Income Taxes

12 Months Ended

Dec. 31, 2020

NOTE 15. INCOME TAXES

As a REIT, we generally are not subject to federal and state corporate income taxes on income from investments in real estate that we distribute to our shareholders. We conduct certain activities through our PotlatchDeltic TRS which are subject to corporate level federal and state income taxes. These activities are principally comprised of our wood products manufacturing operations and certain real estate investments. Therefore, income tax expense or benefit is primarily due to income or loss of the PotlatchDeltic TRS, as well as permanent book versus tax differences.

We are also subject to corporate taxes on built-in gains (the excess of fair market value over tax basis on the merger date) on sales of former Deltic real property held by the REIT during the five years following the Deltic merger. The sale of standing timber is not subject to built-in gains tax.

Income tax expense consists of the following for the years ended December 31:

(in thousands)	2020			2019			2018
Current	$	41,733		$	12,055		$	7,038
Deferred		(14,610	)		(11,082	)		11,370
Net operating loss carryforwards		—			37			791
Income taxes	$	27,123		$	1,010		$	19,199

Income tax expense differs from the amount computed by applying the statutory federal income tax rate of 21% to income before income taxes due to the following for the years ended December 31:

(in thousands, except effective tax rate)	2020			2019			2018
U.S. federal statutory income tax	$	40,730		$	11,901		$	29,837
REIT income not subject to federal income tax		(16,949	)		(11,285	)		(8,773	)
Pension contribution deducted at higher tax rate		—			—			(5,665	)
Change in valuation allowance		(395	)		(395	)		—
State income taxes, net of federal income tax		4,458			903			3,712
Permanent book-tax differences		(1,315	)		(793	)		(771	)
Other items, net		594			679			859
Income taxes	$	27,123		$	1,010		$	19,199
Effective tax rate		14.0	%		1.8	%		13.5	%

The tax effects of significant temporary differences creating deferred tax assets and liabilities at December 31 were:

(in thousands)	2020			2019
Deferred tax assets:
Pension and other postretirement employee benefits	$	34,703		$	32,110
Inventories		552			754
Tax credits		1,519			2,190
Nondeductible accruals		2,005			815
Incentive compensation		971			1,044
Employee benefits		1,323			1,316
Other		1,110			1,296
Total deferred tax assets		42,183			39,525
Valuation allowance		—			(395	)
Deferred tax assets, net of valuation allowance		42,183			39,130
Deferred tax liabilities:
Timber and timberlands, net		(354	)		(965	)
Property, plant and equipment, net		(52,698	)		(50,901	)
Intangible assets, net		(3,656	)		(3,778	)
Real estate development		(1,236	)		(1,402	)
Other		(1,979	)		(2,249	)
Total deferred tax liabilities		(59,923	)		(59,295	)
Deferred tax liabilities, net	$	(17,740	)	$	(20,165	)

At December 31, 2020, we had no state or federal net operating loss carryforwards. We have Idaho Investment Tax Credits of $1.9 million that expire from 2026 through 2034. We use the flow-through method of accounting for investment tax credits.

We believe it is more likely than not that we will have sufficient future taxable income to realize our deferred tax assets.

The following table summarizes the tax years subject to examination by major taxing jurisdictions:

Jurisdiction		Years
Federal		2017 — 2020
Arkansas		2017 — 2020
Idaho		2017 — 2020
Michigan		2016 — 2020
Minnesota		2016 — 2020

At December 31, 2020 and 2019, we had no unrecognized tax benefits. The following is a reconciliation of the beginning and ending unrecognized tax benefits for the year-ended December 31, 2019:

(in thousands)	2019
Balance at January 1	$	564
Additions for tax positions of prior years		—
Reduction for tax positions of prior years		(564	)
Balance at December 31	$	—

We reflect accrued interest related to tax obligations, as well as penalties, in our provision for income taxes. For the years ended December 31, 2020, 2019 and 2018, we recognized insignificant amounts related to interest and penalties in our tax provision. At December 31, 2020, 2019 and 2018, we had insignificant amounts of accrued interest related to tax obligations and no accrued interest receivable with respect to open tax refunds.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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