INCOME TAXES

The components of (loss) earnings before income taxes, after adjusting the (loss) earnings for non-controlling interests, are as follows:



	Year ended September 30,
	2018			2017
United States	$	(2,449,000	)	$	1,522,000
Canada	78,000			(1,431,000		)
	$	(2,371,000	)	$	91,000

The components of the income tax benefit related to the above (loss) income are as follows:



	Year ended September 30,
	2018			2017
Current (benefit) provision:
United States – Federal	$	(429,000	)	$	—
United States – State
Before operating loss carryforwards	7,000			118,000
Benefit of operating loss carryforwards	—			(107,000		)
After operating loss carryforwards	7,000			11,000
	(422,000		)	11,000
Canadian	(560,000		)	(823,000		)
Total current	(982,000		)	(812,000		)
Deferred (benefit) provision:
United States – Federal	—			—
United States – State	(44,000		)	11,000
Canadian	425,000			(279,000		)
Total deferred	381,000			(268,000		)
	$	(601,000	)	$	(1,080,000	)

Consolidated taxes do not bear a customary relationship to pretax results due primarily to the fact that the Company is taxed separately in Canada based on Canadian source operations and in the U.S. based on consolidated operations, and essentially all deferred tax assets, net of relevant offsetting deferred tax liabilities and any amounts estimated to be realizable through tax carryback strategies, are not estimated to have a future benefit as tax credits or deductions. Income from our non-controlling interest in the Kukio Resort Land Development Partnerships is treated as non-unitary for state of Hawaii unitary filing purposes, thus unitary Hawaii losses provide limited sheltering of such non-unitary income. In addition, the U.S. federal current tax benefit for the year ended September 30, 2018 includes a $429,000 benefit from the impacts of the Tax Cuts and Jobs Act of 2017, as discussed further below, and the Canadian current income tax benefit for the year ended September 30, 2017 includes a $369,000 benefit from the lapsing of the statute of limitations on a previously accrued uncertain tax position.

The Tax Cuts and Jobs Act of 2017 (“TCJA”), enacted on December 22, 2017, contains significant changes, including a reduction in the U.S. corporate income tax rate, repeal of the corporate Alternative Minimum Tax (“AMT”), restriction of the deduction for post-TCJA net operating losses to 80% of taxable income and elimination of net operating loss carrybacks, mandatory deemed repatriation and resulting taxation of all undistributed foreign earnings, as well as various other changes that either do not currently have a significant impact to the Company, or that may impact us in the future should those provisions become applicable to the Company. We believe our assessment of the estimated impacts of the TCJA is complete based on information available to date. However, the TCJA makes broad and complex changes to the U.S. tax code and is subject to interpretation until additional guidance is issued by taxation and financial reporting authorities. The ultimate impact of the TCJA may differ from our estimates due to changes in the interpretations and assumptions we used and changes in any future regulatory guidance.

The TCJA reduced the U.S. statutory tax rate from 35% to 21% effective January 1, 2018. The Company’s U.S. federal statutory rate for the fiscal year ended September 30, 2018 is a blended rate of 24.5%, based on a fiscal year blended rate calculation of pre- and post-TJCA rates, and will be 21% for future fiscal years. There was no consolidated financial statement impact of the TCJA’s reduction in the U.S. statutory tax rate in the year ended September 30, 2018, as the Company has a full valuation allowance on its net deferred tax assets under U.S. federal tax law.

The repeal of the corporate AMT provides a mechanism for the refund over time of any unused AMT credit carryovers. Prior to the enactment of the TCJA, it was not more likely than not that the Company’s AMT credit carryovers would provide a future benefit, as such the AMT deferred tax asset had a full valuation allowance. As a result of the new TCJA provision for refundability of the AMT, the Company recorded a current income tax benefit of $429,000, net of an estimated sequestration provision, in the year ended September 30, 2018 to reflect the undiscounted unused AMT credit carryover balance as a non-current income tax receivable. Respective portions of this balance will be reclassified to current income taxes receivable when amounts are eligible for refund within one year of the balance sheet date.

The TCJA restricts the deduction for post-TCJA net operating losses to 80% of taxable income and eliminates the current net operating loss carryback provisions. The Company has determined that all existing pre-TCJA net operating loss carryovers are of sufficient magnitude and life such that they will fully shelter future reversals of U.S. federal deferred tax liabilities. As such, there was no consolidated financial statement impact of the TCJA’s changes to net operating losses in the year ended September 30, 2018.

The TCJA established mandatory deemed repatriation and resulting taxation of all post-1986 undistributed foreign earnings. Through August 2018, as the Company’s Canadian operations consisted of a U.S. corporate subsidiary operating as a branch in Canada and other minor, inactive Canadian corporate subsidiaries, there was no impact from this provision through August 2018. In September 2018, the Company's Canadian operations included an active Canadian corporate subsidiary. We evaluated the impact of the TCJA on this subsidiary and determined that there was no impact from this provision.

