Note 11. Income Taxes

GMG, a wholly owned subsidiary of the Partnership, is a taxable entity for federal and state income tax purposes. Current and deferred income taxes are recognized on the separate earnings of GMG, and the after‑tax earnings of GMG are included in the consolidated earnings of the Partnership.

The following table presents a reconciliation of the difference between the statutory federal income tax rate and the effective income tax rate for the years ended December 31:

 

The following table presents the components of the provision for income taxes for the years ended December 31 (in thousands):

 

Significant components of long‑term deferred taxes were as follows at December 31 (in thousands):

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted in the United States. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. In December 2017, the Securities and Exchange Commission issued guidance under Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. As of December 31, 2017, the Partnership had not completed its accounting for all of the tax effects of the enactment of the Act; however, the Partnership has made a reasonable estimate of the effects on its existing deferred tax balances and one-time transition tax. For the year ended December 31, 2017, the Partnership recognized no transition tax. In all cases, the Partnership will continue to make and refine its calculations as additional analysis is completed. In addition, the Partnership’s estimates may also be affected as the Partnership gains a more thorough understanding of the Act.

The Partnership is still in the process of analyzing the impact of the Act. Where the Partnership has been able to make reasonable estimates of the effects for which its analysis is not yet complete, the Partnership has recorded provisional amounts. Where the Partnership has not yet been able to make reasonable estimates of the impact of certain elements, the Partnership has not recorded any amounts related to those elements and has continued accounting for them in accordance with ASC Topic 740 on the basis of the tax laws in effect immediately prior to the enactment of the Act. As a result of the Act, the Partnership remeasured certain deferred tax assets and liabilities based on the rates at which they are anticipated to reverse in the future, which is generally 21%, resulting in a decrease to the Partnership’s net deferred tax liability of $22.2 million. 

The Partnership’s net deferred tax liabilities are primarily comprised of the differences in the historical tax basis and fair value book basis of property, equipment and land that were acquired in connection with the 2015 Warren acquisition. The decrease in net deferred tax liabilities during 2017 is primarily due to the reduction in the federal statutory tax rate.

At December 31, 2017, GMG had federal and state net operating loss carryforwards of approximately $9.8 million and $21.8 million, respectively, which will begin to expire in 2034 and 2019, respectively. Utilization of the net operating loss carryforwards may be subject to annual limitations due to the ownership percentage change limitations provided by the Internal Revenue Code Section 382 and similar state provisions. In the event of a deemed change in control under Internal Revenue Code Section 382, an annual limitation imposed on the utilization of net operating losses may result in the expiration of all or a portion of the net operating loss carryforwards.

At December 31, 2017, the Partnership had $30.7 million of net deferred tax liabilities (consisting of the $40.1 million total net deferred tax liability less the $9.4 million deferred tax liability relating to land discussed below) relating to property and equipment, net operating loss carryforwards, tax credit carryforwards and other temporary differences, certain of which are available to reduce income taxes in future years. The Partnership recognizes deferred tax assets to the extent that the recoverability of these assets satisfy the “more likely than not” criteria in accordance with the FASB’s guidance regarding income taxes. A valuation allowance must be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which the company operates, length of carryback and carryforward periods and projections of future operating results. The Partnership concluded, based on an evaluation of future operating results and reversal of existing taxable temporary differences, that a portion of these assets will not be realized in a future period. The valuation allowance increased by approximately $0.1 million as of December 31, 2017.

At December 31, 2017, the Partnership also had a $9.4 million deferred tax liability relating to land. Land is an asset with an indefinite useful life and would not ordinarily serve as a source of income for the realization of deferred tax assets. This deferred tax liability will not reverse until some indefinite future period when the asset is either sold or written down due to impairment. Such taxable temporary differences generally cannot be used as a source of taxable income to support the realization of deferred tax assets relating to reversing deductible temporary differences, including loss carryforwards with expiration periods.

The following presents a reconciliation of the differences between income (loss) before income tax benefit (expense) and income subject to income tax expense for the years ended December 31 (in thousands):

The Partnership made approximately $7.4 million, $17.0 million and $2.8 million in income tax payments during 2017, 2016 and 2015, respectively. The increase in taxes paid in 2016 is largely due to the Mirabito Disposition (see Note 5) which resulted in significant gains recognized for tax purposes.

GMG files income tax returns in the United States and various state jurisdictions. With few exceptions, the Partnership is subject to income tax examinations by tax authorities for all years dated back to 2014.

The following presents the changes in gross unrealized tax benefits for the years ended December 31 (in thousands):

Unrecognized tax benefits represent uncertain tax positions for which reserves have been established. The Partnership had gross-tax effected unrecognized tax benefits of $1.0 million, $1.4 million and $0.1 million for 2017, 2016 and 2015, respectively, of which $1.0 million, $1.4 million and $0, respectively, would favorably impact the effective tax rate if recognized.

The FASB’s accounting guidance for income taxes clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing a minimum recognition threshold and measurement of a tax position taken or expected to be taken in a tax return. The Partnership performed an evaluation of all material tax positions for the tax years that remain subject to examination by major tax jurisdictions as of December 31, 2017 (tax years ended December 31, 2017, 2016 and 2015). Tax positions that do not meet the more-likely-than-not recognition threshold at the financial statement date may not be recognized or continue to be recognized under the accounting guidance for income taxes. The Partnership classifies interest and penalties related to income taxes as components of its provision for income taxes, and the amount of interest and penalties recorded in the accompanying balance sheet and statement of operations was $0 and $0.2 million as of and for the years ended December 31, 2017 and 2016, respectively. The Partnership does not anticipate the amount of unrecognized tax benefits to change over the next twelve months.