ANTERO RESOURCES Corp

(13) Income Taxes

For the years ended December 31, 2015, 2016, and 2017, income tax expense (benefit) consisted of the following (in thousands):


	Year ended December 31,
	2015		2016		2017
Current income tax expense (benefit)	$	—		(10,984)		75
Deferred income tax expense (benefit)		575,890		(485,392)		(295,126)
Total income tax expense (benefit)	$	575,890		(496,376)		(295,051)

Income tax expense (benefit) differs from the amount that would be computed by applying the U.S. statutory federal income tax rate of 35% to income or loss before taxes for the years ended December 31, 2015, 2016, and 2017 as a result of the following (in thousands):


	Year ended December 31,
	2015		2016		2017
Federal income tax expense (benefit)	$	544,560		(436,038)		171,530
State income tax expense (benefit), net of federal benefit		26,983		(20,364)		10,779
Change in Federal tax rate, net of state benefit (1)		—		—		(427,962)
Nondeductible equity-based compensation		16,441		3,691		12,098
Noncontrolling interest in Antero Midstream		(13,521)		(34,780)		(59,523)
Change in valuation allowance		570		(10,852)		(2,073)
Other		857		1,967		100
Total income tax expense (benefit)	$	575,890		(496,376)		(295,051)

(1)

The change in the Federal tax rate was due to the passage of Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act. The passage of this legislation resulted in the Company generating a deferred tax benefit primarily due to the reduction in the U.S. statutory rate from 35% to 21%. Based on the Company’s current interpretation and subject to the release of the related regulations and any future interpretive guidance, the Company believes the effects of the change in tax law incorporated herein are substantially complete.

Deferred income taxes reflect the impact of temporary differences between assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. The tax effect of the temporary differences giving rise to net deferred tax assets and liabilities at December 31, 2016 and 2017 is as follows (in thousands):


	2016		2017
Deferred tax assets:
Net operating loss carryforwards	$	495,275		727,522
Equity-based compensation		20,344		12,062
Investment in Antero Midstream		13,028		38,613
Other		16,483		11,236
Total deferred tax assets		545,130		789,433
Valuation allowance		(16,357)		(17,361)
Net deferred tax assets		528,773		772,072
Deferred tax liabilities:
Unrealized gains on derivative instruments		605,487		442,855
Oil and gas properties		866,003		1,058,543
Other		7,500		50,319
Total deferred tax liabilities		1,478,990		1,551,717
Net deferred tax liabilities	$	(950,217)		(779,645)

In assessing the realizability of deferred tax assets, management considers whether some portion or all of the deferred tax assets will be realized based on a more-likely-than-not standard of judgment. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the Company’s temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the projections of future taxable income over the periods in which the deferred tax assets are deductible, management believes that the Company will not realize the benefits of certain of these deductible differences and has recorded a valuation allowance of approximately $16 million and $17 million at December 31, 2016 and 2017, respectively related to net operating loss (NOL) carryforwards primarily attributable to states where the Company no longer operates. The amount of the deferred tax asset considered realizable could be further reduced in the near term if estimates of future taxable income during the carryforward period are revised.

The calculation of the Company’s tax liabilities involves uncertainties in the application of complex tax laws and regulations. The Company gives financial statement recognition to those tax positions that it believes are more‑likely-than‑not to be sustained upon examination by the Internal Revenue Service or state revenue authorities. In 2016, the Company reversed unrecognized benefits recorded in prior years due to the expiration of the applicable statutes of limitations. The removal of the unrecognized benefits did not impact the Company’s 2016 effective tax rate. The Company will continue to monitor potential uncertain tax positions, but does not anticipate any changes within the next year. A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2015, 2016, and 2017 is as follows:


	2015		2016		2017
Balance at beginning of year	$	11,000		11,000		—
Reductions for tax positions of prior years		—		(11,000)		—
Balance at end of year	$	11,000		—		—

As of December 31, 2017, the Company has U.S. Federal and state NOL carryforwards of $3.0 billion and $2.3 billion, respectively, which expire at various dates from 2018 to 2037.

The tax years 2014 through 2017 remain open to examination by the U.S. Internal Revenue Service. The Company and its subsidiaries file tax returns with various state taxing authorities; these returns remain open to examination for tax years 2013 through 2017.