Entity information:
Income Taxes
Keane Group Holdings, LLC was originally organized as a limited liability company and treated as a flow-through entity for federal and most state income tax purposes. As such, taxable income and any related tax credits were passed through to its members and included in their tax returns. As a result of the IPO and related Organizational Transactions, Keane Group, Inc. was formed as a corporation to hold all of the operational assets of Keane Group. Because Keane Group, Inc. is a taxable entity, the Company established a provision for deferred income taxes as of January 20, 2017. Accordingly, a provision for federal and state corporate income taxes has been made only for the operations of Keane Group, Inc. from January 20, 2017 through December 31, 2017 in the accompanying consolidated and combined financial statements.
The following table summarizes the income from continuing operations before income taxes in the following jurisdictions:
 
 
(Thousands of Dollars)
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Domestic
 
$
(35,904
)
 
$
(187,308
)
 
$
(64,470
)
Foreign
 
(87
)
 
221

 
(172
)
 
 
(35,991
)
 
(187,087
)
 
(64,642
)
 
 
 
 
 
 
 

The components of our income tax provision are as follows:
 
 
(Thousands of Dollars)
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
 
Federal
 
$
—

 
$
—

 
$
—

State
 
614

 
—

 
—

Foreign
 
—

 
—

 
(197
)
Total current income tax provision
 
614

 
—

 
(197
)
Deferred:
 
 
 
 
 
 
Federal
 
(536
)
 
—

 
—

State
 
72

 
(114
)
 
—

Foreign
 
—

 
—

 
990

Total deferred income tax provision
 
(464
)
 
(114
)
 
990

 
 
$
150

 
$
(114
)
 
$
793

 
 
 
 
 
 
 

The following table presents the reconciliation of our income taxes calculated at the statutory federal tax rate, currently 35%, to the income tax provision in our financial statements. The Company’s effective tax rate for 2017 of (0.53)% differs from the statutory rate, primarily due to state taxes, a valuation allowance and a reduction of the corporate income tax rate from 35% to 21%, due to the enactment of the Tax Cuts and Jobs Act in December 2017. The Company's effective tax rate for 2016 and 2015 was 0.06% and (1.23)%, respectively.
 
 
(Thousands of Dollars)
 
 
December 31,
2017
% of Income Before Income Taxes
 
December 31,
2016
% of Income Before Income Taxes
 
December 31,
2015
% of Income Before Income Taxes
Income tax provision computed at the statutory federal rate
 
$
(9,795
)
35.00
 %
 
$
(65,480
)
35.00
 %
 
$
(22,625
)
35.00
 %
Reconciling items:
 
 
 
 
 
 
 
 
 
State income taxes, net of federal tax benefit
 
(334
)
1.19
 %
 
(114
)
0.06
 %
 
—

—
 %
Deferred tax asset valuation adjustment
 
(32,593
)
116.46
 %
 
—

—
 %
 
—

—
 %
Tax rate change
 
41,591

(148.61
)%
 
—

—
 %
 
—

—
 %
Other
 
1,281

(4.57
)%
 
—

—
 %
 
—

—
 %
Flow through income not taxable
 
—

—
 %
 
65,480

(35.00
)%
 
22,625

(35.00
)%
Foreign taxes
 
—

—
 %
 
—

—
 %
 
793

(1.23
)%
Income tax provision
 
$
150

(0.53
)%
 
$
(114
)
0.06
 %
 
$
793

(1.23
)%
 
 
 
 
 
 
 
 
 
 

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. The Company adopted ASU 2015-17, "Balance Sheet Classification of Deferred Taxes", during 2017, and thus has classified all deferred tax assets and liabilities as noncurrent.
 
 
(Thousands of Dollars)
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Deferred tax assets:
 
 
 
 
 
 
Stock-based compensation
 
$
2,467

 
$
—

 
$
—

Net operating loss carry-forwards
 
70,745

 
—

 
—

Accruals and other
 
3,994

 
—

 
—

Intangibles
 
—

 
231

 
139

Gross deferred tax assets
 
77,206

 
231

 
139

Valuation allowance
 
(65,347
)
 
(139
)
 
(139
)
Total deferred tax assets
 
11,859

 
92

 
—

Deferred tax liability:
 
 
 
 
 
 
PP&E and intangibles
 
(11,319
)
 
—

 
(22
)
Prepaids and other
 
(1,954
)
 
—

 
—

Total deferred tax liability
 
(13,273
)
 
—

 
(22
)
Net deferred tax liability
 
$
(1,414
)
 
$
92

 
$
(22
)
 
 
 
 
 
 
 

