INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit carry-forwards. Under this method, deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income (loss) in the period that includes the enactment date.
The income tax provision (benefit) for the year ended December 31, 2017, 2016, and 2015 consists of the following:
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| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current |
|
| |
|
| |
|
|
Federal | $ | (785,016 | ) | | $ | (1,402,179 | ) | | $ | (73,649 | ) |
State | — |
| | — |
| | — |
|
Deferred | |
| | |
| | |
|
Federal | 126,501,000 |
| | (99,298,900 | ) | | (398,002,555 | ) |
State | (12,983,000 | ) | | (9,707,000 | ) | | (36,608,000 | ) |
Valuation Allowance | (114,303,000 | ) | | 109,005,900 |
| | 232,260,000 |
|
Total Expense (Benefit) | $ | (1,570,016 | ) | | $ | (1,402,179 | ) | | $ | (202,424,204 | ) |
The following is a reconciliation of the reported amount of income tax benefit for the years ended December 31, 2017, 2016, and 2015 to the amount of income tax expenses that would result from applying the statutory rate to pretax loss.
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| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Income (Loss) Before Taxes and NOL | $ | (10,763,788 | ) | | $ | (294,895,887 | ) | | $ | (1,177,778,745 | ) |
Federal Statutory Rate | 35.00 | % | | 35.00 | % | | 35.00 | % |
Taxes Computed at Federal Statutory Rates | (3,767,000 | ) | | (103,214,000 | ) | | (412,223,000 | ) |
State Taxes, Net of Federal Taxes | (8,476,000 | ) | | (6,306,000 | ) | | (23,825,000 | ) |
Non-Deductible Compensation | 22,000 |
| | 82,000 |
| | 470,000 |
|
Share Based Compensation Tax Deficiency | — |
| | (834,900 | ) | | 307,000 |
|
Federal Rate Reduction | 124,493,000 |
| | — |
| | — |
|
Other | 460,984 |
| | (135,179 | ) | | 586,796 |
|
Valuation Allowance | (114,303,000 | ) | | 109,005,900 |
| | 232,260,000 |
|
Reported Provision (Benefit) | $ | (1,570,016 | ) | | $ | (1,402,179 | ) | | $ | (202,424,204 | ) |
A valuation allowance is established to reduce deferred tax assets if it is determined that it is more likely than not that the related tax benefit will not be realized. On a quarterly basis, management evaluates the need for and adequacy of valuation allowances based on the expected realizability of the deferred tax assets and adjusts the amount of such allowances, if necessary. During 2017, in evaluating whether it was more likely than not that the Company’s net deferred tax assets were realized through future net income, management considered all available positive and negative evidence, including (i) its earnings history, (ii) its ability to recover net operating loss carry-forwards, (iii) the existence of significant proved oil and natural gas reserves, (iv) its ability to use tax planning strategies, (v) its current price protection utilizing oil hedges, (vi) its future revenue and operating cost projections and (vii) the current market prices for oil and natural gas. Based on all the evidence available, management determined it was more likely than not that the net deferred tax assets, other than the deferred tax asset related to the Company’s alternative minimum tax credit, were not realizable, therefore a valuation allowance of $227.0 million was recorded at December 31, 2017. At December 31, 2017, the Company has an alternative minimum tax credit for federal income tax purposes of $0.8 million. Under the Tax Cuts and Jobs Act, enacted in December 2017, the alternative minimum tax credit will be refundable in future years.
At December 31, 2017, the Company had a net operating loss carryforward for federal income tax purposes of $714.5 million. If unutilized, the federal net operating losses will expire from 2031 to 2037.
The significant components of the Company’s deferred tax assets (liabilities) were as follows:
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| | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
Net Operating Loss (NOLs) and Tax Credit Carryforwards | $ | 174,864,900 |
| | $ | 224,679,900 |
|
Share Based Compensation | 797,000 |
| | 1,032,000 |
|
Accrued Interest | 1,144,000 |
| | 1,727,000 |
|
Allowance for Doubtful Accounts | 1,360,000 |
| | 1,795,000 |
|
Crude Oil and Natural Gas Properties and Other Properties | 42,329,000 |
| | 107,642,000 |
|
Derivative Instruments | 7,393,000 |
| | 4,341,000 |
|
Other | (140,000 | ) | | 49,000 |
|
Total Net Deferred Tax Assets (Liabilities) Before Valuation Allowance | 227,747,900 |
| | 341,265,900 |
|
| | | |
Valuation Allowance | (226,962,900 | ) | | (341,265,900 | ) |
| | | |
Total Net Deferred Tax Assets | $ | 785,000 |
| | $ | — |
|
Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards. The Company has no liabilities for unrecognized tax benefits.
The Company’s policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the years ended December 31, 2017, 2016 and 2015, the Company did not recognize any interest or penalties in its statements of operations, nor did it have any interest or penalties accrued in its balance sheet at December 31, 2017 and 2016 relating to unrecognized benefits.
The tax years 2017, 2016, 2015, 2014, 2013, 2012, 2011 and 2010 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which the Company is subject.
The Protecting Americans from Tax Hikes Act of 2015 (PATH) was enacted on December 18, 2015. PATH retroactively extended various temporary individual and business tax incentives for 2015 and in some instances extended certain incentives through 2019. Bonus tax depreciation, a favorable tax incentive for the Company, was extended from 2015 through 2019. In 2017 and 2016, the Company utilized $0.8 million and $1.4 million of its alternative minimum tax credit, respectively, as a result of favorable tax incentives within PATH.
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (“the Act”) which made significant changes that affect the Company. Beginning January 1, 2018, the Company will be taxed at a 21% federal corporate tax rate. The Company has reflected the impact of this rate enactment on its deferred tax assets and liabilities at December 31, 2017, the Company is required to reflect the change in the period in which the law is enacted. The impact of this change was a net reduction in deferred tax assets of $124.5 million, before valuation allowance. The Company’s valuation allowance was reduced by $125.3 million. Due to the Company’s valuation allowance position the net effect of the Act was a tax benefit of $0.8 million.
The Act also repeals the corporate alternative minimum tax for tax years beginning after December 31, 2017 and provides that prior alternative minimum tax credits will be refundable. The Company has credits that are expected to be refunded between 2018 and 2021 as a result of the Act and monetization opportunities under current tax laws.
The Act is a comprehensive tax reform bill containing a number of other provisions that either currently or in the future could impact the Company. The Company has completed the analysis of the Act and does not expect a material change due to the transition impacts. Any changes that do arise due to changes in interpretations of the Act, legislative action to address questions that arise because of the Act, changes in accounting standards for income taxes or related interpretations in response to the Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts will be disclosed in future periods as they arise. The effect of certain limitations effective for the tax year 2018 and forward, specifically related to the deductibility of executive compensation and interest expense, have been evaluated.