INCOME TAXES
The table below presents the components of our provision for income taxes from continuing operations for the years presented:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Current: | | | | | |
Federal | $ | 8,443 |
| | $ | 9,646 |
| | $ | (2,944 | ) |
State | (200 | ) | | 300 |
| | (163 | ) |
Total current income tax (expense) benefit | 8,243 |
| | 9,946 |
| | (3,107 | ) |
Deferred: | | | | | |
Federal | 193,809 |
| | 118,427 |
| | 37,352 |
|
State | 9,876 |
| | 18,822 |
| | 4,063 |
|
Total deferred income tax benefit | 203,685 |
| | 137,249 |
| | 41,415 |
|
Income tax benefit from continuing operations | $ | 211,928 |
| | $ | 147,195 |
| | $ | 38,308 |
|
The following table presents a reconciliation of the statutory rate to the effective tax rate related to our benefit for income taxes from continuing operations:
|
| | | | | | | | |
| Year Ended December, 31, |
| 2017 | | 2016 | | 2015 |
| | | | | |
Statutory tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income tax, net | 1.8 |
| | 2.6 |
| | 2.7 |
|
Effect of state income tax rate changes | — |
| | 0.6 |
| | (0.3 | ) |
Percentage depletion | — |
| | — |
| | 0.3 |
|
Non-deductible compensation | (0.3 | ) | | (0.5 | ) | | (1.2 | ) |
Federal tax reform rate reduction | 33.7 |
| | — |
| | — |
|
Non-deductible goodwill impairment | (7.7 | ) | | — |
| | — |
|
Other | (0.1 | ) | | (0.3 | ) | | (0.6 | ) |
Effective tax rate | 62.4 | % | | 37.4 | % | | 35.9 | % |
Tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below. The 2017 amounts include the reduction of our deferred tax assets and liabilities to a projected combined federal and state deferred tax rate of 23.9 percent as a result of the 2017 Tax Act. Also in 2017, deferred tax liability for properties and equipment was reduced by $94.1 million as a result of recording an impairment charge related to a portion of the Delaware Basin assets. The 2016 amounts include the $403.7 million effect of including the deferred tax liability for the difference in the book and tax basis of the oil and gas properties acquired in a 2016 business combination and $23.8 million of acquired deferred tax assets:
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
| (in thousands) |
Deferred tax assets: | | | |
Deferred compensation | $ | 6,059 |
| | $ | 9,338 |
|
Asset retirement obligations | 21,760 |
| | 34,359 |
|
Federal NOL carryforward | 19,386 |
| | 29,988 |
|
State NOL and tax credit carryforwards, net | 7,815 |
| | 5,189 |
|
Federal tax - credit carryforwards | 4,366 |
| | 5,184 |
|
Allowance for note receivable | — |
| | 17,292 |
|
Net change in fair value of unsettled derivatives | 20,929 |
| | 26,262 |
|
Other | 2,453 |
| | 4,716 |
|
Total gross deferred tax assets | 82,768 |
| | 132,328 |
|
| | | |
Deferred tax liabilities: | | | |
Properties and equipment | 267,498 |
| | 518,964 |
|
Convertible debt | 7,262 |
| | 14,231 |
|
Total gross deferred tax liabilities | 274,760 |
| | 533,195 |
|
Net deferred tax liability | $ | 191,992 |
| | $ | 400,867 |
|
The 2017 Tax Act, enacted into law in December 2017, reduces the corporate income tax rate to 21 percent, effective January 1, 2018. Consequently, we have decreased our deferred tax assets and deferred tax liabilities by $43.8 million and $158.2 million, respectively, with a corresponding income tax benefit of $114.4 million. Our accounting for the deferred income tax effects of the 2017 Tax Act is complete.
Prior to the decrease of deferred tax assets for the federal rate change noted above, the deferred tax assets would have decreased primarily due to the utilization of the deferred tax benefit of an allowance for note receivable, partially offset by a decrease in the value of unsettled derivatives and an increase in federal and state net operating loss (“NOL”) and tax credit carryforwards.
In addition to the decrease of deferred tax liabilities for the tax rate change and our impairment in the Delaware Basin, deferred tax liabilities also decreased for the amortization of the discount and debt issuance costs for the 2021 Convertible Notes, which were issued in 2016. These decreases were partially offset by accelerated deductions on properties and equipment and deductions for lease expirations.
During the year ending December 31, 2017, we generated a federal NOL of $28 million, of which $10.1 million will be utilized as a carryback leaving a federal NOL carryforward of $17.9 million that will begin to expire in 2037. We have a marginal gas well credit of $1.2 million that can be carried forward five years and we have alternative minimum tax credits of $3.2 million that may be carried forward, and pursuant to the new tax law will be refunded over the next four years. Also, we acquired a federal NOL of $60.1 million as a component of our 2016 acquisition in the Delaware Basin that will begin to expire in 2034 and is subject to an annual limitation of $15.1 million as a result of the acquisition, which constitutes a change of ownership as defined under IRS Code Section 382.
As of December 31, 2017, we have state NOL carryforwards of $158.0 million that begin to expire in 2030 and state credit carryforwards of $2.4 million that begin to expire in 2022.
Unrecognized tax benefits and related accrued interest and penalties were immaterial for the three-year period ended December 31, 2017. The statutes of limitations for most of our state tax jurisdictions are open from 2013 forward.
The IRS partially accepted our recently-filed 2016 tax return. The 2016 tax return is currently going through the IRS CAP post-filing review process, with no significant tax adjustments currently proposed. We are currently participating in the CAP Program for the review of our 2017 and 2018 tax years. Participation in the CAP Program has enabled us to have minimal uncertain tax benefits associated with our federal tax return filings.
As of December 31, 2017, we were current with our income tax filings in all applicable state jurisdictions.