INCOME TAXES
On December 22, 2017, the United States enacted significant changes to the U.S. tax law following the passage and signing of H.R.1, “An Act to Provide the Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Act”) (previously known as “The Tax Cuts and Jobs Act”). Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. We have calculated our best estimate of 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 and as result have recorded income tax expense of $21.9 million in the fourth quarter of 2017, the period in which the legislation was enacted. This income tax expense was fully offset by a decrease in the valuation allowance previously recorded on our net deferred tax assets. As such, the Act resulted in no net tax expense. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future was $21.9 million, offset by a corresponding decrease in our valuation allowance. The provisional amount related to the one-time transition tax was zero.
On December 22, 2017, Staff Accounting Bulletin 118 (“SAB 118”) was issued to address the application of US GAAP in situations when a registrant 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. We have made reasonable estimates of the effects and recorded provisional amounts in our financial statement as of December 31, 2017. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
We have not yet completed our calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from US federal taxation and finalize the amounts held in cash or other specified assets.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions of the Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or to treat any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting policy election. A provisional estimate could not be made as we have not yet completed our assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred.
As a partnership, we are generally not subject to income taxes at the entity level because our income is included in the tax returns of our partners. Our operations are treated as a partnership for federal tax purposes with each partner being separately taxed on its share of taxable income. However, a portion of our business is conducted through taxable U.S. corporate subsidiaries. Accordingly, a U.S. federal and state income tax provision has been reflected in the accompanying statements of operations. We have a tax sharing agreement with TETRA with respect to the Texas franchise tax liability. The resulting state tax expense is included in the provision for income taxes. Certain of our operations are located outside of the U.S., and the Partnership is responsible for income taxes in these countries.
The income tax provision (benefit) attributable to our operations for the years ended December 31, 2017, 2016, and 2015 consists of the following:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In Thousands) |
Current | | |
| | |
| | |
|
Federal | | $ | (47 | ) | | $ | — |
| | $ | (1,632 | ) |
State | | 688 |
| | 836 |
| | 1,330 |
|
Foreign | | 1,386 |
| | 999 |
| | 806 |
|
| | 2,027 |
| | 1,835 |
| | 504 |
|
Deferred | | |
| | |
| | |
|
Federal | | — |
| | — |
| | (847 | ) |
State | | 19 |
| | (8 | ) | | (354 | ) |
Foreign | | 738 |
| | 38 |
| | 596 |
|
| | 757 |
| | 30 |
| | (605 | ) |
Total tax provision (benefit) | | $ | 2,784 |
| | $ | 1,865 |
| | $ | (101 | ) |
A reconciliation of the provision (benefit) for income taxes, computed by applying the federal statutory rate to income before income taxes and the reported income taxes, is as follows:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In Thousands) |
Income (loss) tax provision computed at statutory federal income tax rates | | $ | (12,809 | ) | | $ | (46,332 | ) | | $ | (49,888 | ) |
Partnership (earnings) losses | | 12,809 |
| | 46,332 |
| | 49,888 |
|
Corporate subsidiary earnings (loss) subject to federal tax | | 5,805 |
| | (33,791 | ) | | (36,712 | ) |
Impact of goodwill impairments | | — |
| | 2,134 |
| | 3,341 |
|
Impact of U.S. tax law change | | 21,928 |
| | — |
| | — |
|
Valuation allowances | | (28,236 | ) | | 33,056 |
| | 33,682 |
|
Income tax expense attributable to foreign earnings | | 2,565 |
| | 1,297 |
| | 92 |
|
State income taxes (net of federal benefit) | | 734 |
| | (849 | ) | | (619 | ) |
Nondeductible expenses | | 36 |
| | 23 |
| | 79 |
|
Other | | (48 | ) | | (5 | ) | | 36 |
|
Total tax provision (benefit) | | $ | 2,784 |
| | $ | 1,865 |
| | $ | (101 | ) |
Corporate subsidiary earnings (loss) subject to federal tax for 2017 includes $11.1 million related to a cumulative correcting cost allocation adjustment between U.S. subsidiary entities from prior years, the net impact from which is considered immaterial.
