AMPLIFY ENERGY CORP

Note 16. Income Tax

Amplify Energy is a corporation and as a result, is subject to U.S. federal, state and local 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 provisions of the Tax Act that impact us include, but are not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) elimination of the corporate alternative minimum tax (AMT); (3) temporary bonus depreciation that will allow for full expensing of qualified property, and (4) limitations on net operating losses (NOLs) generated after December 31, 2017, to 80% of taxable income. In conjunction with the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification 740 “Income Tax” (“ASC 740”). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

In connection with our initial analysis of the impact of the Tax Act, we provisionally decreased our net deferred tax assets by $23.0 million for the reduction in the federal tax rate and correspondingly decreased the associated valuation allowance by $23.0 million. While we have not completed our accounting for the income tax effects of the Tax Act, there were no specific impacts of the Tax Act for which a reasonable estimate could not be made. Based on a continued analysis of the estimates, it is anticipated that additional revisions may occur during the allowable measurement period.

The components of income tax benefit (expense) are as follows:

	Successor			Predecessor
	Period from			Period from
	May 5, 2017			January 1, 2017		For the Year Ended
	through			through		December 31,
	December 31, 2017			May 4, 2017		2016			2015
	(In thousands)			(In thousands)
Current taxes:
Federal	$	4		$	—	$	6		$	(11	)
State		(34	)		17		8			(48	)
Total current income tax benefit (expense)		(30	)		17		14			(59	)
Deferred taxes:
Federal		1,933			71		8			1,193
State		273			3		(195	)		1,041
Total deferred income tax benefit (expense)		2,206			74		(187	)		2,234
Total income tax benefit (expense)	$	2,176		$	91	$	(173	)	$	2,175

The actual income tax benefit (expense) differs from the expected amount computed by applying the federal statutory corporate tax rate of 35% as follows:

	Successor			Predecessor
	Period from			Period from
	May 5, 2017			January 1, 2017			For the Year Ended
	through			through			December 31,
	December 31, 2017			May 4, 2017			2016			2015
	(In thousands)			(In thousands)
Expected tax benefit (expense) at federal statutory rate	$	310		$	5,764		$	191,870		$	139,183
State income tax benefit (expense), net of federal benefit		240			30			382			645
Non-deductible expenses		(187	)		—			—			—
Changes in valuation allowances		24,767			—			—			—
Remeasurement of federal deferred tax assets due rate change		(22,958	)		—			—			—
Pass-through entities (1)		—			(5,686	)		(191,921	)		(137,704	)
Other		4			(17	)		(504	)		51
Total income tax benefit (expense)	$	2,176		$	91		$	(173	)	$	2,175

(1)	MEMP, a publicly traded partnership with qualifying income, was a pass-through entity for federal income tax purposes.

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):

	Successor			Predecessor
	December 31,			December 31,
	2017			2016
Deferred income tax assets:
Property, Plant & Equipment	$	19,423		$	—
Derivative instrument		6,251			—
Net operating loss carryforward		10,452			9
Asset retirement obligation		1,223			875
Other		779			33
Total deferred income tax assets:		38,128			917
Valuation allowance		(38,128	)		(865	)
Net deferred income tax assets		—			52

Deferred income tax liabilities:
Property, plant and equipment	$	—		$	1,522
Derivatives		—			770
Other		—			40
Total deferred income tax liabilities		—			2,332

Net deferred income tax liabilities	$	—		$	2,280

As of December 31, 2017, the Company had U.S. federal net operating loss carry forwards of approximately $46.8 million that will expire in years 2035 - 2037 and state net operating loss carry forwards of approximately $8.8 million which will expire in varying amounts beginning in 2035.

In assessing deferred tax assets, the Company considers whether a valuation allowance should be recorded for some or all of the deferred tax assets which may not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Among other items, the Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and available tax planning strategies. As of December 31, 2017, a valuation allowance of $38.1 million had been recorded.

Uncertain Income Tax Position. We must recognize the tax effects of any uncertain tax positions we may adopt, if the position taken by us is more likely than not sustainable based on its technical merits. For those benefits to be recognized, an income tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. We had no unrecognized tax benefits as of December 31, 2017.

Tax Audits and Settlements. Generally, our income tax years 2014 through 2017 remain open and subject to examination by the Internal Revenue Service or state tax jurisdictions where we conduct operations. In certain jurisdictions we operate through more than one legal entity, each of which may have different open years subject to examination.