NOTE 12 – INCOME TAXES

The provision for income taxes is comprised of (in thousands):


	Years ended December 31,
	2018		2017			2016
Current:
Federal	$	13,486	$	17,557		$	18,307
State		3,641		3,302			3,472

		17,127		20,859			21,779
Deferred:
Federal		221		(5,895	)		(338	)
State		90		(284	)		(267	)

		311		(6,179	)		(605	)

Total tax expense	$	17,438	$	14,680		$	21,174

The reconciliation between our effective tax rate on net income and the federal statutory rate is as follows (dollars in thousands):


	Years ended December 31,
	2018					2017					2016
Income tax at federal statutory rate	$	15,159		21.0	%	$	19,537		35.0	%	$	20,864		35.0	%
Stock compensation		(436	)	(0.6	%)		(581	)	(1.0	%)		(227	)	(0.4	%)
Qualified Production Activity Deduction		—		0.0	%		(1,715	)	(3.1	%)		(1,776	)	(3.0	%)
Other permanent items		(667	)	(0.8	%)		197		0.4	%		(92	)	(0.1	%)
Change in valuation allowance		312		0.4	%		285		0.5	%		442		0.7	%
Change in uncertain tax positions		969		1.3	%		(1,807	)	(3.2	%)		66		0.1	%
State income taxes, net of federal benefit		2,911		4.0	%		2,150		3.8	%		1,897		3.2	%
Rate impact of the Tax Act		(810	)	(1.1	%)		(3,386	)	(6.1	%)		—		—	%

Total tax expense	$	17,438		24.2	%	$	14,680		26.3	%	$	21,174		35.5	%

Components of the net deferred tax asset or liability are as follows (in thousands):


	As of December 31,
	2018			2017
Deferred Tax Assets
Long-term
Accrued reserves and allowances	$	4,245		$	3,916
Allowance for doubtful accounts		500			426
Inventories		335			213
Intangibles		4,937			3,279
Net operating loss carryforwards		1,446			2,623
Other		4			10

Long-term deferred tax assets		11,467			10,467
Less: Valuation allowance		(1,255	)		(1,746	)

Net deferred tax assets		10,212			8,721

Deferred Tax Liabilities
Long-term
Accrued reserves and allowances		(365	)		(308	)
Property and equipment		(2,091	)		(1,453	)
Intangibles		(3,850	)		(3,543	)
Investment in partnership		(10,266	)		(9,189	)
Other		(242	)		(208	)

Long-term deferred tax liabilities		(16,814	)		(14,701	)

Net deferred tax liabilities	$	(6,602	)	$	(5,980	)

As of December 31, 2018, we have recorded a deferred tax asset of $1.4 million reflecting the benefit of $5.9 million in federal and state income tax net operating loss (NOL) carryforwards, the earliest of which expires in 2030.

Valuation Allowance

We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets on a jurisdiction and by tax filing entity basis. A significant piece of objective negative evidence evaluated is cumulative losses incurred over the most recent three-year period. Such objective evidence limits our ability to consider other subjective positive evidence such as our projections for future growth.

Based on this evaluation, a valuation allowance has been recorded as of December 31, 2018 and 2017 for the net deferred tax assets recorded on certain of our wholly owned subsidiaries. Such deferred tax assets relate primarily to net operating losses that are not more likely than not realizable. However, the amount of the deferred tax asset considered realizable could be adjusted if our estimate of future taxable income during the carryforward period changes, or if objective negative evidence in the form of cumulative losses is no longer present. Additional weight may be given to subjective evidence such as our projections for growth in this situation.

Uncertain Tax Positions

We are subject to taxation in the United States and various state jurisdictions. As of December 31, 2018, our tax years for 2015 through 2017 are subject to examination by the tax authorities. A rollforward of the gross unrecognized tax benefits is as follows (in thousands):


Unrecognized tax benefit, January 1, 2016	$	3,586
Increase as a result of tax positions taken during the period		2,354
Decrease as a result of tax positions taken during the period		(1,356	)
Decrease as a result of expiring statutes		(487	)

Unrecognized tax benefit, December 31, 2016	$	4,097


Increase as a result of tax positions taken during the period		4,353
Decrease as a result of tax positions taken during the period		(2,311	)
Decrease as a result of expiring statutes		(1,689	)

Unrecognized tax benefit, December 31, 2017	$	4,450


Increase as a result of tax positions taken during the period		3,846
Decrease as a result of tax positions taken during the period		(2,850	)
Decrease as a result of expiring statutes		(97	)

Unrecognized tax benefit, December 31, 2018	$	5,349

Unrecognized tax benefits of $2.7 million at December 31, 2018 would affect the effective tax rate. Interest expense and penalties accrued related to uncertain tax positions as of December 31, 2018 are $0.3 million.

We expect a decrease to the amount of unrecognized tax benefits (exclusive of penalties and interest) within the next twelve months of zero to $1.5 million.

Determining uncertain tax positions and the related estimated amounts requires judgment and carry estimation risk. If future tax law changes or interpretations should come to light, or additional information should become known, our conclusions regarding unrecognized tax benefits may change.

Impacts of the Tax Act

The Tax Act was enacted on December 22, 2017. The Tax Act reduced the U.S. federal corporate tax rate from 35% to 21%, which had a positive impact on our 2018 and 2017 effective tax rates due to the revaluation of our ending net deferred tax liabilities.

Under the guidance in the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin No. 118 (“SAB 118”), we recorded provisional amounts for the impact of the Tax Act as of December 31, 2017, representing a $3.8 million tax benefit related to the revaluation of the ending net deferred tax liabilities from 35% to the newly enacted U.S. corporate income tax rate of 21%, which was partially offset by tax expense of $0.4 million net amount for the revaluation of the uncertain tax positions and the valuation allowance. Under the transitional provisions of SAB 118, we had a one-year measurement period to complete the accounting for the initial tax effects of the Tax Act. We recorded its final adjustments to the provisional amounts in 2018 which resulted in a $0.8 million tax benefit largely due to timing provision to return adjustments which impacted deferred balances at the 35% rate that were then revalued at the lower corporate rate. Final regulations will be issued in the future and may be applied retroactively to the date of enactment of U.S. Tax Reform that may result in changes to the tax amounts recorded as a result of the Tax Act.