5. Income Taxes

The Company operates through its various subsidiaries in the United States (“U.S.”); accordingly, income taxes have been provided based upon the tax laws and federal and state income tax rates in the U.S. as they apply to the Company’s current ownership structure.

On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act (“the Tax Reform Act”) was enacted. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and removing the expiration of net operating losses. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. As a result of the Tax Reform Act, the Company recorded a tax expense of $9.2 million due to a remeasurement of deferred tax assets and liabilities. This tax expense represents a provisional amount and the Company’s current best estimates. Any adjustments recorded to the provisional amounts through the first quarter of fiscal 2018 will be included in income from operations as an adjustment to tax expense. The provisional amounts incorporate assumptions made based upon the Company’s current interpretation of the Tax Reform Act and may change as the Company receives additional clarification and implementation guidance.

The Company accounts for income taxes pursuant to Accounting Standards Codification (ASC) 740, Accounting for Income Taxes, which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in Isramco’s financial statements or tax returns. The Company provides for deferred taxes on temporary differences between the financial statements and tax basis of its assets using the enacted tax rates that are expected to apply to taxable income when the temporary differences are expected to reverse.

The Company adopted Accounting Standards Codification (ASC) 740-10, effective January 1, 2007.  The Company recognizes interest and penalties related to unrecognized tax benefits within the provision for income taxes on continuing operations. There were no unrecognized tax benefits that if recognized would affect the tax rate. There were no interest or penalties recognized as of the date of adoption or for the twelve months ended December 31, 2017.  The Company’s tax years subsequent to 2014 currently remain open and subject to examination by federal tax authorities and the tax authorities in Colorado, Louisiana, Michigan, New Mexico, Oklahoma, Texas, and Utah which are the jurisdictions in which the Company has had its principal operations. In certain of these jurisdictions, the Company operates through more than one legal entity, each of which may have different open years subject to examination. It is important to note that years are technically open for examination until the statute of limitations in each respective jurisdiction expires.

The income tax provision differs from the amount of income tax determined by applying the Federal Income Tax Rate to pre-tax income from continuing operations due to the following items:

(1) See Recent Changes in US Tax Law, above. Rate will decrease to 21.0% for fiscal year 2018
 

Deferred tax assets at December 31, 2017 and 2016 are comprised primarily of net operating loss carry forwards and book impairment from write downs of assets. Book basis in excess of tax basis for oil and gas properties and equipment primarily results from differing methodologies for recording property costs and depreciation, depletion and amortization under accounting principles generally accepted in the United States and the applicable income tax statutes and regulations in the jurisdictions in which the Company operates.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the appropriate tax jurisdictions during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, current financial position, results of operations, projected future taxable income and tax planning strategies as well as current and forecasted business economics in the oil and gas industry. Based on the level of historical taxable income and projections for future taxable income, we believe it is unlikely that we will realize the benefits of these net operating loss carryforwards and other deferred tax assets as we do not expect to have a realizable taxable income subject to deduction. Therefore, we have included a full valuation allowance to decrease the deferred tax assets balances to zero.

Effective December 21, 2016, the Israeli government decreased the corporate income tax rate from 25% to 24% for 2017 and announced a further rate decrease from 24% to 23% effective January 2018. A full valuation allowance has been recorded against foreign tax credits based on current interpretation of US Tax Reform law and the expected future utilization of foreign tax credits stems from a lower tax rate of 21% applied on taxable income in United States.

The principal components of the Company’s deferred tax assets as of December 31 were as follows (in thousands):

Components of income (loss) from operations before income taxes are as follows (in thousands):

The principal components of the Company’s Income Tax Provision for the years indicated below were as follows (in thousands):

At December 31, 2017 the Company has U.S. tax loss carry forwards of approximately $2,895,166 which will expire in various amounts beginning in 2028 and ending in 2036.  Utilization of such loss carry forwards could be limited to the extent Isramco has an ownership change that triggers the limitation under Section 382 of Internal Revenue Code of 1986, as amended. A full valuation allowance has been recorded to decrease deferred tax balances associated with loss carry forwards according to our interpretation of US Tax Law and expectations of future usage of these loss carry forwards.