Income Taxes
The following table summarizes the tax expense (benefit) for the periods as noted below (in thousands):
|
| | | | | | | | | | | |
| Successor | | Successor | | Predecessor |
| Year Ended December 31, 2017 | | October 13, 2016
to December 31,
2016 | | January 1, 2016
to October 12,
2016 |
Current tax expense (benefit) | | | |
| | |
|
Federal | $ | (41 | ) | | $ | — |
| | $ | — |
|
State | — |
| | — |
| | — |
|
Total current tax expense (benefit) | (41 | ) | | — |
| | — |
|
Deferred tax expense (benefit) | | | | | |
Federal | (937 | ) | | — |
| | — |
|
State | — |
| | — |
| | — |
|
Total deferred tax expense (benefit) | (937 | ) | | — |
| | — |
|
Total tax expense (benefit) | $ | (978 | ) | | $ | — |
| | $ | — |
|
The following is a reconciliation of the U.S. statutory income tax rate at 35% to our loss before income taxes (in thousands):
|
| | | | | | | | | | | |
| Successor | | Successor | | Predecessor |
| Year Ended December 31, 2017 | | October 13, 2016
to December 31,
2016 | | January 1, 2016
to October 12,
2016 |
Income tax expense (benefit) | | | |
| | |
|
Tax at U.S. statutory income tax | $ | (3,141 | ) | | $ | (1,508 | ) | | $ | 129,481 |
|
Book restructuring gain | — |
| | — |
| | (146,770 | ) |
Remeasurement due to Tax Cuts and Jobs Act | 41,175 |
| | — |
|
| — |
|
Valuation allowance for remeasurement and changes relating to the Tax Cuts and Jobs Act | (42,112 | ) | | — |
| | — |
|
Other valuation allowance | 5,474 |
| | 1,055 |
| | (5,003 | ) |
State income taxes-net of federal benefit | (861 | ) | | (111 | ) | | 16,985 |
|
Nondeductible expenses and other | (1,513 | ) | | 564 |
| | 5,307 |
|
Total income tax expense (benefit) | $ | (978 | ) | | $ | — |
| | $ | — |
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands) for the years ended December 31, 2017 and 2016:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Non-current deferred tax assets: | |
| | |
|
Operating loss carry-forwards | $ | 27,136 |
| | $ | 3,033 |
|
State Tax NOL and Credits | 8,060 |
| | 1,320 |
|
Statutory depletion carry-forward | 4,221 |
| | 7,035 |
|
AMT tax credit carry-forward | 1,008 |
| | 1,052 |
|
Compensation | 1,170 |
| | 244 |
|
Contingent liabilities and other | 298 |
| | 508 |
|
Derivative financial instruments | — |
| | — |
|
Debt discount | 173 |
| | — |
|
Property and equipment | 45,809 |
| | 112,274 |
|
Total gross noncurrent deferred tax assets | 87,875 |
| | 125,466 |
|
Less valuation allowance | (86,711 | ) | | (125,164 | ) |
Net noncurrent deferred tax assets | 1,164 |
| | 302 |
|
Noncurrent deferred tax liabilities: | |
| | |
|
Bond discount | — |
| | (302 | ) |
Derivatives | (227 | ) | | — |
|
Total non-current deferred tax liabilities | (227 | ) | | (302 | ) |
Net non-current deferred tax asset | $ | 937 |
| | $ | — |
|
On December 22, 2017, the United States enacted tax reform legislation known as the H.R.1, commonly referred to as the “Tax Cuts and Jobs Act” (the “Act”), resulting in significant modifications to existing law. The Company has completed the accounting for the effects of the Act during 2017. Our financial statements for the year ended December 31, 2017 reflect certain effects of the Act which includes a reduction in the corporate tax rate from 35% to 21% effective January 1, 2018, as well as other changes. Due to the Company’s valuation allowance position and as a result of changes to tax laws and rates under the Act, the Company recorded a net $1.0 million tax benefit due primarily to the remeasurement of deferred tax assets and liabilities from 35% to 21% and the removal of the valuation allowance on the estimated refundable Alternative Minimum Tax (“AMT”) credits. The valuation allowance decreased by $42.1 million in 2017 due to the changes to tax laws and rates under the Act and increased by $5.5 million for normal operations.
The Company follows the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), which provides additional clarification regarding the application of ASC Topic 740 in situations where the Company does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act for the reporting period in which the Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Act’s enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year from the enactment date. We have calculated the impact of the Act in our year end income tax provision in accordance with our understanding of the Act and guidance available as of the date of this filing. We will continue to gather and evaluate the income tax impact of the Act. The ultimate impact of the Act on our reported results in 2018 and beyond may differ, possibly materially, due to, among other things, changes in interpretations and assumptions we have made, guidance that may be issued, and other actions we may take as a result of the Act.
We have recorded a valuation allowance of $86.7 million at December 31, 2017, which resulted in a net non-current deferred tax asset of $0.9 million appearing on our statement of financial position. We recorded this valuation allowance at this date after an evaluation of all available evidence (including our recent history of net operating losses in 2017 and prior years) that led to a conclusion that based upon the more-likely-than-not standard of the accounting literature, these deferred tax assets were unrecoverable. The tax benefit recorded for 2017 is due to AMT credits that are expected to be recognized by the Company, which have been reduced for the anticipated sequestration. AMT credits were partially monetized in 2016. The remaining $0.9 million of AMT credits, which is less anticipated sequestration, are expected to be fully refundable in tax years 2018 - 2021 regardless of the Company's regular tax liability as a result of the repeal of the Corporate AMT under the Tax Cuts and Jobs Act. The Company no longer has a valuation recorded against our estimate of refundable AMT credits.
As of December 31, 2017, we have federal net operating loss carry-forwards of approximately $759.9 million which have been reduced for the realized cancellation of indebtedness income (“CODI”) of $353.7 million resulting from the Chapter 11 Cases. These carryforwards are subject to IRC Section 382 and it is estimated $129.2 million will be available to offset future U.S taxable income.
IRC Sections 382 and 383 provide an annual limitation with respect to the ability of a corporation to utilize its tax attributes, as well as certain built-in losses, against future U.S. taxable income in the event of a change in ownership. The Company’s emergence from the Chapter 11 Cases was considered a change in ownership for purposes of IRC Section 382. The limitation under the tax code is based on the value of the Company as of the Effective Date. This ownership change resulted in limitation which will eliminate an estimated $630.7 million of federal net operating losses previously available to offset future U.S. taxable income. The Company also has net operating losses in Louisiana and Mississippi which will be subject to limitation due to the ownership change. The Company estimates state net operating losses (“NOLs”) available for use of $63.3 million in Louisiana and $83.5 million in Mississippi after the reduction for unusable NOLs due to the ownership change.
We did not have any unrecognized tax benefits as of December 31, 2017. The amount of unrecognized tax benefits may change in the next twelve months; however we do not expect the change to have a significant impact on our results of operations or our financial position. We file a consolidated federal income tax return in the United States and various combined and separate filings in several state and local jurisdictions. With limited exceptions, we are no longer subject to U.S. Federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2010.
Our continuing practice is to recognize estimated interest and penalties related to potential underpayment on any unrecognized tax benefits as a component of income tax expense in the Consolidated Statement of Operations. We do not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits and the expiration of statute of limitations before December 31, 2017.