11. Income Taxes

As a partnership, we are generally not subject to income taxes at the entity level because our income is included in the tax returns of our partners. However, certain states impose an entity-level income tax on partnerships.

The provision for state income taxes consisted of the following (in thousands):

	Years Ended December 31,
	2012		2011		2010
Current tax provision:
State	$	60	$	918	$	680
Total current	60		918		680
Deferred tax provision:
State	885		—		—
Total deferred	885		—		—
Provision for income taxes	$	945	$	918	$	680

Deferred income tax balances are the direct effect of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the taxes are actually paid or recovered. The tax effects of temporary differences that give rise to deferred tax liabilities are as follows (in thousands):

	Years Ended December 31,
	2012			2011
Deferred tax liabilities:
Property, plant and equipment	$	(885	)	$	—
Total deferred tax liabilities	(885		)	—
Net deferred tax liabilities	$	(885	)	$	—

A reconciliation of the beginning and ending amount of unrecognized tax benefits is shown below (in thousands):

	Years Ended December 31,
	2012		2011		2010
Beginning balance	$	—	$	—	$	—
Additions based on tax positions related to current year	96		—		—
Additions based on tax positions related to prior years	447		—		—
Ending balance	$	543	$	—	$	—

We recorded $0.5 million of unrecognized tax benefits at December 31, 2012. We have not recorded any interest expense and penalties related to unrecognized tax benefits associated with uncertain tax positions. To the extent interest and penalties are assessed with respect to uncertain tax positions, such amounts will be reflected in income tax expense. We did not record any unrecognized tax benefits at December 31, 2011 and 2010.

We and our subsidiaries file consolidated and separate income tax returns in the U.S. federal jurisdiction and in numerous state jurisdictions. State income tax returns are generally subject to examination for a period of three to five years after filing the returns. However, the state impact of any U.S. federal audit adjustments and amendments remain subject to examination by various states for up to one year after formal notification to the states. As of December 31, 2012, we did not have any state audits underway that would have a material impact on our financial position or results of operations.

We believe it is reasonably possible that a decrease of up to $0.5 million in unrecognized tax benefits may be necessary on or before December 31, 2013 due to the settlement of audits. However, due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities which could materially differ from these estimates.

The following table reconciles net income (loss), as reported, to our U.S. federal partnership taxable income (loss) (in thousands):

	Years Ended December 31,
	2012			2011			2010
Net income (loss), as reported	$	10,509		$	6,053		$	(23,333	)
Book/tax depreciation and amortization adjustment	44,329			6,201			7,524
Book/tax adjustment for unit-based compensation expense	797			532			1,209
Book/tax adjustment for interest rate swap terminations	898			10,252			(12,386		)
Other temporary differences	(4,104		)	(2,496		)	2,212
Other permanent differences	9			93			4
U.S. federal partnership taxable income (loss)	$	52,438		$	20,635		$	(24,770	)

The following allocations and adjustments (which are not reflected in the reconciliation because they do not affect our total taxable income) may affect the amount of taxable income or loss allocated to a unitholder:

· Internal Revenue Code (“IRC”) Section 704(c) Allocations: We make special allocations under IRC Section 704(c) to eliminate the disparity between a unitholder’s U.S. GAAP capital account (credited with the fair market value of contributed property or the investment) and tax capital account (credited with the investor’s tax basis). The effect of such allocations will be to either increase or decrease a unitholder’s share of depreciation, amortization and/or gain or loss on the sale of assets.

· IRC Section 743(b) Basis Adjustments: Because we have made the election provided by IRC Section 754, we adjust each unitholder’s basis in our assets (inside basis) pursuant to IRC Section 743(b) to reflect their purchase price (outside basis). The Section 743(b) adjustment belongs to a particular unitholder and not to other unitholders. Basis adjustments such as this give rise to income and deductions by reference to the portion of each transferee unitholder’s purchase price attributable to each of our assets. The effect of such adjustments will be to either increase or decrease a unitholder’s share of depreciation, amortization and/or gain or loss on sale of assets.

· Gross Income and Loss Allocations: To maintain the uniformity of the economic and tax characteristics of our units, we will sometimes make a special allocation of income or loss to a unitholder. Any such allocations of income or loss will decrease or increase, respectively, our distributive taxable income.

The net tax basis in our assets and liabilities is less than the reported amounts on the financial statements by approximately $352.4 million as of December 31, 2012.