Note 10. Income Taxes

The components of the Company’s provision for income taxes for the years ended December 31, 2016, 2015 and 2014 are presented below (amounts in thousands).

	2016			2015			2014
Current:
Federal	$	(12	)	$	(29	)	$	10
State		1,173			665			120
Local		739			557			55
Total current		1,900			1,193			185
Deferred:
Federal		12,881			(68,103	)		846
State		(1,448	)		(2,691	)		711
Local		(89	)		21			26
Total deferred		11,344			(70,773	)		1,583
Income tax (benefit) expense	$	13,244		$	(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, 2016, 2015 and 2014:

	2016				2015				2014
Federal statutory rate		35.0		%		35.0		%		(35.0	)	%
State and local taxes		4.3		%		1.0		%		(4.4	)	%
State tax rate adjustment		—		%		(3.3	)	%		—		%
Stock compensation		(2.0	)	%		—		%		—		%
Permanent items		1.5		%		0.4		%		3.6		%
Valuation allowance		(3.6	)	%		(180.5	)	%		77.3		%
Minority interest		0.1		%		0.2		%		1.2		%
Change in tax status		—		%		18.2		%		(28.0	)	%
Non-taxable gain on fair value adjustment		—		%		(27.9	)	%		—		%
Credits		(1.8	)	%		(1.0	)	%		(1.1	)	%
Other		1.3		%		1.9		%		0.5		%
Provision (benefit) for income taxes		34.8		%		(156.0	)	%		14.1		%

For the year ended December 31, 2016, the difference between the effective rate and the statutory rate is attributable primarily to the release of a majority of the state valuation allowances on the Company’s West Virginia deferred tax assets and excess tax benefits on stock compensation under Accounting Standards Update 2016-09, Compensation – Stock Compensation, which the Company adopted effective the first quarter of 2016. 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. 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, 2015, the difference between the effective rate and the statutory rate is attributable primarily to the release of a majority of the federal and related state valuation allowances on the Company’s deferred tax assets and the non-taxable gain on the fair value adjustment of a 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. As of December 31, 2015, the Company also continued 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 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 and management concluded 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. For the year ended December 31, 2016, the Company remained in a three-year cumulative income position and management concluded it is more-likely-than-not to realize its federal, Louisiana, City of Columbus, Ohio, and West Virginia deferred tax assets, with the exception of non-operating land. The Company continues to provide for a valuation allowance against net state deferred tax assets relating to operations in Pennsylvania. Management determined it was not more-likely-than-not that the Company will realize these net deferred tax assets. 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.

On November 24, 2015, Eldorado Resorts LLC, an indirect wholly-owned subsidiary of Eldorado Resorts, Inc., acquired the additional 50% membership interest in the Silver Legacy Joint Venture partnership. Prior to the 2015 acquisition, a deferred tax asset was recognized to the extent that the tax basis in the partnership interest exceeded the book basis. As a result of the 2015 acquisition, the partnership ceased to exist and the Company wrote off the outside basis deferred tax asset of $8.1 million as a change in tax status.

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, 2016 and 2015 are as follows (amounts in thousands):

	2016			2015
Deferred tax assets:
Loss carryforwards	$	38,377		$	48,722
Accrued expenses		7,748			7,134
Fixed assets		6,327			8,697
Debt		9,991			11,611
Credit carryforwards		2,576			1,378
Stock-based compensation		1,216			701
Other		51			599
		66,286			78,842
Deferred tax liabilities:
Identified intangibles		(143,823	)		(145,053	)
Investment in partnerships		(2,742	)		(2,008	)
Prepaid expenses		(2,804	)		(1,906	)
Other		(100	)		(97	)
		(149,469	)		(149,064	)
Valuation allowance		(7,202	)		(8,575	)
Net deferred tax liabilities	$	(90,385	)	$	(78,797	)

At December 31, 2016, management determined it was more‑likely‑than‑not that the Company will realize its federal, Louisiana, West Virginia and Columbus, Ohio deferred tax assets. The recognition of the West Virginia deferred tax assets during 2016 resulted in an income tax benefit of $1.4 million while 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 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, 2016, the Company had federal and state net operating loss carryforwards of $102.3 million and $48.2 million, respectively. The federal and state net operating losses begin to expire in 2030 and 2018, respectively. As of December 31, 2016, the Company had Alternative Minimum Tax credit carryforwards of $1.1 million, which can be carried forward indefinitely. As of December 31, 2016, the Company had federal jobs credit carry forwards of $1.4 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% stockholders 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, 2016, 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 and its subsidiaries file US federal income tax returns and various state and local income tax returns. The Company does not have tax sharing agreements with the other members within the consolidated ERI group. With few exceptions, the Company is no longer subject to US federal or state and local tax examinations by tax authorities for years before 2013.

The Company was notified by the Internal Revenue Service in October of 2016 that its federal tax return for the year ended December 31, 2014 had been selected for examination. As of December 31, 2016, there have been no proposed adjustments. Management believes that its tax positions are appropriate and that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with Management’s expectations, we would be required to adjust our provision for income taxes in the period such resolution occurs. While the Company believes its reported results are materially accurate, any significant adjustments could have a material adverse effect on the Company’s results of operations, cash flows and financial position if not resolved within expectations.