Income taxes
The income tax provision attributable to our income (loss) before income taxes for the years ended December 31, 2017, 2016 and 2015, consisted of the following:
|
| | | | | | | | | | | | |
| | Year ended December 31, |
(in thousands) | | 2017 | | 2016 (1) | | 2015 |
Current: | | | | | | |
Federal | | $ | (1,420 | ) | | $ | — |
| | $ | — |
|
State | | — |
| | — |
| | — |
|
Total current income tax (benefit) | | $ | (1,420 | ) | | $ | — |
| | $ | — |
|
| | | | | | |
Deferred: | | | | | | |
Federal | | $ | 528,886 |
| | $ | (72,020 | ) | | $ | (414,834 | ) |
State | | (1,496 | ) | | (7,637 | ) | | (45,009 | ) |
Valuation allowance | | (525,674 | ) | | 82,459 |
| | 459,843 |
|
Total deferred income tax (benefit) | | 1,716 |
| | 2,802 |
| | — |
|
Total income tax (benefit) | | $ | 296 |
| | $ | 2,802 |
| | $ | — |
|
| |
(1) | We made certain revisions between components of the reconciliation of our income tax provision for the year ended December 31, 2016. These revisions were deemed to be an immaterial correction of an error and did not affect our net deferred tax assets or liabilities or income tax expense. |
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act ("Tax Act") which, among other things, lowered the U.S. Federal tax rate from 35% to 21%, repealed the corporate alternative minimum tax, and provided for a refund of previously accrued alternative minimum tax credits. We reflected the impact of this rate on our deferred tax assets and liabilities at December 31, 2017, as it is required to reflect the change in the period in which the law is enacted. The Tax Act also repealed the corporate alternative minimum tax for tax years beginning after January 1, 2018 and provided that prior alternative minimum tax credits would be refundable. We have credits that are expected to be refunded between 2018 and 2020 as a result of the Tax Act and monetization opportunities under current law in 2017. In addition, the Tax Act limits the amount taxpayers are able to deduct for net operating loss carryforwards ("NOLs") generated in taxable years beginning after December 31, 2017 to 80% of the taxpayer’s taxable income. The law also generally repeals all carrybacks for losses generated in taxable years ending after December 31, 2017. However, any NOLs generated in taxable years ending after December 31, 2017 can be carried forward indefinitely. On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118, which provides a one-year measurement period from a registrant's reporting period that includes the Tax Act's enactment date to allow the registrant sufficient time to obtain, prepare and analyze information to complete the required accounting under ASC 740. We are still analyzing certain aspects of the Tax Act, which could potentially affect the measurement of our income tax balances and future income tax expense or benefit. The ultimate impact of the Tax Act may differ from the estimates provided herein, possibly materially, due to additional regulatory guidance, changes in interpretations and assumptions, and other actions as a result of the Tax Act.
We have NOLs for U.S. income tax purposes that have been generated from our operations. Our NOLs are scheduled to expire if not utilized between 2028 and 2037. As a result of the repurchase of a portion of our senior unsecured notes during 2015 and 2016, we had cancellation of debt income for tax purposes. We reduced our NOLs by the amount of cancellation of debt income of approximately $86.6 million, $125.8 million and $538.0 million during 2017, 2016 and 2015, respectively.
