Entity information:

• Entity registrant name: REX ENERGY CORP
• CIK: 0001397516
• SEC filing page: http://www.sec.gov/Archives/edgar/data/1397516/000156459017004412/0001564590-17-004412-index.htm
• XBRL Instance: http://www.sec.gov/Archives/edgar/data/1397516/000156459017004412/rexx-20161231.xml
• XBRL Cloud Viewer: https://edgardashboard.xbrlcloud.com/flex/viewer/XBRLViewer.html#instance=http://www.sec.gov/Archives/edgar/data/1397516/000156459017004412/rexx-20161231.xml
• EDGAR Dashboard: https://edgardashboard.xbrlcloud.com/edgar-dashboard/?cik=0001397516
• Generator: Donnelley Financial Solutions
• Total assets: 893,923,000
• Income tax expense (benefit): 2,436,000
• Found reconcilation from statutory to effective rates: True
• Found income tax policy: Coming soon!

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We recognize deferred tax liabilities and assets for the expected future tax consequences of events that may be recognized in our financial statements or tax returns. Using this method, deferred tax liabilities and assets are determined based on the difference between the financial carrying amounts and tax basis of assets and liabilities using enacted tax rates. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Our income tax expense from continuing operations consisted of the following:

 

 

A reconciliation of income tax expense using the statutory U.S. income tax rate compared with actual income tax expense is as follows:

 

Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. Deferred tax assets (liabilities) are comprised of the following at December 31, 2016 and 2015:

 

 

 

Debt Exchanges – Tax Effects

 

During 2016, we completed a series of debt for equity exchanges with holders of our Senior Notes. We accounted for the exchanges as troubled debt restructurings. For additional information regarding the exchanges, see Note 9, Long-Term Debt, to our Consolidated Financial Statements. For tax purposes, as a result of the debt exchanges the company recognized cancellation of debt income (“CODI”). The taxable income generated by the CODI was offset by net operating loss carryforwards from previous years. Applying troubled debt accounting to the exchanges results in book-tax timing differences of deferred financing costs. These costs will be amortized at different rates as they are recognized in income over the term of the new notes.  The timing differences result in the recognition of a deferred tax asset of $182.5 million as of December 31, 2016. We have determined that our ability to recognize the future tax benefits of this deferred tax assets are less than more likely than not, and we have recorded a full valuation allowance to offset the benefit of the deferred tax asset, for the year ending December 31, 2016.

Effective January 1, 2016 Management elected to early adopt ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 eliminates additional paid in capital (“APIC”) pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. The retrospective adoption of ASC 2016-09 eliminates the requirement that excess tax benefits be realized (i.e., through a reduction in income taxes payable) before we can recognize them. Therefore, an income tax benefit of approximately $1.3 million was recognized as of January 1, 2016 through a cumulative adjustment to retained earnings. As the deferred tax asset generated by the cumulative effect adjustment was subject to a full valuation allowance, there is no cumulative effect to retained earnings. For additional information, see Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements

Management continuously evaluates the facts and circumstances representing positive and negative evidence in the determination of our ability to realize our inventory of deferred tax assets. The company’s deferred tax assets consist primarily of net operating losses and deductible temporary differences. For the year ended December 31, 2016, management determined, based on positive and negative evidence, including our three-year cumulative loss position that it was necessary to provide a valuation allowance of approximately $212.0 million for deferred tax assets for which the company may be unable to realize the tax benefit. For the year ended December 31, 2015, management determined, based on positive and negative evidence examined and anticipated future taxable income, that it was necessary to provide a valuation allowance of approximately $148.2 million for deferred tax assets for which the company may be unable to realize the tax benefit. Our management will continue, in future periods, to assess the likely realization of the deferred tax assets. The valuation allowance may change based on future changes in circumstances.

At December 31, 2016, we had available unused gross federal net operating loss carryforwards of $152.2 million and gross state net operating loss carryforwards of $416.5 million that may be applied against future taxable income that expire from 2023 through 2036. The following table shows expirations by year for federal and state net operating loss carryforwards (all figures presented are tax effected):  

 

 

Due to a change of ownership, as defined under the provisions of the Tax Reform Act of 1986, which occurred during 2016, a portion of our domestic net operating loss and tax credit carryforwards may be limited in future periods.  Internal Revenue Code Section 382 places limitations on the amount of taxable income which may be offset by tax carryforward attributes, such as net operating losses or tax credits after a change of ownership event.  As a result of this ownership change, certain of our accumulated net operating losses may be subject to an annual limitation regarding their utilization against taxable income in future periods.  The 2016 change creates an estimated annual utilization limit of approximately $1.4 million on our ability to utilize net operating losses generated prior to the ownership change event.  Built-in gains associated with our deferred tax attributes on the date of the ownership change may decrease the net operating loss utilization limit in future periods, allowing additional utilization of net operating losses generated prior to the date of the ownership change. If we were to experience another ownership change in future periods, our net operating loss carryforwards may be subject to additional utilization limits.

FASB ASC 740-10 sets forth a two-step process for evaluating tax positions. The first step is financial statement recognition of the tax position based on whether it is more likely than not that the position will be sustained upon examination by taxing authorities and resolution through related appeals or litigation, based on the technical merits of the case. FASB ASC 740-10 mandates certain assumptions in applying the more likely than not judgment, including the presupposition of an examination where the taxing authorities are fully informed of all relevant information for evaluation of the tax position. In other words, FASB ASC 740-10 precludes factoring the likelihood of a tax examination into the evaluation of the outcome so that the evaluation is to focus solely on the technical merits of the position.

Our management has concluded that, as of December 31, 2016, we have not taken any tax positions that would require disclosure as “unrecognized positions” and that no liability balance is required to offset any unsustainable positions. We did not have any accrued interest or penalties as of December 31, 2016 and 2015.

We file a consolidated federal income tax return and separate or consolidated state income tax returns in the United States federal jurisdiction and in many state jurisdictions. We are subject to U.S. federal income tax examinations and to various state tax examinations for periods after December 31, 2011.