Income (loss) before income tax provision includes the following components:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In Thousands) |
Domestic | | $ | (40,649 | ) | | $ | (146,007 | ) | | $ | (150,814 | ) |
International | | 2,974 |
| | 9,734 |
| | 4,083 |
|
Total | | $ | (37,675 | ) | | $ | (136,273 | ) | | $ | (146,731 | ) |
We file U.S. federal, state, and foreign income tax returns on behalf of all of our consolidated subsidiaries. With few exceptions, we are not subject to U.S. federal, state, local, or non-U.S. income tax examinations by tax authorities for years prior to 2010. We file tax returns in the U.S. and in various state, local and non-U.S. jurisdictions. The following table summarizes the earliest tax years that remain subject to examination by taxing authorities in any major jurisdiction in which we operate:
|
| |
Jurisdiction | Earliest Open Tax Period |
United States – Federal | 2014 |
United States – State and Local | 2012 |
Non-U.S. jurisdictions | 2011 |
We use the liability method for reporting income taxes, under which current and deferred tax assets and liabilities are recorded in accordance with enacted tax laws and rates. Under this method, at the end of each period, the amounts of deferred tax assets and liabilities are determined using the tax rate expected to be in effect when the taxes are actually paid or recovered. We establish a valuation allowance to reduce the deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. While we consider taxable income in prior carryback years, future reversals of existing taxable temporary differences, future taxable income, and tax planning strategies in assessing the need for the valuation allowance, there can be no guarantee that we will be able to realize all of our deferred tax assets. Significant components of our deferred tax assets and liabilities are as follows:
Deferred Tax Assets
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In Thousands) |
Inventory reserve | | $ | 270 |
| | $ | 690 |
|
Amortization for book in excess of tax expense | | 27,721 |
| | 46,487 |
|
Accruals | | 264 |
| | 452 |
|
Net operating losses | | 17,809 |
| | 33,300 |
|
Bad debt reserve | | 144 |
| | 472 |
|
Other | | 42 |
| | 84 |
|
Total deferred tax assets | | 46,250 |
| | 81,485 |
|
Valuation allowance | | (39,367 | ) | | (69,176 | ) |
Net deferred tax assets | | $ | 6,883 |
| | $ | 12,309 |
|
Deferred Tax Liabilities
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In Thousands) |
Accruals | | $ | 1,076 |
| | $ | 269 |
|
Depreciation for tax in excess of book expense | | 7,011 |
| | 11,892 |
|
All other | | 190 |
| | 838 |
|
Total deferred tax liability | | 8,277 |
| | 12,999 |
|
Net deferred tax liability | | $ | 1,394 |
| | $ | 690 |
|
At December 31, 2017, we have federal, state, and foreign net operating loss carryforwards/carrybacks equal to approximately $15.4 million, $1.5 million, and $0.9 million, respectively. In those foreign jurisdictions and states in which net operating losses are subject to an expiration period, our loss carryforwards, if not utilized, will expire from 2019 to 2036. Utilization of the net operating loss and credit carryforwards may be subject to a significant annual limitation due to ownership changes that have occurred previously or could occur in the future provided by Section 382 of the Internal Revenue Code of 1986, as amended.
The decrease in the valuation allowance during the year ended December 31, 2017 was $29.8 million. The change in the valuation allowance during 2017 primarily relates to the decrease in the federal statutory income tax rate from 35% to 21%. The increases in the valuation allowance during the years ended December 31, 2016 and 2015 were $33.0 million and $34.1 million, respectively. The change in the valuation allowance during 2016 primarily relates to deferred tax assets associated with losses generated in our U.S. corporate subsidiaries and certain foreign jurisdictions. We believe that it is more likely than not we will not realize all the tax benefits of the deferred tax assets within the allowable carryforward period. Therefore, an appropriate valuation allowance has been provided.
ASC 740 provides guidance on measurement and recognition in accounting for income tax uncertainties and provides related guidance on derecognition, classification, disclosure, interest, and penalties. As of December 31, 2017 and 2016, the Partnership had no material unrecognized tax benefits (as defined in ASC 740-10). We do not expect to incur interest charges or penalties related to our tax positions, but if such charges or penalties are incurred, our policy is to account for interest charges as interest expense and penalties as tax expense in the consolidated statements of operations.