Income taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We are subject to U.S. federal corporate income taxes, state income tax in states where business is conducted (most notably Oklahoma), and margin tax in the state of Texas.

Tax Cuts and Jobs Act. On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted. The Act amends existing U.S. tax laws that impact the company, most notably a reduction of the maximum U.S. federal corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The other changes to existing U.S. tax laws as a result of the Act, which we believe have the most significant impact on our federal corporate income taxes are as follows:


•	Preservation of long-standing upstream oil and gas tax provisions such as immediate deduction of intangible drilling costs;


•	Limitations regarding the deductibility of interest expense to 30% of the taxpayer’s adjusted taxable income after December 31, 2017;


•	Limitations of the utilization of net federal operating loss carryforwards to 80% of taxable income for losses arising after December 31, 2017 with an indefinite carryforward;


•	Modified provisions related to the limitations on deductions for executive performance based compensation; and


•	Repeal of the corporate alternative minimum tax (“AMT”) and allowing taxpayers to claim a refund on any AMT credit carryovers from 2018 through 2022.

Under the provisions of Staff Accounting Bulletin No. 118 (“SAB 118”), as of December 31, 2017, we had not completed our accounting for all of the enactment-date income tax effects of the Act under ASC 740, Income Taxes. As of December 31, 2018, we have completed our analysis of the impacts of the Act under SAB 118 with immaterial differences to our provisional amounts previously recorded fully offset by a corresponding change in valuation allowance.

Income tax (benefit) expense from continuing operations consists of the following:



	Successor						Predecessor
	Period from			Period from			Period from		Period from
	January 1, 2018			March 22, 2017			January 1, 2017		January 1, 2016
	through			through			through		through
	December 31, 2018			December 31, 2017			March 21, 2017		December 31, 2016
Current income taxes
Federal	$	(77	)	$	(162	)	$	—	$	(10	)
State	—			(187		)	37		(92		)
Total current income taxes	(77		)	(349		)	37		(102		)
Deferred income taxes
Federal	—			—			—		—
State	—			—			—		—
Total deferred income taxes	—			—			—		—
Income tax (benefit) expense	$	(77	)	$	(349	)	$	37	$	(102	)

A reconciliation of the U.S. federal statutory income tax rate to the effective tax rate is as follows:



	Successor				Predecessor
	Period from		Period from		Period from		Period from
	January 1, 2018		March 22, 2017		January 1, 2017		January 1, 2016
	through		through		through		through
	December 31, 2018		December 31, 2017		March 21, 2017		December 31, 2016
Federal statutory rate	21.0	%	35.0	%	35.0	%	35.0	%
Remeasurement of deferred taxes	—	%	(94.7	)%	—		—
State income taxes, net of federal benefit	(0.1	)%	5.8	%	2.2	%	4.1	%
Statutory depletion	(0.4	)%	0.4	%	—		—
Valuation allowance	2.8	%	54.1	%	(25.9	)%	(39.0	)%
EOR tax credit	(25.9	)%	(8.4	)%	—	%	—	%
Return to provision adjustment (1)	(1.7	)%	10.2	%	—	%	—	%
Other, net	4.1	%	(2.4	)%	(11.3	)%	(0.1	)%
Effective tax rate	(0.2	)%	—	%	—	%	—	%

____________________________________________________________


(1)	The adjustment for the period ended December 31, 2018 primarily related to state net operating loss adjustments, reorganization-related items and deferred tax true-ups associated with our oil and gas properties.

Components of the deferred tax assets and liabilities are as follows:



	December 31, 2018			December 31, 2017
Deferred tax assets related to
Asset retirement obligations	$	10,013		$	18,470
Accrued expenses, allowance and other	2,264			4,359
Property and equipment	—			—
Derivative instruments	—			3,379
Net operating loss carryforwards
Federal	242,070			193,010
State	66,575			44,536
Statutory depletion carryforwards	2,383			2,870
Enhanced oil recovery credit	18,758			10,009
Interest limitation	5,771			—
Alternative minimum tax credit carryforwards	—			154
	347,834			276,787
Less valuation allowance	(216,109		)	(215,157		)
Deferred tax asset	131,725			61,630
Deferred tax liabilities related to
Property and equipment	(125,224		)	(61,333		)
Derivative instruments	(6,353		)	—
Inventories	(148		)	(297		)
Deferred tax liability	(131,725		)	(61,630		)
Net deferred tax liability	$	—		$	—

