NOTE Q—INCOME TAXES
We evaluate our deferred tax assets periodically to determine if valuation allowances are required. Ultimately, the realization of deferred tax assets is dependent upon generation of future taxable income during those periods in which temporary differences become deductible and/or credits can be utilized. To this end, management considers the level of historical taxable income, the scheduled reversal of deferred tax liabilities, tax-planning strategies and projected future taxable income. Based on these considerations, and the carry-forward availability of a portion of the deferred tax assets, management believes it is more likely than not that we will realize the benefit of the deferred tax assets.
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 Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, (1) bonus depreciation that will allow for full expensing of qualified property; (2) reduction of the U.S. federal corporate tax rate; (3) elimination of the corporate alternative minimum tax; (4) a new limitation on deductible interest expense; (5) the repeal of the domestic production activity deduction; (6) limitations on the deductibility of certain executive compensation; and (7) limitations on net operating losses generated after December 31, 2017, to 80 percent of taxable income. We are not currently subject to the various international changes of the Tax Act.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the 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. As we are not subject to either the international changes of the Tax Act or other applicable provisions, we believe that the income tax effects of the Tax Act applicable to our accounting under ASC 740 is substantially complete for the year ended December 31, 2017. Additional information that may affect the accounting under ASC 740 would include further clarification and guidance on how the Internal Revenue Service and state taxing authorities will implement the Tax Act. We do not believe potential adjustments in future periods would materially impact the Company’s financial condition or results of operations.
The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. Because ASC 740-10-25-47 requires the effect of a change in tax laws or rates to be recognized as of the date of enactment, we are required to adjust deferred tax assets and liabilities as of December 22, 2017. Accordingly, we have recorded a decrease related to deferred tax assets and liabilities of $45.0 million and $80.8 million, respectively, with a corresponding net adjustment to deferred income tax benefit of $35.8 million for the year ended December 31, 2017.
The expense or benefit for income taxes (in thousands) consisted of the following for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | (10,754 | ) | | $ | 60 |
| | $ | (170 | ) |
State | (1,167 | ) | | (274 | ) | | 1,448 |
|
| $ | (11,921 | ) | | $ | (214 | ) | | $ | 1,278 |
|
Deferred: | | | | | |
Federal | 22,641 |
| | 32,944 |
| | 7,439 |
|
State | (2,040 | ) | | 3,959 |
| | 3,034 |
|
| $ | 20,601 |
| | $ | 36,903 |
| | $ | 10,473 |
|
Income tax (expense) benefit | $ | 8,680 |
| | $ | 36,689 |
| | $ | 11,751 |
|
Deferred tax assets and liabilities are recognized for the estimated future tax effects, based on enacted tax laws, of temporary differences between the values of assets and liabilities recorded for financial reporting and for tax purposes and of net operating loss and other carry forwards.
The tax effects of the types of temporary differences and carry forwards that gave rise to deferred tax assets and liabilities (in thousands) at December 31, 2017 and 2016 consisted of the following:
|
| | | | | | | |
| At December 31, |
| 2017 | | 2016 |
Gross deferred tax assets: | | | |
Net operating loss carry forward and state tax credits | $ | 22,783 |
| | $ | 65,022 |
|
Pension and post-retirement benefit costs | 13,710 |
| | 22,920 |
|
Alternative minimum tax credit carry forward | 30,401 |
| | 19,431 |
|
Property, plant and equipment | 5,750 |
| | 6,112 |
|
Accrued expenses | 10,755 |
| | 6,752 |
|
Inventories | 4,354 |
| | 4,362 |
|
Third-party products liability | 249 |
| | 511 |
|
Stock-based compensation expense | 8,785 |
| | 5,576 |
|
Note payable | 3,133 |
| | 4,009 |
|
Other | 5,095 |
| | 5,458 |
|
Total deferred tax assets | $ | 105,015 |
| | $ | 140,153 |
|
Gross deferred tax liabilities: | | | |
Land and mineral property basis difference | $ | (78,520 | ) | | $ | (126,315 | ) |
Fixed assets and depreciation | (51,556 | ) | | (61,531 | ) |
Intangibles | (4,795 | ) | | (2,260 | ) |
Other | — |
| | (122 | ) |
Total deferred tax liabilities | $ | (134,871 | ) | | $ | (190,228 | ) |
Net deferred tax liabilities | $ | (29,856 | ) | | $ | (50,075 | ) |
We have federal net operating loss carry forwards of approximately $93.4 million at December 31, 2017. The losses will expire in years 2027 through 2036. Approximately $69.0 million of the losses are subject to an annual limitation under Internal Revenue Code Section 382, but are expected to be fully realized. Under the Tax Act, net operating loss (NOL) deductions arising in tax years beginning after December 31, 2017 can only offset up to 80 percent of future taxable income. The Act also prohibits NOL carrybacks, but allows indefinite carryforwards for NOLs arising in tax years beginning after December 31, 2017. Net operating losses arising before January 1, 2018 are accounted for under the previous tax rules that imposed no limit on the amount of the taxable income that can be set off using NOLs (except for a 90 percent limit for AMT carryforwards) and that can be carried back 2 years, and carried forward 20 years.
At December 31, 2017 and 2016, we have an alternative minimum tax credit carry forward of approximately $30.4 million and $19.4 million, respectively. The Tax Act repeals the corporate alternative minimum tax (AMT), effective for tax years beginning after December 31, 2017, but allows an entity to claim portions of any unused AMT credits over the next four years to offset its regular tax liability. An entity with unused AMT credits as of December 31, 2017 can first use these credits to offset its regular tax for 2017, and can then claim up to 50 percent of the remaining AMT credits in 2018, 2019, and 2020, with all remaining AMT credits refundable in 2021.
At the end of each reporting period as presented, there were no material amounts of interest and penalties recognized in the statement of operations or balance sheets. We have no material unrecognized tax benefits or any known material tax contingencies at December 31, 2017 or December 31, 2016 and do not expect this to change significantly within the next twelve months. Tax returns filed with the IRS for the years 2014 through 2016 along with tax returns filed with numerous state entities remain subject to examination.
The income tax expense or benefit (in thousands) differed from the amount that would be provided by applying the U.S. federal statutory rate for the years ended December 31, 2017, 2016 and 2015 due to the following:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income tax (expense) benefit computed at U.S. federal statutory rate | $ | (47,784 | ) | | $ | 27,211 |
| | $ | (41 | ) |
Decrease (increase) resulting from: | | | | | |
Statutory depletion | 20,259 |
| | 4,734 |
| | 8,918 |
|
Prior year tax return reconciliation | 219 |
| | 435 |
| | 393 |
|
State income taxes, net of federal benefit | (2,267 | ) | | 2,369 |
| | 1,370 |
|
Adjustment to deferred taxes from the Tax Act rate reduction | 35,772 |
| | — |
| | — |
|
Equity compensation | 2,602 |
| | 2,003 |
| | — |
|
Other, net | (121 | ) | | (63 | ) | | 1,111 |
|
Income tax (expense) benefit | $ | 8,680 |
| | $ | 36,689 |
| | $ | 11,751 |
|
The largest permanent item in computing both our effective tax rate and taxable income is the deduction allowed for statutory depletion. The deduction for statutory depletion does not necessarily change proportionately to changes in income before income taxes.