INCOME TAXES

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



	Year ended September 30,
	2019			2018
United States	$	(3,039,000	)	$	(2,449,000	)
Canada	(9,606,000		)	78,000
	$	(12,645,000	)	$	(2,371,000	)

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



	Year ended September 30,
	2019			2018
Current (benefit) provision:
United States – Federal	$	(31,000	)	$	(429,000	)
United States – State	(52,000		)	7,000
Canadian	(4,000		)	(560,000		)
Total current	(87,000		)	(982,000		)
Deferred (benefit) provision:
United States – State	(24,000		)	(44,000		)
Canadian	(120,000		)	425,000
Total deferred	(144,000		)	381,000
	$	(231,000	)	$	(601,000	)

On June 28, 2019, the Canadian province of Alberta enacted legislation that decreased the provincial general corporate tax rate from 12% to 11% effective July 1, 2019, with further 1% rate reductions on January 1 of every year until the provincial general corporate tax rate is 8% on January 1, 2022, bringing Barnwell of Canada’s and Octavian Oil’s total Canadian statutory tax rates from 30.65% and 27.00%, respectively, to 29.70% and 26.00%, respectively, effective July 1, 2019 and to 26.85% and 23.00%, respectively, effective January 1, 2022. There was no financial statement impact of this rate reduction as changes in deferred tax assets and liabilities were fully offset by a corresponding change in the related valuation allowance.

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 years ended September 30, 2019 and 2018 includes a $31,000 and a $429,000, respectively, benefit from the impacts of the Tax Cuts and Jobs Act of 2017 (“TCJA”), as discussed further below.

The repeal of the corporate Alternative Minimum Tax (“AMT”) by the TCJA 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 TCJA provision for refundability of the AMT, the Company recorded a current income tax benefit of $429,000, net of a 6.6% 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. In January 2019, the IRS clarified that sequestration would not apply to the refundable corporate AMT credit for tax years that begin after December 31, 2017. As such, the previously provided $31,000 reduction in the refundable AMT credit carryover receivable was reversed in the year ended September 30, 2019. Additionally, as 50% of the total AMT credit carryover is refundable for the tax year ended September 30, 2019, and therefore receivable upon the filing of the Company’s U.S. federal income tax return for the current year, the Company reclassified $230,000 of the non-current income tax receivable to current income tax receivable. Respective portions of the remaining 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. As such, utilization of 20% of the Company’s U.S. federal net operating loss generated in the current fiscal year is disallowed and will be carried forward indefinitely

A reconciliation between the reported income tax benefit and the amount computed by multiplying the loss attributable to Barnwell before income taxes by the U.S. federal tax rate of 21% is as follows:



	Year ended September 30,
	2019			2018
Tax benefit computed by applying statutory rate	$	(2,655,000	)	$	(498,000	)
Impact of TCJA limitation on post-TCJA net operating loss carryforwards	260,000			—
Impact of TCJA tax rate change on net deferred tax assets	—			5,817,000
Increase (decrease) in the valuation allowance	3,003,000			(6,044,000		)
Impact of TCJA on alternative minimum tax credit carryovers	(31,000		)	(429,000		)
Additional effect of the foreign tax provision on the total tax provision	(736,000		)	592,000
U.S. state tax provision, net of federal benefit	(76,000		)	(36,000		)
Other	4,000			(3,000		)
	$	(231,000	)	$	(601,000	)

The changes in the valuation allowance shown in the table above exclude the impact of changes in 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,
	2019			2018
Deferred income tax assets:
Foreign tax credit carryover under U.S. tax law	$	2,421,000		$	2,455,000
U.S. federal net operating loss carryover	8,366,000			7,208,000
U.S. state unitary net operating loss carryovers	873,000			639,000
Canadian net operating loss carryover	850,000			314,000
Tax basis of investment in land in excess of book basis under U.S. tax law	296,000			296,000
Property and equipment accumulated book depreciation and depletion in excess of tax under Canadian tax law	308,000			—
Property and equipment accumulated book depreciation and depletion in excess of tax under U.S. tax law	945,000			1,183,000
Liabilities accrued for books but not for tax under U.S. tax law	2,250,000			1,901,000
Liabilities accrued for books but not for tax under Canadian tax law	1,641,000			2,097,000
Other	294,000			277,000
Total gross deferred income tax assets	18,244,000			16,370,000
Less valuation allowance	(17,687,000		)	(14,039,000		)
Net deferred income tax assets	557,000			2,331,000
Deferred income tax liabilities:
Property and equipment accumulated tax depreciation and depletion in excess of book under Canadian tax law	—			(1,828,000		)
Book basis of investment in land development partnerships in excess of tax basis under U.S. tax law	(557,000		)	(627,000		)
Book basis of investment in land development partnerships in excess of tax basis under U.S. state non-unitary tax law	(168,000		)	(191,000		)
Total deferred income tax liabilities	(725,000		)	(2,646,000		)
Net deferred income tax liability	$	(168,000	)	$	(315,000	)
Reported as:
Deferred income tax assets	—			—
Deferred income tax liabilities	(168,000		)	(315,000		)
Net deferred income tax liability	$	(168,000	)	$	(315,000	)

The total valuation allowance increased $3,648,000 for the year ended September 30, 2019. The increase was primarily due to a $2,113,000 increase in the valuation allowance for deferred tax assets under Canadian law related to Canadian jurisdiction net operating loss carryforwards and future asset retirement obligation deductions that may not be realizable and a $902,000 increase in the U.S. federal tax law valuation allowance related to U.S. federal net operating loss carryforwards resulting from the pre-tax book loss. Of the total net increase in the valuation allowance for fiscal 2019, $3,225,000 was recognized as an income tax expense and $423,000 was charged to accumulated other comprehensive loss.

Net deferred tax assets at September 30, 2019 of $557,000 consists of the portion of U.S. federal consolidated deferred tax assets that are estimated to be partially realized through corresponding reversals of U.S. federal consolidated deferred tax liabilities related to the Kukio Resort Land Development Partnership excess of book income over taxable income.

At September 30, 2019, Barnwell had U.S. federal foreign tax credit carryovers, U.S. federal net operating loss carryovers, U.S. state unitary net operating loss carryovers and Canadian net operating loss carryovers totaling $2,421,000, $41,078,000, $13,644,000 and $3,485,000, respectively. All four items were fully offset by valuation allowances at September 30, 2019. The U.S. federal net operating loss carryovers generated through September 30, 2017 expire in fiscal years 2032-2037, the U.S. state unitary net operating loss carryovers expire in fiscal years 2033-2039, the Canadian net operating loss carryovers expire in fiscal years 2037-2039, and the foreign tax credit carryovers expire in fiscal years 2021-2025. The U.S. federal net operating loss carryovers generated in the years ended September 30, 2019 and 2018 have no expiry, however as discussed previously, 20% of net operating losses generated in fiscal 2019 and future years are nondeductible and will be carried forward indefinitely 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. The Company has no uncertain tax positions as of September 30, 2019 or 2018.

Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities at September 30, 2019:



Jurisdiction	Fiscal Years Open
U.S. federal	2016 – 2018
Various U.S. states	2016 – 2018
Canada federal	2012 – 2018
Various Canadian provinces	2012 – 2018