INCOME TAXES
We account for income taxes in accordance with Accounting Standard Codification 740, Income Taxes. This standard requires the recognition of deferred tax assets and liabilities for the tax effect of temporary differences between the financial statement and tax basis of recorded assets and liabilities at enacted tax rates in effect when the related taxes are expected to be settled or realized. We recognize income taxes in each of the tax jurisdictions where we conduct business. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
A summary of the provision for income taxes is as follows (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current portion of income tax expense (benefit): | | | | | | |
Federal | | $ | (2,793 | ) | | $ | (1,365 | ) | | $ | — |
|
State | | 10 |
| | 3 |
| | (123 | ) |
Deferred portion of income tax expense: | | | | | | |
Federal | | — |
| | — |
| | 116,128 |
|
State | | — |
| | — |
| | 33,968 |
|
Total income tax (benefit) expense | | $ | (2,783 | ) | | $ | (1,362 | ) | | $ | 149,973 |
|
A reconciliation of the federal statutory income tax rate of 35% to our effective rate is as follows (in thousands, except percentages):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Federal taxes at statutory rate | | $ | (8,992 | ) | | $ | (23,793 | ) | | $ | (131,181 | ) |
Add: | |
|
| |
|
| |
|
|
State taxes, net of federal benefit | | (1,414 | ) | | (4,982 | ) | | (18,639 | ) |
Change in valuation allowance | | (104,507 | ) | | 25,496 |
| | 300,333 |
|
Change in federal and state tax rates | | 115,545 |
| | — |
| | — |
|
Percentage depletion | | (598 | ) | | (552 | ) | | (1,285 | ) |
Other | | (2,817 | ) | | 2,469 |
| | 745 |
|
Net (benefit) expense as calculated | | $ | (2,783 | ) | | $ | (1,362 | ) | | $ | 149,973 |
|
| | | | | | |
Effective tax rate | | 10.8 | % | | 2.0 | % | | (40.0 | )% |
During the year ended December 31, 2017, our effective tax rate was impacted by the decrease in our expected future rate at which our deferred tax assets will reverse due to newly enacted federal tax legislation, which reduced the value of our deferred tax assets by $115.5 million. Since we have a full valuation allowance against our deferred tax assets, a corresponding decrease in our valuation allowance was also required. Additionally, our valuation allowance increased due to increases in our deferred tax asset related to current year activity. The net decrease in our valuation allowance was $104.5 million for the year ended December 31, 2017. Finally, our effective tax rate was impacted by a benefit of $2.7 million related to our ability to monetize existing alternative minimum tax credits through a carryback as well as an election available to taxpayers in 2017.
During the year ended December 31, 2016, our effective tax rate was impacted by the increase in our valuation allowance of $25.5 million, as well as an election to monetize a portion of our existing alternative minimum tax credits in the amount of $1.4 million.
During the year ended December 31, 2015, our effective tax rate was impacted by the increase in our valuation allowance of $300.3 million.
As of December 31, 2017, and 2016, we had gross deferred tax assets of $221.6 million and $326.1 million, respectively. During the year ended December 31, 2017, our deferred tax assets decreased primarily due to a decrease in our expected future tax rate at which our deferred tax assets will be recovered because of federal tax legislation enacted in December 2017. Included in gross deferred tax assets as of December 31, 2017, were approximately $247.8 million of federal net operating loss carryforwards, which expire beginning in 2033, and approximately $314.4 million of state net operating loss carry forwards, the majority of which begin to expire in 2033. Also included are $1.9 million of federal research and development credits which begin to expire in 2031. The federal loss carryforward could be subject to examination by the tax authorities within three years after the carryforward is utilized, while the state net operating loss carryforwards could be subject to examination by the tax authorities generally within three and four years after the carryforward is utilized, depending on jurisdiction.
