NOTE 15. INCOME TAXES

As a REIT, we generally are not subject to federal and state corporate income taxes on income from investments in real estate that we distribute to our shareholders. We are required to pay federal and state corporate income taxes on income from our non-real estate investments which are held in taxable REIT subsidiaries (TRS). These activities are principally comprised of our wood products manufacturing operations and certain real estate investments held for sale.

As of January 1, 2016, we are no longer subject to corporate income taxes on built-in gains, the excess of fair market value over tax basis, on sales of real property held at the time of our REIT conversion.

On December 22, 2017, H.R. 1, Tax Cuts and Jobs Act (the Act) was enacted and included broad tax reforms. Under the provisions of the Act, the U.S. corporate tax rate decreased from 35% to 21% effective January 1, 2018, which required a remeasurement of our deferred tax assets and liabilities as of the date of enactment. Accordingly, net deferred tax assets, including the related valuation allowance, were reduced by $10.7 million and the change was recorded as an increase to the 2017 tax provision.

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

(Dollars in thousands)	2017		2016			2015
Current	$	16,657	$	(6,178	)	$	128
Deferred		14,325		2,143			1,097
Net operating loss carryforwards		1,039		(290	)		(6,793	)
Income tax provision (benefit)	$	32,021	$	(4,325	)	$	(5,568	)

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)	2017			2016			2015
U.S. federal statutory income tax	$	41,466		$	2,314		$	9,151
REIT income not subject to federal income tax		(20,651	)		(7,199	)		(14,110	)
U.S. tax rate change on deferred tax assets and liabilities		10,528			—			—
Intercompany profit-in-inventory elimination adjustment		—			1,465			—
Change in valuation allowance		140			162			488
State income taxes, net of federal income tax		2,608			(740	)		(838	)
Domestic production activities deduction		(1,511	)		(2	)		—
Permanent book-tax differences		(252	)		(218	)		(70	)
Research and development credits		(294	)		(689	)		—
All other items		(13	)		582			(189	)
Income tax provision (benefit)	$	32,021		$	(4,325	)	$	(5,568	)
Effective tax rate		27.0	%		(65.4	%)		(21.3	%)

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

(Dollars in thousands)	2017			2016
Deferred tax assets:
Pensions	$	19,439		$	37,423
Other postretirement employee benefits		7,891			13,002
Net operating loss carryforwards		54			983
Inventories		353			443
Tax credits		2,443			2,207
Nondeductible accruals		2,566			2,067
Incentive compensation		1,131			1,643
Employee benefits		1,037			1,444
Other		88			120
Total deferred tax assets		35,002			59,332
Valuation allowance		(790	)		(650	)
Deferred tax assets, net of valuation allowance		34,212			58,682
Deferred tax liabilities:
Timber and timberlands, net		(1,432	)		(2,165	)
Property, plant and equipment, net		(12,683	)		(14,018	)
Other		(301	)		(448	)
Total deferred tax liabilities		(14,416	)		(16,631	)
Deferred tax assets, net	$	19,796		$	42,051

As of December 31, 2017, we had no federal net operating loss carryforwards; state net operating loss and capital loss carryforwards were $1.2 million that expire from 2021 through 2030; and Idaho Investment Tax Credits were $3.1 million that expire from 2019 through 2031. 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.

Due to the impact of the change in federal rate under the Act, the valuation allowance on our deferred tax assets increased during 2017 by $0.1 million, and was $0.8 million as of December 31, 2017. The valuation allowance is related to certain Idaho Investment Tax Credit carryforwards we expect will expire prior to realization. During 2016, the valuation allowance increased from $0.5 to $0.7 million 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		2013 — 2017
Arkansas		2014 — 2017
Michigan		2013 — 2017
Minnesota		2013 — 2017
Idaho		2014 — 2017

As of December 31, 2017, we had $0.6 million of unrecognized tax benefits which, if recognized, would impact the effective tax rate. There was $0.9 unrecognized tax benefits at December 31, 2016 and no unrecognized tax benefits at December 31, 2015. We currently believe there is a reasonable possibility that the amounts of unrecognized tax benefits will significantly decrease in the next 12 months based on the closing of certain ongoing state tax examinations.

A reconciliation of the beginning and ending unrecognized tax benefits is as follows:

(Dollars in thousands)	2017			2016
Balance at January 1	$	850		$	—
Additions for tax positions of prior years		8			850
Reduction for tax positions of prior years		(294	)		—
Balance at December 31	$	564		$	850

We reflect accrued interest related to tax obligations, as well as penalties, in our provision for income taxes. For the years ended December 31, 2017, 2016 and 2015, we recognized insignificant amounts related to interest and penalties in our tax provision. At December 31, 2017 and 2016, we had insignificant amounts of accrued interest related to tax obligations and no accrued interest receivable with respect to open tax refunds.