Income Taxes

12 Months Ended

Dec. 31, 2020

17. INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted rates expected to be applicable to taxable income in the years those temporary differences are recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income during the period that includes the enactment date. A valuation allowance is recorded by the company when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The CARES Act was signed into law on March 27, 2020. The CARES Act includes several significant business tax provisions including elimination of the taxable limit for certain net operating losses (“NOL”), allowing businesses to carry back NOLs arising in 2018, 2019 and 2020 to the five prior tax years, accelerating refunds of previously generated corporate AMT credits, and loosening the business interest limitation under §163(j) from 30% to 50%. The CARES Act also contains an employee retention credit to encourage employers to maintain headcounts even if employees cannot report to work because of issues related to COVID-19. In the second quarter of 2020, the company filed its preliminary 2019 federal income tax return, as well as a refund claim with the IRS to carry back our 2019 NOL to prior years. In the fourth quarter of 2020 the company filed its final 2019 federal income tax return and trued-up our 2019 NOL. The company recorded an income tax benefit of approximately $41.6 million related to the CARES Act including adjustments to certain valuation allowances.

Green Plains Partners is a limited partnership, which is treated as a flow-through entity for federal income tax purposes and is not subject to federal income taxes. As a result, the consolidated financial statements do not reflect such income taxes on pretax income or loss attributable to the noncontrolling interest in the partnership.

Income tax expense (benefit) consists of the following (in thousands):


	Year Ended December 31,
	2020		2019		2018
Current	$	(37,047)	$	(2,177)	$	7,758
Deferred		(13,336)		(18,881)		(24,484)
Total		(50,383)		(21,058)		(16,726)
Less: Income tax expense - discontinued operations		-		258		3,421
Income tax benefit - continuing operations	$	(50,383)	$	(21,316)	$	(20,147)

Differences between income tax expense from continuing operations at the statutory federal income tax rate and as presented on the consolidated statements of operations are summarized as follows (in thousands):



		Year Ended December 31,
	2020		2019		2018
Tax expense at federal statutory rate	$	(33,698)	$	(36,317)	$	1,060
State income tax expense, net of federal benefit		(802)		(7,839)		702
Nondeductible compensation		421		762		921
Noncontrolling interests		(4,015)		(3,961)		(4,370)
Unrecognized tax benefits		(28)		36		15,148
R&D credits		-		(323)		(34,979)
Increase in valuation allowance		6,279		25,314		-
Disposition of subsidiary		-		(373)		(1,022)
Tax Cuts and Jobs Act impact		-		-		278
Stock compensation		721		369		993
Audit adjustments		-		-		559
Amended return adjustments		(19,786)		-		374
Other		525		1,016		189
Income tax benefit	$	(50,383)	$	(21,316)	$	(20,147)

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Significant components of deferred tax assets and liabilities are as follows (in thousands):



	December 31,
	2020		2019
Deferred tax assets:
Net operating loss carryforwards - Federal	$	11,670	$	27,935
Net operating loss carryforwards - State		10,875		8,788
Tax credit carryforwards - Federal		64,081		49,937
Tax credit carryforwards - State		7,369		7,750
Derivative financial instruments		-		342
Deferred revenue		149		795
Interest expense carryforward		6,609		5,539
Investment in partnerships		45,519		46,774
Inventory valuation		290		1,560
Stock-based compensation		1,439		1,347
Accrued expenses		5,351		4,325
Leases		7,958		6,993
Organizational and start-up costs		1,047		-
Other		337		51
Total		162,694		162,136
Valuation allowance		(43,336)		(33,337)
Total deferred tax assets		119,358		128,799

Deferred tax liabilities:
Convertible debt		(9,154)		(12,266)
Fixed assets		(104,364)		(107,909)
Derivative financial instruments		(724)		-
Organizational and start-up costs		-		(4,484)
Right-of-use assets		(5,116)		(4,140)
Total deferred tax liabilities		(119,358)		(128,799)
Deferred income taxes	$	-	$	-

At December 31, 2020, the company has federal R&D credits of $67.8 million which will begin to expire in 2033. The company also has $7.4 million of state credits which will expire beginning in 2021. The company has federal net operating losses of $11.7 million which do not have an expiration date.

The company increased the valuation allowance associated with its net deferred tax assets due to uncertainty that it will realize these assets in the future. The valuation allowance on deferred tax assets was recognized as a result of negative evidence, including cumulative losses in recent years, outweighing the more subjective positive evidence. Management considers whether it is more likely than not that some or all of the deferred tax assets will be realized, which is dependent on the generation of future taxable income and other tax attributes during the periods those temporary differences become deductible. Scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies are considered to make this assessment. The company will continue to regularly assess the realizability of deferred tax assets. Changes in earnings performance and future earnings projections, among other factors, may cause the company to adjust its valuation allowance on deferred tax assets, which would impact the company’s results of operations in the period it is determined that these factors have changed.

The company’s federal income tax returns for the tax years ended December 31, 2014 and 2017 are currently under audit. The company’s federal returns for the tax years ended December 31, 2015, 2016, 2018 and 2019 are still subject to audit. A reconciliation of unrecognized tax benefits is as follows (in thousands):



Unrecognized Tax Benefits
Balance at January 1, 2020	$	51,596
Additions for prior year tax positions		27
Additions for current year tax positions		(54)
Balance at December 31, 2020	$	51,569

Recognition of these tax benefits would favorably impact the company’s effective tax rate. Unrecognized tax benefits of $51.6 million include $51.4 million recorded as a reduction of the deferred asset associated with the federal tax credit carryforwards. Interest and penalties associated with uncertain tax positions are accrued as part of income taxes payable.

As a result of delays due to the COVID-19 pandemic, the progress of our ongoing 2014 federal audit has been significantly impacted. While progress has been slow, we believe it is reasonably possible that approximately $23.0 million in unrecognized tax benefits related to R&D credits may be settled within the coming year as a result of the ongoing federal audit. In addition, the results of the current audit may cause the company to significantly increase or decrease the unrecognized tax benefits associated with R&D credits for periods not under audit. At this time, the company does not have enough information to be able to reasonably estimate the potential impact.

- 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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