Callon Petroleum Company Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Income Taxes

Income Taxes

6 Months Ended

Jun. 30, 2020

The Company provides for income taxes at the 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:


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019

Income tax expense computed at the statutory federal income tax rate	21	%	21	%	21	%	21	%

State taxes net of federal expense	1	%	1	%	1	%	1	%

Section 162(m)	—	%	—	%	—	%	—	%

Effective income tax rate, before discrete items	22	%	22	%	22	%	22	%
Valuation allowance	(25	%)	—	%	(31	%)	—	%
Other discrete items ⁽¹⁾	—	%	1	%	—	%	2	%
Effective income tax rate, after discrete items	(3	%)	23	%	(9	%)	24	%

(1) Accounts for the potential impact of periodic volatility of stock-based compensation tax deductions on future effective tax rates.

Management monitors company-specific, oil and natural gas industry and worldwide economic factors and assesses the likelihood that

the Company’s net deferred tax assets will be utilized prior to their expiration. A significant item of objective negative evidence considered was the cumulative historical three year pre-tax loss and a net deferred tax asset position at June 30, 2020, driven primarily by the impairment of evaluated oil and gas properties recognized for the three months ended June 30, 2020. This limits the ability to consider other subjective evidence such as the Company’s potential for future growth. Based on the evaluation of the evidence available during the three months ended June 30, 2020, the Company concluded that it is more likely than not that the net deferred tax assets will not be realized and recorded a valuation allowance of $377.6 million, reducing the net deferred tax assets as of June 30, 2020 to zero.

The Company will continue to evaluate whether the valuation allowance is needed in future reporting periods. The valuation allowance will remain until the Company can conclude that the net deferred tax assets are more likely than not to be realized. Future events or new evidence which may lead the Company to conclude that it is more likely than not its net deferred tax assets will be realized include, but are not limited to, cumulative historical pre-tax earnings, improvements in crude oil prices, and taxable events that could result from one or more future potential transactions. The valuation allowance does not preclude the Company from utilizing the tax attributes if the Company recognizes taxable income. As long as the Company continues to conclude that the valuation allowance against its net deferred tax assets is necessary, the Company will have no significant deferred income tax expense or benefit.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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