized, would affect the effective income tax rate. The statute of limitations lapsed during 2017 for approximately $6.0 million of unrecognized tax benefits. We recognized a reduction of $5.9 million in income tax expense as a result. Consistent with our historical financial reporting, to the extent we incur interest income, interest expense, or penalties related to unrecognized income tax benefits, they are recorded in “Other net income or expense.” The amount of interest and penalties included in the table above are not material. We do not expect a material change in unrecognized tax benefits related to federal and state exposures will occur within the next twelve months.

Our U.S. federal tax returns for 2014 and subsequent years remain subject to examination by tax authorities. We are also subject to examination in various state jurisdictions for 2013 and subsequent years.