A reconciliation between the reported income tax benefit and the amount computed by multiplying the (loss) earnings attributable to Barnwell before income taxes by the U.S. federal tax rate of 21% and 35% for the years ended September 30, 2018 and 2017, respectively, is as follows:



	Year ended September 30,
	2018			2017
Tax (benefit) provision computed by applying statutory rate	$	(498,000	)	$	32,000
Impact of TCJA tax rate change on net deferred tax assets	5,817,000			—
Decrease in the valuation allowance	(6,044,000		)	(1,034,000		)
Impact of TCJA on alternative minimum tax credit carryovers	(429,000		)	—
Additional effect of the foreign tax provision on the total tax provision	592,000			254,000
Uncertain tax positions - lapse of statute	—			(369,000		)
U.S. state tax provision, before changes in uncertain tax positions and net of federal benefit	(36,000		)	22,000
Other	(3,000		)	15,000
	$	(601,000	)	$	(1,080,000	)

The changes in the valuation allowance shown in the table above exclude the impact of changes in uncertain tax positions, state taxes and refundable alternative minimum tax credit carryovers, the valuation allowance impacts of which are incorporated within the respective reconciliation line items elsewhere in the table.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:



	September 30,
	2018			2017
Deferred income tax assets:
Foreign tax credit carryover	$	2,455,000		$	3,062,000
Alternative minimum tax credit carryover	—			460,000
U.S. federal net operating loss carryover	7,208,000			9,773,000
Canadian net operating loss carryover	314,000			—
Tax basis of investment in land and residential real estate in excess of book basis	296,000			877,000
Property and equipment accumulated book depreciation and depletion in excess of tax under U.S. tax law	1,183,000			2,180,000
Liabilities accrued for books but not for tax under U.S. tax law	1,901,000			3,910,000
Liabilities accrued for books but not for tax under Canadian tax law	2,097,000			2,103,000
Other	916,000			1,091,000
Total gross deferred income tax assets	16,370,000			23,456,000
Less valuation allowance	(14,039,000		)	(21,158,000		)
Net deferred income tax assets	2,331,000			2,298,000
Deferred income tax liabilities:
Property and equipment accumulated tax depreciation and depletion in excess of book under Canadian tax law	(1,828,000		)	(914,000		)
Book basis of investment in land development partnerships in excess of tax basis	(818,000		)	(1,289,000		)
Other	—			(31,000		)
Total deferred income tax liabilities	(2,646,000		)	(2,234,000		)
Net deferred income tax (liability) asset	$	(315,000	)	$	64,000
Reported as:
Deferred income tax assets	—			300,000
Deferred income tax liabilities	(315,000		)	(236,000		)
Net deferred income tax (liability) asset	$	(315,000	)	$	64,000

The total valuation allowance decreased $7,119,000 for the year ended September 30, 2018. The decrease was primarily due to $5,817,000 in decreases in various deferred tax assets for which a full valuation allowance had been provided as the result of the decrease in the income tax rate provided for by the TCJA. The decrease was also attributable to a decrease in foreign tax credit carryovers and alternative minimum tax credit carryovers. Foreign tax credit carryovers decreased as a portion of Canadian tax losses for the year ended September 30, 2018 will be carried back to obtain a refund of a portion of Canadian income taxes previously paid. Alternative minimum tax credit carryovers were reduced to zero due to such carryovers now being refundable under the TCJA, as discussed above. Of the total net decrease in the valuation allowance for fiscal 2018, $6,970,000 was recognized as an income tax benefit and $149,000 was credited to accumulated other comprehensive loss.

Net deferred tax assets at September 30, 2018 of $2,331,000 consists of the portion of deferred tax assets related to liabilities accrued for books but not for tax under Canadian tax law and net operating loss carryovers under Canadian tax law for which it is estimated that it is more likely than not that such future deductions will be realizable as the result of concurrent deferred tax liability reversals.

At September 30, 2018, Barnwell had U.S. federal foreign tax credit carryovers, U.S. federal net operating loss carryovers and Canadian net operating loss carryovers totaling $2,455,000, $34,322,000 and $1,163,000, respectively. All three items were fully offset by valuation allowances at September 30, 2018. The U.S. federal net operating loss carryovers generated through September 30, 2017 expire in fiscal years 2032-2037, the Canadian net operating loss carryovers expire in fiscal years 2037-2038, and the foreign tax credit carryovers expire in fiscal years 2019-2025. The U.S. federal net operating loss carryover generated in the year ended September 30, 2018 has no expiry under the changes made by the TCJA.

FASB ASC Topic 740, Income Taxes, prescribes a threshold for recognizing the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority.

Below are the changes in unrecognized tax benefits.



	Year ended September 30,
	2018		2017
Balance at beginning of year	$	—	$	377,000
Effect of tax positions taken in prior years	—		—
Accrued interest related to tax positions taken	—		11,000
Settlements	—		(10,000		)
Lapse of statute	—		(369,000		)
Translation adjustments	—		(9,000		)
Balance at end of year	$	—	$	—

The Company has no remaining uncertain tax positions as of September 30, 2018 or 2017.

Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities at September 30, 2018:



Jurisdiction	Fiscal Years Open
U.S. federal	2015 – 2017
Various U.S. states	2015 – 2017
Canada federal	2011 – 2017
Various Canadian provinces	2011 – 2017