The utilization of our NOLs to offset taxable income in future periods may be limited if we undergo an ownership change based on the criteria in Section 382 of the Internal Revenue Code. Generally, an ownership change occurs for Section 382 purposes when the percentage of stock held by one or more five-percent shareholders increases by more than 50 percentage points over the lowest stock ownership held by such shareholders on any testing date within a three-year period. See further discussion of the potential limitations on the utilization of our net operating losses as part of "Item 1A. Risk Factors". The Internal Revenue Code permits the exclusion of cancellation of debt income from taxable income if the discharge occurs during a Chapter 11 case. If this occurs, the amount of cancellation of debt income would reduce a company's tax attributes unless it is offset by NOLs. The NOLs that are available to offset cancellation of debt income in a Chapter 11 case are not limited by Section 382 of the Internal Revenue Code. NOLs available for utilization as of December 31, 2017 were approximately $2.1 billion.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax liabilities and assets are as follows:
|
| | | | | | | | |
(in thousands) | | December 31, 2017 | | December 31, 2016 (1) |
Deferred tax assets: | | | | |
Net operating loss and AMT credits carryforwards | | $ | 548,701 |
| | $ | 767,236 |
|
Oil and natural gas properties, gathering assets, and equipment | | 236,601 |
| | 428,056 |
|
Debt restructuring | | 3,978 |
| | 99,934 |
|
Other | | 54,487 |
| | 73,923 |
|
Total deferred tax assets before valuation allowance | | 843,767 |
| | 1,369,149 |
|
Valuation allowance | | (843,480 | ) | | (1,369,149 | ) |
Total deferred tax assets | | 287 |
| | — |
|
Deferred tax liabilities: | | | | |
Goodwill | | $ | (4,518 | ) | | $ | (2,802 | ) |
Derivative financial instruments | | (287 | ) | | — |
|
Total deferred tax liabilities | | (4,805 | ) | | (2,802 | ) |
Net deferred tax assets (liabilities) | | $ | (4,518 | ) | | $ | (2,802 | ) |
| |
(1) | We made certain revisions between components of our non-current deferred tax assets as of December 31, 2016. As a result, our deferred tax assets and valuation allowance increased by $0.8 million. These revisions were deemed to be an immaterial correction of an error and did not affect our net deferred tax assets or liabilities or income tax expense. |
As previously discussed, we reflected the impact of the change in the tax rate as a result of the Tax Act on our deferred tax assets and liabilities at December 31, 2017. During the years ended 2017, 2016 and 2015, we recognized a full valuation allowance against our net deferred tax assets.
A reconciliation of our income tax provision (benefit) computed by applying the statutory United States federal income tax rate to our income (loss) before income taxes for the years ended December 31, 2017, 2016 and 2015 is presented in the following table:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
(in thousands) | | 2017 | | 2016 (1) | | 2015 |
Federal income taxes (benefit) provision at statutory rate of 35% | | $ | 8,630 |
| | $ | (77,860 | ) | | $ | (417,333 | ) |
Increases (reductions) resulting from: | | | | | | |
Adjustments to the valuation allowance | | (525,674 | ) | | 82,459 |
| | 459,843 |
|
Non-deductible compensation | | 3,206 |
| | 5,019 |
| | 2,399 |
|
State taxes net of federal benefit | | (1,496 | ) | | (7,637 | ) | | (45,009 | ) |
Federal and state tax rate change | | 421,610 |
| | — |
| | — |
|
Non-deductible interest | | 149,577 |
| | — |
| | — |
|
Non-taxable gain on warrants | | (55,716 | ) | | — |
| | — |
|
Other | | 159 |
| | 821 |
| | 100 |
|
Total income tax provision | | $ | 296 |
| | $ | 2,802 |
| | $ | — |
|
| |
(1) | We made certain revisions between components of the reconciliation of our income tax provision for the year ended December 31, 2016. These revisions were deemed to be an immaterial correction of an error and did not affect our net deferred tax assets or liabilities or income tax expense. |
During the year ended December 31, 2017, we recognized a current income tax benefit of $1.4 million due to refunds for alternative minimum tax credits. During the years ended 2017 and 2016, we recognized deferred income tax expense of $1.7 million and $2.8 million related to a deferred tax liability for tax deductible goodwill. During the years ended 2017 and 2016, the book basis of goodwill exceeded the tax basis that caused the previous book and tax basis differences to change from a deferred tax asset to a deferred tax liability. The deferred tax liability related to goodwill is considered to have an indefinite life based on the nature of the underlying asset and cannot be offset under GAAP with a deferred tax asset with a definite life, such as NOLs. However, the deferred income tax expense is not expected to result in cash payments of income taxes in the foreseeable future.
We did not recognize any liabilities for unrecognized tax benefits. As of December 31, 2017, 2016 and 2015, our policy is to recognize interest related to unrecognized tax benefits of interest expense and penalties in operating expenses. We have not accrued any interest or penalties relating to unrecognized tax benefits in the Consolidated Financial Statements.
We file a corporate consolidated income tax return for U.S. federal income tax purposes and file income tax returns in various states. With few exceptions, we are no longer subject to U.S. federal and state and local examinations by tax authorities for years before 2008.