As of December 31, 2017, the Company had total U.S. federal tax net operating loss (“NOL”) carryforwards of $320.0 million. Of this amount, $85.6 million related to the Company’s current year federal tax loss, and the remaining $234.4 million was generated prior to the IPO transaction. As part of the IPO transaction (immediately before), the existing owners of Keane Group contributed all of their direct and indirect equity interests in Keane Group to Keane Investor Holdings LLC, who then contributed those interests to the Company in exchange for common stock of the Company. This event constituted a change in ownership for purposes of Section 382 of the Internal Revenue Code (“IRC”). As a result, the amount of pre-change NOLs and other tax attributes that are available to offset future taxable income are subject to an annual limitation. The annual limitation is based on the value of the Company as of the effective date of the acquisition. As of December 31, 2017, it is expected that the NOLs subject to IRC Section 382 will be available for use during the applicable carryforward period without becoming permanently lost by the Company. The Company’s Section 382 annual limitation is $19.2 million. This annual limitation is available to be carried forward to the following year if not utilized. As the Company realized a taxable loss for the year ended December 31, 2017, the current year limitation of $19.2 million will be available for use in 2018. As such, the total annual limitation available for use in 2018 will be $38.4 million. The Company’s total NOL Carryforward available to reduce federal taxable income in 2018 is $124.0 million. These carryforwards will begin to expire in 2031.
Included in the Company’s recording of its initial deferred taxes, pursuant to the Organizational Transactions, are deferred tax liabilities related to certain of the Company's indefinite-lived intangible assets. The deferred tax liability related to these indefinite-lived intangible assets will only reverse at the time of ultimate sale or impairment. Due to the uncertain timing of this reversal, the temporary differences associated with these indefinite-lived intangibles cannot be considered a source of future taxable income for purposes of determining a valuation allowance. As such, the deferred tax liability cannot be used to support an equal amount of the deferred tax asset. This is often referred to as a “naked credit.” The Company recognized a deferred tax liability of $1.9 million associated with this naked credit upon the IPO. This is presented within other noncurrent liabilities in the audited consolidated and combined balance sheet. This amount will increase as additional tax amortization is recognized, but will only decrease if the indefinite-lived intangibles are sold, impaired or if the Company establishes indefinite-lived deferred tax assets such as NOLs with an indefinite life under the newly passed Tax Cuts and Jobs Act legislation.
ASC 740, "Income Taxes", requires the Company to reduce its deferred tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. As a result of the Company’s evaluation of both the positive and negative evidence, the Company determined it does not believe it is more likely than not that its deferred tax assets will be utilized in the foreseeable future and has recorded a valuation allowance. The valuation allowance as of December 31, 2017 fully offsets the impact of the initial benefit recorded related to the formation of Keane Group, Inc., excluding deferred tax liabilities related to certain indefinite lived intangibles. This initial deferred impact was recorded as an adjustment to equity due to a transaction between entities under common control. The valuation allowance as of December 31, 2017 was $65.3 million. The valuation allowance for foreign deferred tax assets as of December 31, 2016 and 2015 of $0.1 million was related to the Company's tax basis in certain assets located in Canada.
Changes in the valuation allowance for deferred tax assets were as follows:
 
 
(Thousands of Dollars)
Valuation allowance as of the beginning of January 1, 2017
 
$
139

Charge as debit to equity
 
97,801

Charge as (benefit) expense to income tax provision for current year activity
 
8,032

Charge as (benefit) expense to income tax provision for change in deferred tax rate
 
(40,625
)
Changes to other comprehensive income
 
—

Valuation allowance as of December 31, 2017
 
$
65,347

 
 
 

In December 2017, the Tax Cuts and Jobs Act legislation was enacted. The Tax Cuts and Jobs Act includes significant changes to the U.S. corporate tax system, including a U.S. federal corporate income tax rate reduction from 35% to 21% as well as many other changes. ASC 740 requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation was enacted. As a result, the Company recorded a $41.6 million expense related to the re-measurement of the deferred tax assets and liabilities from 35% to the new 21% tax rate in December 2017. Additionally, the Company recorded a $40.6 million benefit related to the re-measurement of the ending valuation allowance from 35% to the new 21%. The effects of other provisions of the Act are not expected to have an adverse impact on our consolidated and combined financial statements. The Company will continue to analyze the impacts of the Tax Cuts and Jobs Act on the Company and refine its estimates as necessary in 2018.
There were no unrecognized tax benefits nor any accrued interest or penalties associated with unrecognized tax benefits during the years ended December 31, 2017, 2016 and 2015. The Company believes it has appropriate support for the income tax positions taken and to be taken on the Company's tax returns and its accruals for tax liabilities are adequate for all open years based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company's tax returns are open to audit under the statute of limitations for the years ended December 31, 2014 through December 31, 2016 for federal tax purposes and for the years ended December 31, 2013 through December 31, 2016 for state tax purposes.