Income Taxes
The following table shows the components of the income tax expense (benefit) for the periods indicated: |
| | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Five Months Ended December 31, | | | Seven Months Ended July 31, | | Year Ended December 31, | | Year Ended December 31, |
| 2017 | | | 2017 | | 2016 | | 2015 |
Current income tax expense (benefit): | | | | | | | | |
Federal | $ | (251 | ) | | | $ | — |
| | $ | 477 |
| | $ | (137 | ) |
State | 146 |
| | | 15 |
| | 105 |
| | 21 |
|
Total Current | (105 | ) | | | 15 |
| | 582 |
| | (116 | ) |
Deferred income tax expense (benefit): | | | | | | | | |
Federal | (186 | ) | | | (51 | ) | | 217 |
| | 115 |
|
State | (56 | ) | | | (286 | ) | | 8 |
| | (116 | ) |
Total Deferred | (242 | ) | | | (337 | ) | | 225 |
| | (1 | ) |
Total income tax (benefit) expense from continuing operations | $ | (347 | ) | | | $ | (322 | ) | | $ | 807 |
| | $ | (117 | ) |
A reconciliation of the income tax (expense) benefit and the amount computed by applying the statutory federal income tax rate of 35% to loss from continuing operations before income taxes is as follows: |
| | | | | | | | | | | | |
| Successor | | | Predecessor |
| Five Months Ended December 31, | | | Seven Months Ended July 31, | | Year Ended December 31, | | Year Ended December 31, |
| 2017 | | | 2017 | | 2016 | | 2015 |
U.S. federal income tax benefit at statutory rate | 35.0 | % | | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State and local income taxes, net of federal benefit | 1.5 | % | | | 0.8 | % | | 3.3 | % | | 0.9 | % |
Compensation | (0.5 | )% | | | 0.1 | % | | (0.2 | )% | | (0.6 | )% |
Impact of fresh start accounting adjustments | — | % | | | 3.3 | % | | — | % | | — | % |
Impairment of goodwill | — | % | | | — | % | | — | % | | (18.8 | )% |
Tax Act revaluation of deferred tax balances | 69.9 | % | | | — | % | | — | % | | — | % |
Change in valuation allowance | (105.5 | )% | | | (40.3 | )% | | (38.7 | )% | | (16.4 | )% |
Other | 0.3 | % | | | 0.9 | % | | 0.1 | % | | (0.1 | )% |
Benefit (expense) for income taxes | 0.7 | % | | | (0.2 | )% | | (0.5 | )% | | — | % |
Significant components of our deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows:
|
| | | | | | | |
| Successor | | Predecessor |
| December 31, | | December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Reserves | $ | 494 |
| | $ | 1,604 |
|
Deferred financing costs | 233 |
| | 530 |
|
Net operating losses | 65,600 |
| | 123,382 |
|
Federal credit carryover | 226 |
| | 477 |
|
Equity based compensation | — |
| | 624 |
|
Long-term debt | — |
| | 74,412 |
|
Intangible asset and goodwill | 11,982 |
| | 16,781 |
|
Capital loss carry forward | 42,671 |
| | 67,766 |
|
Other | 3,663 |
| | 6,360 |
|
Total | 124,869 |
| | 291,936 |
|
Less: Valuation allowance | (88,766 | ) | | (236,080 | ) |
Total deferred tax assets | 36,103 |
| | 55,856 |
|
Deferred tax liabilities: | | | |
Fixed assets | (35,538 | ) | | (55,649 | ) |
Other | (481 | ) | | (702 | ) |
Total deferred tax liabilities | (36,019 | ) | | (56,351 | ) |
Net deferred tax asset (liability) | $ | 84 |
| | $ | (495 | ) |
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation (the “Tax Act”). This legislation makes significant changes in U.S. tax law including a reduction in the corporate statutory income tax rates from 35% to 21%, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. As a result of the enacted law, we were required to revalue deferred tax assets and liabilities as of December 22, 2017 using the new statutory rate and have reflected this revaluation in our effective tax rate reconciliation. The Tax Act’s impact in 2017 reduced the value of our net deferred tax asset balance by $50.8 million at December 31, 2017. As we are subject to a valuation allowance, there was no material impact to our tax provision. The other provisions of the Tax Act did not have a material impact on the 2017 consolidated financial statements.
