USD Partners LP

INCOME TAXES

U.S. Federal and State Income Taxes

We are treated as a partnership for U.S. federal and most state income tax purposes, with each partner being separately taxed on their share of our taxable income. One of our subsidiaries, USD Rail LP, has elected to be classified as an entity taxable as a corporation for U.S. federal income tax purposes. We are also subject to state franchise tax in the state of Texas, which is treated as an income tax under the applicable accounting guidance. Our U.S. federal income tax expense is based upon our estimated annual effective federal income tax rate of 34% as applied to USD Rail LP’s taxable income of $2.0 million, taxable loss of $0.8 million and taxable income of $161 thousand for the years ended December 31, 2017, 2016 and 2015, respectively. We recorded a provision for U.S. federal income tax in 2017 and 2015, utilizing net operating loss carryforwards to offset a portion of our taxable income. As a result of the losses in 2016, we did not record a provision for U.S. federal income taxes for that year.

On December 22, 2017, United States legislation referred to as the Tax Cuts and Jobs Act, or TCJA, was signed into law. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA includes significant changes to the Internal Revenue Code of 1986 (as amended, the Code), including amendments which significantly change the taxation of individual and business entities. The most significant change included in the TCJA is a reduction in the corporate federal income tax rate from 35% to 21%. We do not expect changes in the Code from the TCJA to have a material impact on our tax provision in future periods.

Foreign Income Taxes

Our Canadian operations are conducted through entities that are subject to Canadian federal and provincial income taxes. The Canadian federal income tax rate on business income is currently 15%. In June 2015, the Canadian province of Alberta enacted a tax rate increase which raised income tax rates on Alberta businesses from a previous rate of 10% to an effective rate of 11% for all of 2015, further increasing to 12% beginning January 1, 2016. As a result, we recognized income tax liabilities and expenses in our consolidated financial statements based upon the combined federal and provincial income tax rate of 27% as applied to the pretax book income for our Canadian operations for 2017 and 2016 and 26% for 2015. The combined rate of 27% was also used to compute deferred income tax expense, which is the result of temporary differences that are expected to reverse in the future. For the year ended December 31, 2015, we used all $3.0 million of available net operating loss carryforwards to partially offset our taxable income. As a result, our effective Canadian income tax rate was 23.4% for 2015.

The 2017 income tax expense of our Canadian operations includes a reduction to our estimate for 2016 income tax expense resulting from refunds of approximately $2.6 million (C$3.4 million) in connection with our Canadian federal and provincial income tax returns for 2016, which we filed in June 2017. In 2016, we adopted a methodology for determining the return attributable to our Canadian subsidiaries based upon completion of a study we initially commissioned in 2015, which affected the amount of Canadian federal and provincial income taxes to which our Canadian operations are subject. We calculated our 2017 and 2016 income tax provisions for our Canadian operations utilizing this same methodology. This methodology also resulted in a reduction of our Canadian income tax liability for the 2015 tax year, which we reflected in the third quarter of 2016.

Consolidated Provision for (Benefit from) Income Taxes

Components of our provision for (benefit from) income taxes are presented below:



	Years Ended December 31,
	2017			2016			2015
	(in thousands)
Current income tax expense (benefit)
U.S. federal income tax	$	687		$	—		$	346
U.S. federal operating loss carryforward	(200		)	—			(301		)
State income tax expense (benefit)	(115		)	208			154
Canadian federal and provincial income taxes expense (benefit)	(1,314		)	(1,013		)	5,596
Benefit of Canadian operating loss carryforwards	—			—			(854		)
Total current income tax expense (benefit)	(942		)	(805		)	4,941
Deferred income tax expense (benefit)
U.S. federal income tax (benefit)	(262		)	245			—
Canadian federal and provincial income taxes expense (benefit)	12			(199		)	814
Total change in deferred income tax expense (benefit)	(250		)	46			814
Provision for (benefit from) income taxes	$	(1,192	)	$	(759	)	$	5,755

The components of our income before income taxes and a reconciliation between income tax expense based on the U.S. statutory income tax rate and our effective income tax expense are presented below:



	Years Ended December 31,
	2017			2016			2015
	(in thousands)
Domestic	$	25,663		$	27,367		$	3,222
Foreign	(4,648		)	(3,954		)	20,226
Income before income taxes	$	21,015		$	23,413		$	23,448

Income tax expense at the U.S. federal statutory rate	$	7,145		$	7,961		$	7,972
Amount attributable to partnership not subject to income tax	(8,590		)	(8,718		)	247
Foreign income tax rate differential	326			397			(2,303		)
Other	28			(68		)	135
State income tax expense (benefit) ⁽¹⁾	(132		)	201			125
Change in valuation allowance	31			(532		)	(421		)
Provision for (benefit from) income taxes	$	(1,192	)	$	(759	)	$	5,755


⁽¹⁾	Net of the federal income tax expense or benefit for the deduction associated with state income taxes.

Our deferred income tax assets and liabilities reflect the income tax effect of differences between the carrying amounts of our assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Major components of deferred income tax assets and liabilities associated with our operations were as follows as of the dates indicated:



	December 31, 2017
	U.S.		Foreign			Total
	(in thousands)
Deferred income tax assets
Deferred revenues	$	—	$	—		$	—
Other assets	16		—			16
Capital loss carryforwards	—		469			469
Operating loss carryforwards	—		—			—
Deferred income tax liabilities
Unbilled revenue	—		(284		)	(284		)
Prepaid expenses	—		—			—
Property and equipment	—		(346		)	(346		)
Valuation allowance	—		(469		)	(469		)
Deferred income tax liability, net	$	16	$	(630	)	$	(614	)



	December 31, 2016
	U.S.			Foreign			Total
	(in thousands)
Deferred income tax assets
Deferred revenues	$	89		$	—		$	89
Capital loss carryforwards	—			438			438
Operating loss carryforwards	257			—			257
Deferred income tax liabilities
Prepaid expenses	(592		)	—			(592		)
Property and equipment	—			(577		)	(577		)
Valuation allowance	—			(438		)	(438		)
Deferred income tax liability, net	$	(246	)	$	(577	)	$	(823	)

We had no available U.S. federal loss carryforward remaining at December 31, 2017 and approximately $0.8 million at December 31, 2016. The Canadian loss carryforward was approximately $4.6 million and $4.4 million at December 31, 2017 and 2016, respectively, $1.2 million of which will begin expiring in 2034.

We are subject to examination by the taxing authorities for the years ended December 31, 2017, 2016 and 2015. We did not have any unrecognized income tax benefits or any uncertain tax positions for which income tax reserves would be required as of December 31, 2017 and 2016.