Note 10. Income Taxes

The components of the Company’s provision for income taxes for the years ended December 31, 2015 and 2014 are presented below (amounts in thousands). For the year ended December 31, 2013, the Company was treated as a partnership for income tax purposes.


	2015		2014
Current:
Federal	$	(29)	$	10
State		665		120
Local		557		55
Total current		1,193		185
Deferred:
Federal		(68,103)		846
State		(2,691)		711
Local		21		26
Total deferred		(70,773)		1,583
Income tax (benefit) expense	$	(69,580)	$	1,768

The following is a reconciliation of the statutory federal income tax rate (benefit) to the Company’s effective tax rate for the years ended December 31, 2015 and 2014:


	2015		2014
Federal statutory rate	35.0	%	(35.0)	%
State and local taxes	1.0	%	(4.4)	%
State tax rate adjustment	(3.3)	%	—	%
Permanent items	0.4	%	3.6	%
Valuation allowance	(180.5)	%	77.3	%
Minority interest	0.2	%	1.2	%
Change in tax status	18.2	%	(28.0)	%
Non-taxable gain on fair value adjustment	(27.9)	%	—	%
Other	0.9	%	(0.6)	%
(Benefit) provision for income taxes	(156.0)	%	14.1	%

For the year ended December 31, 2015, the difference between the effective rate and the statutory rate is attributable primarily to the release of most of the federal valuation allowance on the Company’s deferred tax assets and the non-taxable gain on the fair value adjustment of previously unconsolidated affiliate. The Company continues to provide for a valuation allowance against net federal and state deferred tax assets associated with non-operating land, the sale of which could result in capital losses that can only be offset against capital gains. The Company also continues to provide for a valuation allowance against net state deferred tax assets relating to operations in Pennsylvania and West Virginia. Management determined it was not more-likely-than-not that the Company will realize these net deferred tax assets.

For the year ended December 31, 2014, the difference between the effective rate and the statutory rate is attributed primarily to the federal and state valuation allowances on the Company’s deferred tax assets. As a result of the Company’s net operating losses and net deferred tax asset position as of December 31, 2014 (after exclusion of certain deferred tax liabilities that generally cannot be offset against deferred tax assets, known as “Naked Credits”), the Company provided for a full valuation allowance against substantially all of the net federal and the net state deferred tax assets.

A valuation allowance is recognized if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax asset will not be realized. Management must analyze all available positive and negative evidence regarding realization of the deferred tax assets and make an assessment of the likelihood of sufficient future taxable income. For the year ended December 31, 2014, the Company was in a three-year cumulative loss position, which was significant negative evidence, and the Company did not have positive evidence to outweigh the negative evidence. For the year ended December 31, 2015, the Company’s position changed to a three-year cumulative income position. Additionally, due to positive evidence including reduction in interest expense and acquisitions of properties with positive operations, management believes it is more-likely-than-not to realize its federal, Louisiana and City of Columbus, Ohio deferred tax assets with the exception of non-operating land. The Company will continue to evaluate the realization of its deferred tax assets on a quarterly basis and make adjustments to its valuation allowance as appropriate.

Prior to September 19, 2014, HoldCo was taxed as a partnership under the Internal Revenue Code pursuant to which income taxes were primarily the responsibility of the partners. The Company is a C Corporation subject to the federal and state corporate‑level income taxes at prevailing corporate tax rates. As a result of this change in status, a state tax expense of $0.7 million was recognized by the Company during 2014.

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. Significant components of the Company’s net deferred taxes related to continuing operations at December 31, 2015 and 2014 are as follows (amounts in thousands):


	2015		2014
Deferred tax assets:
Loss and credit carryforwards	$	50,100	$	43,505
Accrued expenses		7,134		6,431
Fixed assets		8,697		10,956
Investment in partnerships		—		5,845
Debt		11,611		23,826
Stock-based compensation		701		179
Other		599		35
		78,842		90,777
Deferred tax liabilities:
Identified intangibles		(145,053)		(146,715)
Investment in partnerships		(2,008)		—
Prepaid expenses		(1,906)		(2,042)
Other		(97)		—
		(149,064)		(148,757)
Valuation allowance		(8,575)		(89,067)
Net deferred tax liabilities	$	(78,797)	$	(147,047)

At December 31, 2015, management determined it was more‑likely‑than‑not that the Company will realize its federal, Louisiana and Columbus, Ohio deferred tax assets. The recognition of the federal deferred tax assets during 2015 resulted in an income tax benefit of $80.3 million. Management has determined that it is not more-likely-than-not that the Company will realize its Pennsylvania and West Virginia deferred tax assets. Therefore, a full valuation allowance has been recognized against these deferred tax assets, excluding deferred tax liabilities related to indefinite‑lived assets. These indefinite‑lived assets primarily related to gaming licenses in various jurisdictions. These gaming licenses are not being amortized for book purposes, and will only reverse upon ultimate sale or book impairment. Due to the uncertain timing of such reversal, the temporary differences associated with indefinite‑lived intangibles and certain land improvements cannot be considered a source of future taxable income for purposes of determining the valuation allowance.

As of December 31, 2015, the Company had federal and state net operating loss carryforwards of $133.3 million and $40.0 million, respectively. The federal and state net operating losses begin to expire in 2027 and 2018, respectively. As of December 31, 2015, the Company had Alternative Minimum Tax credit carryforwards of $0.6 million, which can be carried forward indefinitely. As of December 31, 2015, the Company had federal jobs credit carryforwards of $0.8 million, which begin to expire in 2026.

Utilization of net operating loss, credit, and other carryforwards are subject to annual limitations due to ownership changes as provided by the Internal Revenue Code of 1986, as amended and similar state provisions. An ownership change is defined as a greater than 50% change in ownership by 5% shareholders in any three‑year period. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, the Company had a “change in ownership” event that limits the utilization of net operating loss, credit, and other carryforwards that were previously available to MTR Gaming Group to offset future taxable income. The “change in ownership” event occurred on September 19, 2014 in connection with the merger with MTR Gaming Group. This limitation resulted in no significant loss of federal attributes, but did result in significant loss of state attributes. The federal and state net operating loss credit and other carryforwards are stated net of limitations.

As of December 31, 2015, there were no unrecognized tax benefits and the Company does not expect a significant increase or decrease to the total amounts of unrecognized tax benefits within the next twelve months. We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.

The Company files a US federal and various state and local income tax returns. With few exceptions, the Company is no longer subject to US federal or state and local tax examinations by tax authorities for years before 2012.