Note 9. Income Taxes

 

The components of the federal income tax provision for the years ended December 31, 2017, 2016 and 2015 are (in thousands):

 

 

The difference between the statutory federal income taxes calculated using a U.S. federal statutory corporate income tax rate of 35% and the Company’s effective tax rate of (5.7)% is summarized as follows (in thousands):

 

 

The Company’s deferred tax position reflects the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting. Significant components of the deferred tax assets and liabilities are as follows (in thousands):

 

 

As of December 31, 2017, the Company had NOLs of approximately $1,737.7 million which begin to expire in 2031. Additionally, the Company had net operating losses in the states of Montana, Mississippi, and Louisiana which will begin to expire in 2018, 2033 and 2026, respectively.

 

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2017.

 

On the basis of this evaluation, as of December 31, 2017, a valuation allowance of approximately $338.6 million has been recorded to record only the portion of the deferred tax asset that is more likely than not to be realized. The Company will continue to assess the need for a valuation allowance against deferred tax assets considering all available information obtained in future reporting periods.

 

The Company files income tax returns in the U.S. and various state jurisdictions. Sanchez is no longer subject to examination by federal income tax authorities prior to 2014. State statutes vary by jurisdiction.

 

As of December 31, 2017, 2016 and 2015, the Company had no material uncertain tax positions.

 

On December 22, 2017, the President signed into law Public Law No. 115-97, a comprehensive tax reform bill commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that significantly reforms the Internal Revenue Code of 1986, as amended (the “Code”).  Among the many provisions included in the Tax Act is a provision to reduce the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018.

 

We recognized the income tax effects of the Tax Act in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes.  The guidance allows for a measurement period of up to one year after the enactment date to finalize the recording of the related tax impacts.  As such, our 2017 financial results reflect the provisional income tax effects of the Tax Act for which the accounting under ASC Topic 740 is incomplete, but a reasonable estimate could be determined.  We did not identify any items for which the income tax effects of the Tax Act could not be reasonably estimated as of December 31, 2017. 

 

As of December 31, 2017, we had deferred tax assets primarily related to our net operating loss carryforwards. Prior to the Tax Act, the value of these deferred tax assets was recorded at the previous income tax rate of 35%, which represented their expected future benefit to us. As a result of the Tax Act, the future benefit of these deferred tax assets was re-measured at the new income tax rate of 21% and we recorded an approximate $227.4 million provisional non-cash adjustment (exclusive of a valuation allowance) for the year ended December 31, 2017. We determined the effects of the rate change using our best estimate of temporary book-to-tax differences. Upon final analysis and remeasurement of our deferred tax balances, the adjustment we recorded during the fourth quarter of 2017 to reflect the change in corporate income tax rates may need to be adjusted in subsequent periods.

 

We continue to assess the impact of the Tax Act on our business. Our provisional amounts may be adjusted due to changes in interpretations of the Tax Act, legislative action to address questions that arise because of the Tax Act, or changes in accounting standards for income taxes or related interpretations. Any updates or changes to provisional estimates will be reported in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018.