Income Taxes
JPE LLC was organized as a limited liability company and treated as a pass-through entity for federal income tax purposes. As such, taxable income and any related tax credits were passed through to its members and included in their tax returns. Accordingly, provision for federal and state corporate income taxes has been made only for the operations of the Company from January 27, 2017 through December 31, 2017 in the accompanying consolidated and combined financial statements. Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. Upon the change in tax status as a result of the corporate reorganization, the Company established an $80.7 million provision for deferred income taxes, which was recognized as tax expense from continuing operations.
On December 22, 2017, the President signed into law Public Law No. 115-97, a comprehensive tax reform bill commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act, among other things, (i) permanently reduces the U.S. corporate income tax rate to 21%, (ii) repeals the corporate alternative minimum tax, (iii) imposes new limitations on the utilization of net operating losses and eliminates their carryforward restrictions and (iv) provides for more general changes to the taxation of corporations, including changes to cost recovery rules and to the deductibility of interest expense. In addition, the Tax Act preserves deductibility of intangible drilling costs and provides for 100% bonus depreciation on tangible personal property expenditures through 2022. The bonus depreciation percentage is phased down from 100% beginning in 2023 to 0% for years after 2026. The Company recognizes the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted or signed into law.
The SEC issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the impact of the Tax Act on a company's financial statements. The Company has substantially completed the analysis of the Tax Act and does not expect a material change due to the transition impacts. Any changes that do arise due to changes in interpretations of the Tax Act, legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts will be disclosed in future periods as they arise.
The components of the Company’s provision for income taxes are as follows:
|
| | | |
| Year Ended |
(in thousands) | December 31, 2017 |
Current income tax expense: | |
Federal | $ | — |
|
State | — |
|
| — |
|
Deferred income tax expense: | |
Federal | 56,350 |
|
State | 1,593 |
|
| 57,943 |
|
Provision for income taxes | $ | 57,943 |
|
A reconciliation of the income tax expense calculated at the federal statutory rate of 35% to the total income tax expense is as follows:
|
| | | |
| Year Ended |
(in thousands) | December 31, 2017 |
Income (loss) before income taxes | $ | (393,991 | ) |
Less: loss before income taxes prior to corporate reorganization | (375,476 | ) |
Income (loss) before income taxes subsequent to corporate reorganization | $ | (18,515 | ) |
| |
Income tax expense (benefit) at the federal statutory rate | $ | (6,480 | ) |
Income tax expense relating to change in tax status | 80,704 |
|
Federal tax reform changes - 2017 Tax Act | (37,282 | ) |
State income taxes, net of federal benefit | 199 |
|
Nondeductible equity-based compensation | 20,781 |
|
Other permanent differences | 21 |
|
Income tax expense (benefit) | $ | 57,943 |
|
Effective tax rate | (14.7 | )% |
Prior to the Company’s change in tax status in January 2017, income taxes did not significantly impact the results of operations. The equity-based compensation related to shares of common stock transferred to Management Holdco is not deductible for federal or state income tax purposes. See Note 6, Equity-based Compensation, for more information on the shares of common stock transferred to Management Holdco.
The components of the Company’s deferred income tax assets and liabilities as of December 31, 2017 are as follows:
|
| | | |
(in thousands) | December 31, 2017 |
Deferred income tax assets: | |
Commodity derivatives | $ | 11,412 |
|
Equity-based compensation | 928 |
|
Net operating loss carryforwards | 16,093 |
|
Other | 1,726 |
|
| 30,159 |
|
Deferred income tax liabilities: | |
Oil and natural gas properties | 88,102 |
|
| 88,102 |
|
Net deferred income tax assets (liabilities) | $ | (57,943 | ) |
The Company had U.S. net operating losses of approximately $16.1 million, which expire in 2037. Deferred tax assets are reduced by a valuation allowance if the Company believes it is more likely than not such deferred tax assets will not be realized. The Company periodically assesses its deferred tax assets for realizability and, as a result of such assessment, determined as of December 31, 2017 sufficient evidence existed to indicate it is more likely than not that its deferred tax assets will be realized.
The calculation of the Company’s tax liabilities involves uncertainties in the application of complex tax laws and regulations. That Company gives financial statement recognition to those tax provisions that it believes are more likely than not to be sustained upon examination by the Internal Revenue Service or other government agency. As of December 31, 2017, the Company did not have any accrued liability for unrecognized tax positions and does not anticipate recognition of any significant liabilities for uncertain tax positions during the next 12 months. At December 31, 2017, the Company has made no provisions for interest or penalties related to uncertain tax positions.
The Company files income tax returns in the U.S. federal jurisdiction, Texas and Colorado. There are currently no federal or state income tax examinations underway. The Company’s U.S. federal income tax returns remain open to examination by the taxing authorities for tax years 2014 through 2017, and its Texas and Colorado tax returns remain open to examination for the years 2013 through 2017.