INCOME TAXES

As a REIT, we generally are not subject to federal and state corporate income taxes on income of the REIT that we distribute to our shareholders. We conduct certain activities through taxable REIT subsidiaries (TRS) that 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 held for sale.

Upon REIT election, which was January 1, 2006, we were subject to corporate income taxes on built-in gains (the excess of fair market value over tax basis) for 10 years on sales of real property that were held upon REIT election. The Small Business Jobs Act of 2010 modified the built-in gains provisions to exempt sales of real properties in 2011, if five years of the recognition period had elapsed before January 1, 2011. The reduced five-year holding period was extended each year through 2014, and was made permanent in 2015. Accordingly, the built-in gains tax did not apply to Potlatch sales of real property that occurred in 2011 through 2015.

We reflect accrued interest related to tax obligations, as well as penalties, in our provision for income taxes. For the years ended December 31, 2015, 2014 and 2013, we recognized insignificant amounts related to interest and penalties in our tax provision. At December 31, 2015 and 2014, we had no accrued interest related to tax obligations and no accrued interest receivable with respect to open tax refunds.

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



(Dollars in thousands)	2015			2014			2013
Current	$	128		$	21,205		$	16,352
Deferred	1,097			(2,143		)	(2,754		)
Net operating loss carryforwards	(6,793		)	625			287
Income tax (benefit) provision	$	(5,568	)	$	19,687		$	13,885

Income tax expense differs from the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes due to the following for the years ended December 31:



(Dollars in thousands)	2015			2014			2013
U.S. federal statutory income tax	$	9,151		$	38,359		$	29,563
REIT income not subject to federal income tax	(14,110		)	(16,812		)	(13,918		)
Change in valuation allowance	488			(1,818		)	(683		)
State income taxes, net of federal income tax	(838		)	2,234			942
Domestic production activities deduction	—			(1,055		)	(1,579		)
Permanent book-tax differences	(70		)	(1,073		)	(384		)
All other items	(189		)	(148		)	(56		)
Income taxes	$	(5,568	)	$	19,687		$	13,885
Effective tax rate	(21.3		)%	18.0		%	16.4		%

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



(Dollars in thousands)	2015			2014
Deferred tax assets:
Pensions	$	35,066		$	31,527
Other postretirement employee benefits	13,834			16,209
Net operating loss carryforwards	6,935			142
Inventories	2,325			2,720
Tax credits	2,123			1,904
Nondeductible accruals	2,041			2,033
Incentive compensation	2,009			2,544
Employee benefits	1,769			1,839
Other	116			224
Total deferred tax assets	66,218			59,142
Valuation allowance	(488		)	—
Deferred tax assets, net of valuation allowance	65,730			59,142
Deferred tax liabilities:
Timber and timberlands, net	(5,010		)	(5,120		)
Property, plant and equipment, net	(14,120		)	(10,626		)
Total deferred tax liabilities	(19,130		)	(15,746		)
Net deferred tax assets	$	46,600		$	43,396

As of December 31, 2015, we have a federal net operating loss carryforward of $17.4 million that expires in 2035, state net operating loss carryforwards of $18.1 million that expire from 2016 through 2035, and Idaho Investment Tax Credits of $3.2 million that expire from 2016 through 2029. We use the flow-through method of accounting for investment tax credits.

With the exception of the valuation allowance discussed below, we believe it is more likely than not that we will have sufficient future taxable income to realize our deferred tax assets.

The valuation allowance on our deferred tax assets increased during 2015, and was $0.5 million as of December 31, 2015. The valuation allowance is related to certain Idaho Investment Tax Credit carryforwards we expect will expire prior to realization. During 2014, the valuation allowance decreased from $2.2 million to zero, with $1.8 million of the decrease due to the actual use and expected future use of certain Idaho Investment Tax Credits.

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



Jurisdiction	YEARS
Federal	2012	-	2015
Arkansas	2012	-	2015
Michigan	2011	-	2015
Minnesota	2011	-	2015
Idaho	2012	-	2015

As of December 31, 2015 and 2014, we had no liabilities for unrecognized tax benefits. We do not currently believe there is a reasonable possibility of recording a liability for unrecognized tax benefits within the next twelve months.