Income Taxes
The components of income from continuing operations before income taxes for each of the three years ended December 31, 2017 and income tax expense (benefit) attributable thereto were as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
(Thousands of dollars) | 2017 | | 2016 | | 2015 |
Income (loss) from continuing operations before income taxes | $ | 240,022 |
| | $ | 352,031 |
| | $ | 218,289 |
|
Income tax expense (benefit) | | | | | |
Federal - Current | $ | 39,147 |
| | 74,932 |
| | 58,039 |
|
Federal - Deferred | (50,714 | ) | | 38,807 |
| | 15,853 |
|
State - Current and deferred | 6,325 |
| | 16,800 |
| | 6,806 |
|
Total | $ | (5,242 | ) | | $ | 130,539 |
| | $ | 80,698 |
|
The following table reconciles income taxes based on the U.S. statutory tax rate to the Company’s income tax expense (benefit).
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| | | | | | | | | | | |
| Years Ended December 31, |
(Thousands of dollars) | 2017 | | 2016 | | 2015 |
Income tax expense based on the U.S. statutory tax rate | $ | 84,008 |
| | $ | 123,211 |
| | $ | 76,401 |
|
State income taxes, net of federal benefit | 2,976 |
| | 11,438 |
| | 4,424 |
|
Effect of U.S. tax law change | (88,927 | ) | | — |
| | — |
|
Other, net | (3,299 | ) | | (4,110 | ) | | (127 | ) |
Total | $ | (5,242 | ) | | $ | 130,539 |
| | $ | 80,698 |
|
An analysis of the Company’s deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 showing the tax effects of significant temporary differences is as follows:
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| | | | | | | |
| December 31, |
(Thousands of dollars) | 2017 | | 2016 |
Deferred tax assets | | | |
Property costs and asset retirement obligations | $ | 2,833 |
| | $ | 4,059 |
|
Employee benefits | 4,382 |
| | 10,742 |
|
Other deferred tax assets | 3,436 |
| | 7,623 |
|
Total gross deferred tax assets | 10,651 |
| | 22,424 |
|
Less valuation allowance | — |
| | — |
|
Net deferred tax assets | 10,651 |
| | 22,424 |
|
Deferred tax liabilities | | | |
Accumulated depreciation and amortization | (142,081 | ) | | (197,727 | ) |
State deferred taxes | (18,944 | ) | | (18,643 | ) |
Other deferred tax liabilities | (3,871 | ) | | (10,710 | ) |
Total gross deferred tax liabilities | (164,896 | ) | | (227,080 | ) |
Net deferred tax liabilities | $ | (154,245 | ) | | $ | (204,656 | ) |
In management’s judgment, the net deferred tax assets in the preceding table will more likely than not be realized as reductions of future taxable income or by utilizing available tax planning strategies.
In December 2017, the Tax Cuts and Jobs Act ("the Act") was enacted, which made major changes to the Federal income tax system for corporations and individuals. Two key corporate provisions of the Act that impacted the Company in 2017 were the reduction of the Federal corporate income tax rate from 35% to 21% and the increase of Federal bonus depreciation from 50% to 100% on certain qualifying assets retroactive to September 27, 2017. As a result, the Company has calculated its best estimate of the impact of the Act in its year-end income tax provision in accordance with its understanding of the Act and guidance available as of the date of the filing and as a result has recorded $88.9 million as a tax benefit in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount relates primarily to the remeasurement of certain deferred tax assets and liabilities based on the rates of which they are expected to reverse in the future.
In conjunction with the effectiveness of the Act, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the implications of U.S. GAAP in situations where the registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company made its best estimate and has recorded provisional amounts related to certain equity and fixed asset temporary differences based on available information as of December 31, 2017. Additional work is necessary to finalize these amounts and any subsequent adjustments will be recorded as a component of tax expense in the 2018 quarter in which the analysis is completed.
Murphy Oil’s tax returns in multiple jurisdictions that include the Company are subject to audit by taxing authorities. These audits often take years to complete and settle. As of December 31, 2017, the earliest year remaining open for Federal audit and/or settlement is 2017 and for the states it ranges from 2012-2016. Although the Company believes that recorded liabilities for unsettled issues are adequate, additional gains or losses could occur in future periods from resolution of outstanding unsettled matters.
The FASB’s rules for accounting for income tax uncertainties clarify the criteria for recognizing uncertain income tax benefits and require additional disclosures about uncertain tax positions. Under U.S. GAAP the financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50 percent likely of being realized upon ultimate settlement. Liabilities associated with uncertain income tax positions are included in Deferred Credits and Other Liabilities in the Consolidated Balance Sheets. A reconciliation of the beginning and ending amount of the consolidated liability for unrecognized income tax benefits during the year ended December 31, 2017 and 2016 is shown in the following table.
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| | | | | | |
| Year Ended December 31, |
(Thousands of dollars) | 2017 | 2016 |
| | |
Balance at January 1 | $ | 7,874 |
| $ | 5,450 |
|
Additions for tax positions related to prior years | 4,406 |
| 3,771 |
|
Additions for tax positions related to current year | — |
| — |
|
Settlements with taxing authorities | (5,451 | ) | — |
|
Expiration of statutes of limitation | (2,391 | ) | (1,347 | ) |
| |
| |
|
Balance at December 31 | $ | 4,438 |
| $ | 7,874 |
|
All additions or reductions to the above liability affect the Company’s effective tax rate in the respective period of change. The Company accounts for any applicable interest and penalties on uncertain tax positions as a component of income tax expense. Income tax expense for the years ended December 31, 2017, 2016 and 2015 included interest and penalties of $0.4 million, $1.5 million and $0.7 million, respectively, associated with uncertain tax positions.
During the next twelve months, the Company currently expects to add immaterial amounts to the liability for uncertain taxes for 2018 events. Although existing liabilities could be reduced by settlement with taxing authorities or lapse due to statute of limitations, the Company believes that the changes in its unrecognized tax benefits due to these events will not have a material impact on the Consolidated Income Statement during 2018.
We adopted ASU 2016-09 on January 1, 2017, which requires the excess tax benefits or deficiencies to be reflected in the Consolidated Statements of Income as a component of the provision for income taxes whereas they previously were recognized in paid-in-capital. Total excess tax benefits recognized in the twelve months ended December 31, 2017 was $2.2 million.