Bonanza Creek Energy, Inc.

INCOME TAXES

On December 22, 2017 the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that will affect 2017, including but not limited to, (1) bonus depreciation that will allow for full (100%) expensing of qualified property acquired and placed into service after September 27, 2017, and (2) limitations on the deductibility of certain executive compensation under IRC §162(m) related to plans made after November 2, 2017.

The Tax Act also establishes new tax laws that will affect 2018, including but not limited to, (1) reduction of U.S. federal corporate tax rate to 21%; (2) the elimination of the corporate alternative minimum tax (“AMT”) and refunding of existing AMT credit carryforwards; (3) limitation on deductible interest expense; (4) the repeal of the domestic production activity deduction (DPAD); and (5) limitations on net operating losses (“NOL’s”) generated after December 31, 2017 to 80% of taxable income. The NOL’s generated in 2018 and beyond are to be carried forward indefinitely with no carryback.

The Tax Act preserved the deductibility of intangible drilling costs for federal income tax purposes, which allows us to deduct all or a portion of intangible drilling costs in the year incurred and minimizes current taxes payable in periods of taxable income.

Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, given the provisions of enacted tax laws. On December 22, 2017, the Tax Act was enacted, which reduced the federal corporate tax rate from 35% to 21% beginning January 1, 2018. We recognized the effect of this rate change on our deferred tax assets and liabilities in 2017, which resulted in a noncash decrease to the income tax provision of $74.0 million, which was subject to a valuation allowance at December 31, 2017. Tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. In addition, the Tax Act provides for a refund of previous AMT credits, and we accordingly reversed the valuation allowance on our AMT credit carryforward of $0.4 million that will now be refundable through 2021 and have reclassified this amount from deferred tax asset to other noncurrent assets on the accompanying balance sheets.

We will continue to analyze the Tax Act and future IRS regulations, refine its calculations and gain a more thorough understanding of how individual states are implementing this new law. This further analysis could potentially affect the measurement of deferred tax balances or potentially give rise to new deferred tax amounts.

Deferred tax assets and liabilities are measured by applying the provisions of enacted tax laws to determine the amount of taxes payable or refundable currently or in future years related to cumulative temporary differences between the tax bases of assets and liabilities and amounts reported in the Company’s balance sheet. The tax effect of the net change in the cumulative temporary differences during each period in the deferred tax assets and liabilities determines the periodic provision for deferred taxes.

The provision for income taxes consists of the following (in thousands):



	Successor		Predecessor
	April 29, 2017 through December 31, 2017		January 1, 2017 through April 28, 2017		Year Ended December 31, 2016		Year Ended December 31, 2015

Current tax (expense) benefit
Federal	$	376	$	—	$	—	$	192
State		—		—		—		(965	)
Deferred tax (expense) benefit		—		—		—		165,667
Total income tax (expense) benefit	$	376	$	—	$	—	$	164,894

Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to the net deferred tax liability result from the following components (in thousands):



	Successor		Predecessor
	As of December 31, 2017		As of December 31, 2016

Deferred tax liabilities:
Oil and gas properties	$	—	$	4,136
Total deferred tax liabilities		—		4,136
Deferred tax assets:
Federal and state tax net operating loss carryforward		117,115		234,544
Oil and gas properties		1,319		—
Derivative liability		3,457		—
Reclamation costs		9,516		11,841
Stock compensation		1,419		6,694
Accrued compensation		1,285		2,228
Inventory		1,529		—
Settlement liabilities		—		2,761
AMT credit		—		403
State bonus depreciation addback		1,089		1,481
Other long-term liabilities		231		406
Total deferred tax assets		136,960		260,358
Less: Valuation allowance		136,960		256,222
Total deferred tax assets after valuation allowance		—		4,136
Total non-current net deferred tax liability	$	—	$	—

The Company has $477.6 million and $618.5 million of net operating loss carryovers for federal income tax purposes, of which $0.0 million and $14.4 million is not recorded as a benefit for financial statement purposes as it relates to tax deductions that are different from the stock-based compensation expense recorded for financial statement purposes, as of December 31, 2017 and 2016, respectively. The federal net operating loss carryforward begins to expire in 2031. The benefit of these excess tax deductions will not be recognized for financial statement purposes until the related deductions reduce taxes payable.

Federal income tax expense differs from the amount that would be provided by applying the statutory United States federal income tax rate of 35% to income before income taxes primarily due to the effect of state income taxes, rate changes, and other permanent differences, as follows (in thousands):



	Successor			Predecessor
	April 29, 2017 through December 31, 2017			January 1, 2017 through April 28, 2017			Year Ended December 31, 2016			Year Ended December 31, 2015

Federal statutory tax (expense) benefit by applying the statutory rate	$	1,889		$	(931	)	$	69,633		$	318,654
Decrease (increase) in tax resulting from:
State tax expense net of federal benefit		172			(85	)		6,358			30,178
Prior year true-up		—			(7,572	)		—			—
Stock compensation		—			(1,773	)		—			—
Permanent differences		(715	)		(35,273	)		—			—
Rate change		(73,956	)		—			—			—
Other		(642	)		—			(317	)		(3,390	)
Valuation allowance		73,628			45,634			(75,674	)		(180,548	)
Total income tax (expense) benefit	$	376		$	—		$	—		$	164,894

During the year ended December 31, 2017, the decrease in tax rate was primarily due to the enactment of the Tax Act. There was $0.4 million of current income tax benefits in the accompanying statements of operations due to the AMT payments being refunded as prescribed in the Tax Act. The valuation allowance decreased to $137.0 million in 2017 due to decreased tax rate as mandated by the Tax Act. Net operating losses are inherently subject to changes in ownership.

During the year ended December 31, 2016, the decrease in tax rate was primarily due to placing a valuation allowance against net deferred tax assets. There was no deferred income tax benefit or expense in the accompanying statements of operations. The valuation allowance increased to $256.2 million in 2016 due to continued deterioration of our operational results. Net operating losses are inherently subject to changes in ownership.

During the year ended December 31, 2015, the decrease in tax rate was primarily due to placing a valuation allowance against net deferred tax assets. Total deferred income tax benefit in the accompanying statements of operations is $165.7 million.

The Company had no unrecognized tax benefits as of December 31, 2017, 2016 and 2015.