Deferred tax asset valuation allowance. The ultimate realization of our deferred tax assets is dependent upon the generation of future taxable income during the periods in which those deferred tax assets would be deductible. We assess the realizability of our deferred tax assets each period by considering whether it is more likely than not that all or a portion of our deferred tax assets will not be realized. We consider all available evidence (both positive and negative) when determining whether a valuation allowance is required. We evaluated possible sources of taxable income that may be available to realize the benefit of deferred tax assets, including projected future taxable income, the reversal of existing temporary differences, taxable income in carryback years and available tax planning strategies in making this assessment.

Due to continued tax losses, we maintained our deferred tax asset position at December 31, 2018. We believe that it is more likely than not that these deferred tax assets will not be realized and as such we are maintaining the full valuation allowance against our net deferred tax assets.

We will continue to evaluate whether the valuation allowance is needed in future reporting periods. The valuation allowance will remain until we can determine that the net deferred tax assets are more likely than not to be realized. Future events or new evidence which may lead us to conclude that it is more likely than not that our net deferred tax assets will be realized include, but are not limited to, cumulative historical pre-tax earnings, improvements in oil prices, and taxable events that could result from one or more transactions. The valuation allowance does not prevent future utilization of the tax attributes if we recognize taxable income. As long as we conclude that the valuation allowance against our net deferred tax assets is necessary, we likely will not have any additional deferred income tax expense or benefit.

Net operating loss carryforwards. We have federal net operating loss carryforwards of approximately $1,152,714 at December 31, 2018, of which $1,011,368 will expire at various times between 2028 and 2037 if not utilized in earlier periods. However, because of the Act, the estimated federal net operating loss of $141,346 generated in 2018 does not expire but may only offset 80% of taxable income in any given year. At December 31, 2018, we have state net operating loss carryforwards of approximately $1,404,542, which will expire between 2018 and 2038 if not utilized in earlier periods. In addition, at December 31, 2018, we had federal percentage depletion carryforwards of approximately $11,347, which are not subject to expiration.

Elements of the Reorganization Plan provided that our indebtedness related to Prior Senior Notes and certain general unsecured claims were exchanged for Successor common stock in settlement of those claims. Absent an exception, a debtor recognizes cancellation of indebtedness income (“CODI”) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The Internal Revenue Code of 1986, as amended (“IRC”), provides that a debtor in a Chapter 11 bankruptcy case may exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is determined based on the fair market value of the consideration received by the creditors in settlement of outstanding indebtedness. As a result of the market value of equity upon emergence from Chapter 11 bankruptcy proceedings, the amount of CODI was $60,398, which reduced the value of the Company’s net operating losses.

IRC Section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. As a result of the Chapter 11 reorganization and related transactions, the Company experienced an ownership change within the meaning of IRC Section 382 on March 21, 2017. The Company analyzed alternatives available within the IRC to taxpayers in Chapter 11 bankruptcy proceedings in order to minimize the impact of the March 21, 2017 ownership change on its tax attributes. Upon filing the 2017 U.S. Federal income tax return, the Company elected an available alternative which subjects existing tax attributes at emergence to an IRC Section 382 limitation that could result in some or all of the remaining net operating loss carryforwards expiring unused. Upon final determination of tax return amounts for the year ended December 31, 2017, including attribute reduction that occurred on January 1, 2018, the Company has total federal net operating loss carryforwards of $1,011,368 including $760,067 which are subject to limitation due to the ownership change that occurred upon emergence from bankruptcy and $251,301 of post-change net operating loss carryforwards not subject to this limitation. The Company estimates that it will incur an additional $141,346 of post-change net operating loss carryforward not subject to the limitation for the tax year ended December 31, 2018. The limitation did not result in a current tax liability for the tax year ended December 31, 2017 and is not expected to result in a tax liability for the tax year ended December 31, 2018.