As of December 31, 2017, we had net operating loss (“NOL”) carryforwards for federal income tax purposes of approximately $251.6 million, which expire in 2031 through 2037, state NOL carryforwards of approximately $277.3 million, which expire in 2018 through 2037, federal alternative minimum tax credits of $0.2 million, which do not expire and will be refunded over a four year period beginning in 2018, and capital loss carryforwards of approximately $188.5 million, which begin to expire in 2019. Pursuant to United States Internal Revenue Code Section 382, if we undergo an ownership change, the NOL carryforward limitations would impose an annual limit on the amount of the taxable income that may be offset by our NOLs generated prior to the ownership change. We have determined that an ownership change occurred on April 15, 2016 as a result of the debt restructuring that occurred during fiscal 2016. In addition, another ownership change occurred on August 7, 2017 as a result of the chapter 11 reorganization described further in Note 4. The limitation under Section 382 may result in federal NOLs expiring unused. Subject to the impact of those rules as a result of past or future restructuring transactions, we may be unable to use all or a significant portion of our NOLs to offset future taxable income.
As required by GAAP, we assess the recoverability of our deferred tax assets on a regular basis and record a valuation allowance for any such assets where recoverability is determined to be not more likely than not. As a result of our continued losses, we determined that our deferred tax liabilities were not sufficient to fully realize our deferred tax assets prior to the expiration of our NOLs, and accordingly, a valuation allowance continues to be required to be recorded against our deferred tax assets. We have recorded a decrease of approximately $147.3 million to our valuation allowance during the year ended December 31, 2017. The decrease in the valuation allowance during 2017 primarily relates to the impact of fresh start accounting adjustments and debt forgiveness, as well as the decrease in the federal statutory income tax rate as a result of the Tax Act. We recorded an increase of approximately $64.4 million to our valuation allowance during the year ended December 31, 2016. As a result of the restructuring of our debt in 2016, we realized $211.8 million of cancellation of debt income, of which $65.1 million was excluded from income due to an insolvency exception and $146.7 million was recognized for income tax purposes during the year ended December 31, 2016. We reduced our net operating loss carryforward by the amount of the insolvency exclusion during 2016.
A reconciliation of our valuation allowance on deferred tax assets for the years ended December 31, 2017 and 2016 is as follows: |
| | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, | | | Year Ended December 31, |
| 2017 | | | 2016 |
Balance at beginning of period | $ | 236,080 |
| | | $ | 171,720 |
|
Additions to valuation allowance | — |
| | | 64,360 |
|
Valuation allowance release, net | (147,314 | ) | | | — |
|
Balance at end of period | $ | 88,766 |
| | | $ | 236,080 |
|
As of December 31, 2017 and 2016 we did not have any unrecognized tax benefits as the previous unrecognized tax benefits lapsed due to the statute of limitations.
We recognize potential accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. We did not have any accrued interest and penalties as of December 31, 2017 and 2016. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.
We are subject to the following significant taxing jurisdictions: U.S. federal, Pennsylvania, Louisiana, North Dakota, Ohio, Texas, West Virginia, and Arizona. We have had NOLs in various years for federal purposes and for many states. The statute of limitations for a particular tax year for examination by the Internal Revenue Service is generally three years subsequent to the filing of the associated tax return. However, the Internal Revenue Service can adjust NOL carryovers up to three years subsequent to the last year in which the loss carryover is finally used. Accordingly, there are multiple years open to examination. The statute of limitations is generally three to four years for many of the states where we operate. The Company is currently not under income tax examination in any tax jurisdictions.