10. Income Taxes

In December 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (the “Act”), making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, additional limitations on executive compensation, and limitations on the deductibility of interest. We have estimated our provision for income taxes in accordance with the Act and guidance available as of the date of this filing. As a result, we have recorded $23 million as additional income tax benefit in the fourth quarter of 2017, the period in which the legislation was enacted, primarily related to the decrease in the federal corporate tax rate. This reflects the provisional amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future. The ultimate impact may differ from these provisional amounts, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, and additional regulatory guidance that may be issued.

In December 2017, the SEC issued SAB 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, we have determined that the $23 million of the deferred tax benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities is a provisional amount and a reasonable estimate at December 31, 2017.

10. Income Taxes (continued)

Benefit for income taxes from continuing operations are as follows:

	2017			2016			2015
	(In Thousands)
Current:
Federal	$	67		$	46		$	(4,655	)
State		(381	)		11			(429	)
Total Current	$	(314	)	$	57		$	(5,084	)

Deferred:
Federal	$	(50,084	)	$	(46,926	)	$	(25,958	)
State		9,639			4,913			(1,478	)
Total Deferred	$	(40,445	)	$	(42,013	)	$	(27,436	)
Benefit for income taxes	$	(40,759	)	$	(41,956	)	$	(32,520	)

The current provision (benefit) for federal income taxes shown above includes regular federal income tax after the consideration of permanent and temporary differences between income for GAAP and tax purposes. The current provision (benefit) for state income taxes includes regular state income tax and provisions for uncertain income tax positions, and other similar adjustments.

The deferred tax provision (benefit) results from the recognition of changes in our prior year deferred tax assets and liabilities, and the utilization of state NOL carryforwards and other temporary differences. We reduce income tax expense for tax credits in the year they arise and are earned. At December 31, 2017, our gross amount of the investment tax credits available to offset state income taxes was not material. These investment tax credits do not expire and carryforward indefinitely. The gross amount of federal tax credits was $8.0 million. These credits carryforward for 20 years and begin expiring in 2034.

We utilized approximately $0.4 million and $9.6 million of state NOL carryforwards to reduce tax liabilities in 2016 and 2015, respectively, (none in 2017). At December 31, 2017, we have remaining federal and state tax NOL carryforwards of $541.9 million and $579.8 million, respectively. The federal NOL carryforwards begin expiring in 2033 and the state NOL carryforwards begin expiring in 2017.

We considered both positive and negative evidence in our determination of the need for valuation allowances for the deferred tax assets associated with federal and state NOLs and federal credits and in conjunction with the IRC Section 382 limitation and determined that it was more-likely-than-not that the federal NOL and credits would be utilized before expiration. For 2017, 2016 and 2015, we determined it was more-likely-than-not that approximately $536.0 million, $312.3 million and $34.5 million, respectively, of the state NOL carryforwards would not be able to be utilized before expiration and a valuation allowance was maintained for the deferred tax assets associated with these state NOL carryforwards, net of federal benefit of approximately $26.9 million and $13.1 million in 2017 and 2016, respectively.

When non-qualified stock options (“NSOs”) are exercised, the grantor of the options is permitted to deduct the spread between the fair market value of the stock issued and the exercise price of the NSOs as compensation expense in determining taxable income. Prior to the adoption of ASU 2016-09 on January 1, 2017 (as discussed under Recently Issued Accounting Pronouncements of Note 1), income tax benefits related to stock-based compensation deductions in excess of the compensation expense recorded for financial reporting purposes were not recognized in earnings as a reduction of income tax expense for financial reporting purposes. The excess stock-based compensation tax deduction for 2015 was $0.6 million (none for 2016), respectively, and was included in the net change in capital in excess of par value rather than an increase in the benefit for income taxes. Upon adoption of this ASU, excess tax benefits that were not previously recognized, because the related tax deduction had not reduced current taxes payable, were recorded with a cumulative effect adjustment as discussed in Note1. Under the new guidance, all tax effects related to share-based payments at settlement (or expiration) are recorded through the income statement when it arises, subject to normal valuation allowance considerations. In 2017, we recognized an excess tax benefit of $0.2 million.

10. Income Taxes (continued)

Deferred tax assets and liabilities include temporary differences and carryforwards as follows:

	December 31,
	2017			2016
	(In Thousands)

Allowance for doubtful accounts	$	77		$	158
Inventory		316			2,048
Deferred compensation		2,393			4,003
Other accrued liabilities		1,964			3,024
Net operating loss		142,950			150,277
Other		15,540			18,337
Less valuation allowance on deferred tax assets		(26,920	)		(13,128	)
Total deferred tax assets	$	136,320		$	164,719

Property, plant and equipment		(186,561	)		(249,714	)
Prepaid and other insurance reserves		(2,561	)		(4,603	)
Other		(1,985	)		(4,233	)
Total deferred tax liabilities	$	(191,107	)	$	(258,550	)

Net deferred tax liabilities	$	(54,787	)	$	(93,831	)

All of our income (loss) before taxes relates to domestic operations. Detailed below are the differences between the amount of the benefit for income taxes and the amount which would result from the application of the federal statutory rate to “Loss from continuing operations before benefit for income taxes”.

	2017			2016			2015
	(In Thousands)
Benefit for income taxes at federal statutory rate	$	(24,868	)	$	(45,531	)	$	(27,512	)
State current and deferred income tax benefit		(2,699	)		(4,452	)		(2,184	)
Energy credit		—			(888	)		(2,846	)
Valuation allowance		7,651			11,855			918
Tax reform		(22,988	)		—			—
Other		2,145			(2,940	)		(896	)
Benefit for income taxes	$	(40,759	)	$	(41,956	)	$	(32,520	)

A reconciliation of the beginning and ending amount of uncertain tax positions is as follows:

	2017			2016			2015
	(In Thousands)
Balance at beginning of year	$	657		$	259		$	657
Additions based on tax positions related to the current year		11			454			70
Additions based on tax positions of prior years		—			4			13
Reductions for tax positions of prior years		(50	)		(60	)		(443	)
Settlements		—			—			(38	)
Balance at end of year	$	618		$	657		$	259

10. Income Taxes (continued)

We expect that the amount of unrecognized tax benefits may change as the result of ongoing operations, the outcomes of audits, and the expiration of statute of limitations. This change is not expected to have a significant effect on our results of operations or financial condition. For 2017, 2016, and 2015, if recognized, the effect on the effective tax rate from unrecognized tax benefits would be insignificant.

We record interest related to unrecognized tax positions in interest expense and penalties in operating other expense. During 2017, we recognized $132,000 of interest and penalties associated with unrecognized tax benefits. Minimal amounts were recognized in 2016 and 2015. At December 31, 2017, $201,000 is accrued for interest and penalties (minimal at December 31, 2016).

LSB and certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the 2014-2017 years remain open for all purposes of examination by the U.S. Internal Revenue Service (“IRS”) and other major tax jurisdictions. We are currently under examination by the IRS for the tax year 2015.