Significant components of our deferred tax assets and liabilities were as follows (in thousands):
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred tax assets (liabilities): | | | | |
Property, plant, equipment and mineral properties, net | | $ | 136,543 |
| | $ | 212,049 |
|
Federal and state net operating loss carryforwards | | 68,733 |
| | 85,695 |
|
Other | | 7,225 |
| | 9,665 |
|
Asset retirement obligation | | 5,472 |
| | 10,934 |
|
R&D credits | | 1,896 |
| | 1,896 |
|
Equity compensation | | 1,529 |
| | 3,542 |
|
Inventory | | 947 |
| | 1,285 |
|
Accrued employee compensation and benefits | | 24 |
| | (239 | ) |
AMT credits | | — |
| | 2,861 |
|
Prepaid expenses | | $ | (779 | ) | | $ | (1,591 | ) |
Total deferred tax assets | | 221,590 |
| | 326,097 |
|
Valuation allowance | | (221,590 | ) | | (326,097 | ) |
Deferred tax asset, net | | $ | — |
| | $ | — |
|
In assessing the need for a valuation allowance, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing the relative impact of all the available positive and negative evidence regarding our forecasted taxable income using both historical and projected future operating results, the reversal of existing taxable temporary differences, taxable income in prior carryback years, as permitted by regulation, and the availability of tax planning strategies. The ultimate realization of deferred tax assets is dependent upon the generation of certain types of future taxable income during the periods in which those temporary differences become deductible. In making this assessment, we consider the scheduled reversal of deferred tax liabilities, our ability to carry back the deferred tax asset, projected future taxable income, and tax planning strategies.
As of December 31, 2017, and 2016, we have a full valuation allowance against our deferred tax assets because we do not believe it is more likely than not that we will fully realize the benefit of the deferred tax assets. During 2017, our valuation allowance decreased $104.5 million due to the decrease in our deferred tax assets related to a decrease in our expected future rate at which our deferred tax assets will reverse, due to federal and state tax legislation enacted in late 2017, and the change in our deferred tax assets due to current year activity. The net change in our valuation allowance is reflected in income tax benefit for the year ended December 31, 2017. Our deferred tax asset, net of the valuation allowance, at both December 31, 2017, and 2016, is zero.
The estimated statutory income tax rates that are applied to our current and deferred income tax calculations are impacted most significantly by the tax jurisdictions in which we conduct business. Changing business conditions for normal business transactions and operations, as well as changes to state tax rates and apportionment laws, potentially alter the apportionment of income among the states for income tax purposes. These changes to apportionment laws result in changes in the calculation of our current and deferred income taxes, including the valuation of our deferred tax assets and liabilities. The effects of any such changes are recorded in the period of the adjustment. Such adjustments can increase or decrease the net deferred tax asset on the balance sheet and impact the corresponding deferred tax benefit or deferred tax expense on the statement of operations.
A decrease of our state tax rate decreases the value of its deferred tax asset, resulting in additional deferred tax expense being recorded in the income statement. Conversely, an increase in our state income tax rate would increase the value of the deferred tax asset, resulting in an increase in our deferred tax benefit. Because of the magnitude of the temporary differences between our book and tax basis in the assets, relatively small changes in the state tax rate may have a pronounced impact on the value of our net deferred tax asset.
Each quarter we evaluate the need for a liability for uncertain tax positions. At December 31, 2017, and 2016, there were no items that required disclosure in accordance with FASB guidance on accounting for uncertainty in income taxes.
We operate, and accordingly file income tax returns, in the U.S. federal jurisdiction and various U.S. state jurisdictions. With few exceptions, we are no longer subject to income tax examinations for years prior to 2014.
The Tax Cuts and Jobs Act was enacted on December 22, 2017. Significant changes to the Internal Revenue Code including reducing the U.S. corporate tax rate were included in the legislation. As a result, the reduced tax rate caused a $115.5 million decrease to our deferred tax asset and related valuation allowance. As the deferred tax asset is subject to a full valuation allowance, the change in rates had no financial statement impact.