Income Taxes

12 Months Ended

Dec. 31, 2019

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.

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 pre-tax 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,
	2019		2018		2017
Current	$	(2,177)	$	7,758	$	(43,705)
Deferred		(18,881)		(24,484)		(81,077)
Total		(21,058)		(16,726)		(124,782)
Less: Income tax expense - discontinued operations		258		3,421		7,279
Income tax benefit - continuing operations	$	(21,316)	$	(20,147)	$	(132,061)

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,
	2019		2018		2017
Tax expense at federal statutory rate	$	(36,317)	$	1,060	$	(19,400)
State income tax expense, net of federal benefit		(7,839)		702		(1,159)
Nondeductible compensation		762		921		222
Noncontrolling interests		(3,961)		(4,370)		(7,199)
Unrecognized tax benefits		36		15,148		25,720
R&D credits		(323)		(34,979)		(74,033)
Increase in valuation allowance		25,314		-		-
Disposition of subsidiary		(373)		(1,022)		-
Tax Cuts and Jobs Act impact		-		278		(57,223)
Stock compensation		369		993		-
Audit adjustments		-		559		-
Amended return adjustments		-		374		-
Other		1,016		189		1,011
Income tax benefit	$	(21,316)	$	(20,147)	$	(132,061)

‎

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



	December 31,
	2019		2018
Deferred tax assets:
Net operating loss carryforwards - Federal	$	27,935	$	-
Net operating loss carryforwards - State		8,788		4,004
Tax credit carryforwards - Federal		49,937		47,956
Tax credit carryforwards - State		7,750		9,369
Derivative financial instruments		342		-
Deferred revenue		795		2,236
Interest expense carryforward		5,539		2,048
Investment in partnerships		46,774		50,009
Inventory valuation		1,560		3,603
Stock-based compensation		1,347		1,458
Accrued expenses		4,325		5,439
Leases		6,993		2,516
Other		51		43
Total		162,136		128,681
Valuation allowance		(33,337)		(7,413)
Total deferred tax assets		128,799		121,268

Deferred tax liabilities:
Convertible debt		(12,266)		(7,508)
Fixed assets		(107,909)		(118,330)
Derivative financial instruments		-		(1,573)
Organizational and start-up costs		(4,484)		(3,980)
Right-of-use assets		(4,140)		-
Total deferred tax liabilities		(128,799)		(131,391)
Deferred income taxes	$	-	$	(10,123)

At December 31, 2019, the company has federal R&D credits of $49.7 million which will begin to expire in 2033. The company also has $7.8 million of state credits which will expire beginning in 2021. The company has federal net operating losses of $27.9 million which do not expire.

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



Unrecognized Tax Benefits
Balance at January 1, 2019	$	51,558
Additions for prior year tax positions		6
Additions for current year tax positions		32
Balance at December 31, 2019	$	51,596

Recognition of these tax benefits would favorably impact the company’s effective tax rate. Unrecognized tax benefits of $51.6 million include $40.8 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.

We believe it is reasonably possible that approximately $12.5 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 estimate the potential adjustment.