INCOME TAXES
The reconciliation of the federal statutory income tax rate to our effective income tax rate is as follows:
|
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
U.S. federal statutory tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State tax rate | | — | % | | (1.7 | )% | | — | % |
State deferred rate change | | (59.0 | )% | | — | % | | — | % |
U.S. tax reform rate change | | 47.6 | % | | — | % | | — | % |
Disallowed interest from investment in limited partnership | | — | % | | 5.0 | % | | 5.2 | % |
Investments tax credit | | — | % | | (33.8 | )% | | — | % |
Other | | (0.2 | )% | | — | % | | 2.2 | % |
Valuation allowance | | (23.4 | )% | | (4.5 | )% | | (42.4 | )% |
Effective tax rate | | — | % | | — | % | | — | % |
Significant components of our deferred tax assets and liabilities at December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets | | | |
NOL carryforwards and credits | | | |
Federal | $ | 586,096 |
| | $ | 587,434 |
|
State | 168,265 |
| | 169,371 |
|
Other | 85 |
| | 88 |
|
Less: net deferred tax asset valuation allowance | (242,803 | ) | | (270,494 | ) |
Total deferred tax assets | 511,643 |
| | 486,399 |
|
| | | |
Deferred tax liabilities | | | |
Investment in limited partnership | (511,643 | ) | | (486,399 | ) |
Total deferred tax liabilities | (511,643 | ) | | (486,399 | ) |
| | | |
Net deferred tax assets | $ | — |
| | $ | — |
|
The federal deferred tax assets presented above do not include the state tax benefits as our net deferred state tax assets are offset with a full valuation allowance.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation (Tax Cuts and Jobs Act), which reduced the top U.S. corporate income tax rate from 35% to 21%. As a result of the legislation, we remeasured our December 31, 2017 U.S. deferred tax assets and liabilities. The result of the remeasurement was a $56.4 million reduction to our U.S. net deferred tax assets and represents a 47.6% increase to our effective tax rate. A corresponding change, reducing the effective tax rate, was recorded to the valuation allowance, and therefore there was no impact to current period income tax expense.
The effective tax rate reconciliation for 2017 was significantly impacted by a change in our state apportionment factor.
We account for our federal investment tax credits under the flow-through method. At December 31, 2017 and 2016, we had an investment tax credit carryforward of $7.3 million related to capital equipment placed in service by Cheniere Partners. The investment tax credit carryforward expires in 2036.
At December 31, 2017, we had federal and state NOL carryforwards of approximately $2.8 billion and $2.1 billion, respectively. These NOL carryforwards will expire between 2021 and 2037.
Due to our historical losses and other available evidence related to our ability to generate taxable income, we have established a valuation allowance to fully offset our federal and state net deferred tax assets as of December 31, 2017 and 2016. We will continue to evaluate the realizability of our deferred tax assets in the future. The decrease in the valuation allowance was $27.7 million for the year ended December 31, 2017.
Changes in the balance of unrecognized tax benefits are as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Balance at beginning of period | $ | 10,314 |
| | $ | 10,314 |
|
Additions based on tax positions related to current year | — |
| | — |
|
Additions for tax positions at formation | — |
| | — |
|
Reductions for tax positions of prior years | — |
| | — |
|
Settlements | — |
| | — |
|
U.S. tax reform rate change | (4,125 | ) | | — |
|
Balance at end of the period | $ | 6,189 |
| | $ | 10,314 |
|
Any settlement of uncertain tax positions would result in an adjustment to our NOL carryforward which, if utilized, will reduce taxable income in a future year. As a result, the tabular rollforward reflects the unrecognized tax benefits at the reduced corporate income tax rate of 21%.
Our effective tax rate will not be affected if the unrecognized federal income tax benefits provided above were recognized. Currently, we do not recognize any accrued liabilities, interest and penalties associated with the unrecognized tax benefits provided above in our Consolidated Statements of Income or our Consolidated Balance Sheets. We recognize interest and penalties related to income tax matters as part of income tax expense.
We have entered into a Tax Sharing Agreement with Cheniere as discussed in Note 6—Related Party Transactions. Any amounts due to Cheniere under the Tax Sharing Agreement in excess of our income tax provision calculated on a hypothetical carve-out basis will be recorded as an equity distribution.
Our taxable income or loss is included in the consolidated federal income tax return of Cheniere. Cheniere’s federal and state tax returns for the years after 2013 remain open for examination. Tax authorities may have the ability to review and adjust carryover attributes that were generated prior to these periods if utilized in an open tax year.
Cheniere experienced an ownership change within the provisions of U.S. Internal Revenue Code (“IRC”) Section 382 in 2008, 2010 and 2012. An analysis of the annual limitation on the utilization of Cheniere’s NOLs was performed in accordance with IRC Section 382. It was determined that IRC Section 382 will not limit the use of Cheniere’s NOLs in full over the carryover period. Cheniere will continue to monitor trading activity in its respective shares which may cause an additional ownership change which could ultimately affect our ability to fully utilize Cheniere’s existing NOL carryforwards.