Prior to the Stone Combination, Talos Energy LLC was a partnership for U.S. federal income tax purposes and was not subject to U.S. federal income tax or state income tax (in most states) at the entity level. As such, Talos Energy LLC did not recognize U.S. federal income tax expense or state income tax expense in most states. Talos Energy LLC’s operations in the shallow waters off the coast of Mexico are conducted under a different legal form and are subject to foreign income taxes.

	Year Ended December 31,
	2020			2019			2018
Current income tax expense (benefit)
United States	$	(499	)	$	437		$	—
Mexico		185			1,183			1,345
Total current income tax expense (benefit)	$	(314	)	$	1,620		$	1,345

Deferred income tax expense (benefit)
United States	$	35,923		$	(37,131	)	$	1,064
Mexico		(26	)		(630	)		513
Total deferred income tax expense (benefit)		35,897			(37,761	)		1,577
Total income tax expense (benefit)	$	35,583		$	(36,141	)	$	2,922

A reconciliation of income tax expense (benefit) computed at the U.S. federal statutory tax rate to the Company’s income tax expense (benefit) is as follows (in thousands, except percentages):

	Year Ended December 31,
	2020			2019			2018
Income tax expense (benefit) at the federal statutory tax rate	$	(90,304	)	$	4,744		$	47,137
Earnings not subject to tax		—			—			9,980
State income taxes		(14,215	)		1,396			11,738
Foreign income taxes		—			—			1,008
Foreign rate differential		(1,030	)		(4,948	)		432
Prior year taxes		(4,237	)		(1,950	)		417
Other adjustments		—			137			800
Change in tax status		—			—			(35,925	)
Legal entity reorganization		(17,566	)		39,336			—
Change in valuation allowance		162,213			(75,196	)		(32,665	)
Other permanent differences		722			340			—
Total income tax expense (benefit)	$	35,583		$	(36,141	)	$	2,922
Effective tax rate		(8.27	)%		(159.99	)%		1.30	%

The Company’s effective tax rate for the year ending December 31, 2020 differed from the federal statutory rate of 21.0% primarily due to a non-cash tax expense of $162.2 million related to the recognition of a valuation allowance for its excess federal and state deferred tax assets. This expense was partially offset by a tax benefit of $17.6 million from adopting the final regulations under Sec. 163(j) of the Internal Revenue Code for tax years ended December 31, 2018 and December 31, 2019. The adoption of the final regulations reduced the non-cash tax expense recognized in the year ending December 31, 2019 from the legal entity conversion of a partnership to a corporation. The Company’s effective tax rate for the year ending December 31, 2019 differed from the federal statutory rate of 21.0% primarily due to a non-cash tax benefit of $75.2 million related to the full release of the valuation allowance for its federal and a significant portion of its state deferred tax assets. The federal and state portion of the release equals $80.2 million, partially offset by a $5.0 million increase in valuation allowance recorded against foreign deferred tax assets. Additionally, the Company recorded a tax expense of $39.3 million related to the reorganization of our subsidiaries, of which $38.9 million represents the non-cash impact from the legal entity conversion of a partnership to a corporation.

Net deferred tax assets (liabilities) reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities were as follows (in thousands):

	Year Ended December 31,
	2020			2019
Deferred tax assets:
Federal net operating loss	$	133,804		$	131,204
Foreign tax loss carryforward		45,980			2,316
State net operating loss		25,740			24,270
Asset retirement obligations		106,604			89,059
Tax credits		522			449
Derivatives		16,346			2,794
Other well equipment inventory		9,470			10,014
Accrued bonus		3,069			3,753
Operating lease liabilities		4,904			2,317
Other		7,727			7,004
Total deferred tax assets		354,166			273,180
Valuation allowance		(178,998	)		(19,118	)
Total deferred tax assets, net	$	175,168		$	254,062

Deferred tax liabilities:
Oil and gas properties	$	170,596		$	211,216
Deferred financing		1,765			3,752
Operating lease assets		1,652			1,814
Prepaid		3,216			3,419
Total deferred tax liabilities		177,229			220,201
Net deferred tax asset (liability)	$	(2,061	)	$	33,861

The table below presents the details of the Company’s net operating loss carryovers as of December 31, 2020 (in thousands):

As of December 31, 2020, the Company had U.S. federal net operating loss carryforwards (“NOLs”) of approximately $637.2 million, of which $537.9 million is subject to limitation under Section 382 of the Internal Revenue Code (“IRC”). IRC Section 382 provides an annual limitation with respect to the ability of a corporation to utilize its tax attributes, against future U.S. taxable income in the event of a change in ownership. If not utilized, such carryforwards would begin to expire in 2035.

The Company recorded a valuation allowance of $179.0 million and $19.1 million as of December 31, 2020 and 2019, respectively. Deferred income tax assets and liabilities are recorded related to NOLs and temporary differences between the book and tax basis of assets and liabilities expected to produce tax deductions and income in the future. The realization of these assets depends on recognition of sufficient future taxable income in specific tax jurisdictions in which those temporary differences or NOLs relate. In assessing the need for a valuation allowance, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Through the third quarter of 2020 and year ended December 31, 2019, the Company maintained a valuation allowance related to certain state and foreign deferred tax assets. The Company did not maintain a valuation allowance against its federal deferred tax assets and a significant portion of its state deferred tax assets due to the sustained positive operating performance during the most recent three-year period and the availability of expected future taxable income. During the fourth quarter of 2020, the Company recorded a write down of oil and natural gas properties of $267.9 million, which resulted in the Company having a cumulative loss for the most recent three-year period. This objective negative evidence limits the Company’s ability to consider other subjective positive evidence, such as forecasts of future taxable income. Consequently, the Company reduced the net federal and state deferred tax assets by a valuation allowance to the amount realizable without consideration of forecasted taxable income. The Company will continue to assess the valuation allowance on an ongoing basis and as such the amount of the deferred tax assets the Company considers realizable could be adjusted in future periods

The table below sets forth the beginning and ending balance of the total amount of unrecognized tax benefits. None of the unrecognized benefits would impact the effective tax rate if recognized. While amounts could change during the next 12 months, the Company does not anticipate having a material impact on its financial statements.

	Year Ended December 31,
	2020			2019
Total unrecognized tax benefits, beginning balance	$	791		$	360
Increases in unrecognized tax benefits as a result of:
Tax positions taken during a prior period		(208	)		8
Tax positions taken during the current period		65			423
Settlements with taxing authorities		—			—
Lapse of applicable statute of limitations		—			—
Total unrecognized tax benefits, ending balance	$	648		$	791

The Company recognizes interest and penalties related to uncertain tax positions as interest expense and general and administrative expenses, respectively.

The 2017 through 2019 tax years remain open to examination by the tax jurisdictions in which the Company is subject to tax. The statute of limitations with respect to the U.S. federal income tax returns of the Company for years ending on or before December 31, 2016 are closed (except to the extent of any NOL carryover balance).