| Income Taxes |
Income Taxes
The following table presents Callon’s deferred tax assets and liabilities with respect to its carryforwards and other temporary differences:
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As of December 31, |
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2018 |
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2017 |
Deferred tax asset (a)
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Federal net operating loss carryforward |
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$ |
151,497 |
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$ |
97,437 |
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Interest expense carryforward (b)
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|
7,335 |
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|
— |
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Statutory depletion carryforward |
|
5,381 |
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|
5,381 |
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Alternative minimum tax credit carryforward (b)
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|
— |
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|
52 |
|
Asset retirement obligations |
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2,347 |
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|
572 |
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Derivatives asset |
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— |
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|
6,186 |
|
Unvested RSU equity awards |
|
2,751 |
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|
1,749 |
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Other |
|
991 |
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|
2,401 |
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Deferred tax asset before valuation allowance |
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170,302 |
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|
113,778 |
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Deferred tax liability (a)
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Oil and natural gas properties |
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169,682 |
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|
54,264 |
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Derivatives liability |
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10,184 |
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— |
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Total deferred tax liability |
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179,866 |
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|
54,264 |
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Net deferred tax asset (liability) before valuation allowance |
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(9,564 |
) |
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59,514 |
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Less: Valuation allowance |
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— |
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(60,919 |
) |
Net deferred tax liability |
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$ |
(9,564 |
) |
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$ |
(1,405 |
) |
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(a) |
Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The 2017 Tax Act lowered the U.S. federal corporate tax rate from 35% to 21%, which caused the Company to remeasure its deferred income tax assets and liabilities at the new rate. As of December 31, 2018 and 2017, the Company’s tax rate applied was 21%. As a result of the change in the applied tax rate on our deferred tax assets and liabilities, in 2017 the Company recorded a $40,611 reduction in our net deferred tax assets with a corresponding reduction in our valuation allowance.
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(b) |
The 2017 Tax Act revised the rules regarding the deductibility of net interest expense incurred in tax years beginning after 2017, with non-deductible amounts being carried forward to future taxable years. |
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(c) |
The 2017 Tax Act repealed the Alternative Minimum Tax (“AMT”) effective for years beginning after December 31, 2017. The result had an immaterial impact in income. |
U.S. federal net operating loss (“NOL”) utilization was changed by the 2017 Tax Act for losses incurred in tax years beginning after December 31, 2017. Post-2017 NOLs do not have an expiration period, but may only offset 80% of the Company’s taxable income in any year of utilization. As of December 31, 2018, Post-2017 NOLs amounted to $58,298. If not utilized, the Company’s existing federal NOL carryforwards, unaffected by the 2017 Tax Act, will expire as follows:
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Year Expiring |
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Total |
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2019-2024 |
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2025-2027 |
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2028-2030 |
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2031-2033 |
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2034-2038 |
Federal NOL carryforwards |
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$ |
662,712 |
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$ |
115,387 |
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$ |
39,714 |
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$ |
32,111 |
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$ |
22,164 |
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$ |
453,336 |
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As a result of a historical write-down of oil and natural gas properties in 2016, discussed in Notes 2 and Supplemental Information on Oil and Natural Gas Operations, the Company had incurred a cumulative three year loss. Because of the impact the cumulative loss had on the determination of the recoverability of deferred tax assets through future earnings, the Company assessed the ability to realize its deferred tax assets based on the future reversals of existing deferred tax liabilities. Accordingly, the Company established a valuation allowance for the net deferred tax asset. As of December 31, 2017, the valuation allowance was $60,919. During 2018, the Company’s tax position transitioned from a net deferred tax asset position to a net deferred tax liability position, thereby unwinding the valuation allowance balance to $0 as of December 31, 2018.
The Company had no significant unrecognized tax benefits at December 31, 2018. Accordingly, the Company does not have any interest or penalties related to uncertain tax positions. However, if interest or penalties were to be incurred related to uncertain tax positions, such amounts would be recognized in income tax expense.
The Company provides for income taxes at a statutory rate of 21% adjusted for permanent differences expected to be realized, which primarily relate to non-deductible executive compensation expenses, restricted stock windfalls, and state income taxes. The following table presents a reconciliation of the reported amount of income tax expense to the amount of income tax expense that would result from applying domestic federal statutory tax rates to pretax income from continuing operations:
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For the Year Ended December 31, |
Components of income tax rate reconciliation |
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2018 |
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2017 |
|
2016 |
Income tax expense computed at the statutory federal income tax rate |
|
21 |
% |
|
35 |
% |
|
35 |
% |
State taxes net of federal expense |
|
1 |
% |
|
1 |
% |
|
— |
% |
Section 162(m) |
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1 |
% |
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— |
% |
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(1 |
)% |
Valuation allowance |
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(20 |
)% |
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(35 |
)% |
|
(34 |
)% |
Effective income tax rate |
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3 |
% |
|
1 |
% |
|
— |
% |
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For the Year Ended December 31, |
Components of income tax expense |
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2018 |
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2017 |
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2016 |
Current federal income tax benefit |
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$ |
— |
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$ |
(48 |
) |
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$ |
(104 |
) |
Deferred federal income tax (benefit) expense |
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3,594 |
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(45 |
) |
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— |
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Deferred state income tax expense |
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4,516 |
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|
1,366 |
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|
90 |
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Total income tax (benefit) expense |
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$ |
8,110 |
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$ |
1,273 |
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$ |
(14 |
) |
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