

	Year Ended December 31,
	2019			2018			2017

	(In thousands)
Current income taxes:
Federal	$	(15	)	$	(1,041	)	$	—
State	—			—			—
	(15		)	(1,041		)	—
Deferred income taxes:
Federal	67,516			(10,464		)	5,413
State	(2,601		)	1,004			1,628
	64,915			(9,460		)	7,041
Total	$	64,900		$	(10,501	)	$	7,041

The total income tax provision (benefit) differs from the amounts computed by applying the U.S. statutory income tax rate to net loss before income taxes. A reconciliation of the tax on the Company’s net loss before income taxes and total tax expense (benefit) is shown below:



	Year Ended December 31,
	2019			2018			2017

	(In thousands)
Income tax benefit at U.S. statutory rate	$	(267,540	)	$	(2,255	)	$	(4,037	)
Income tax expense (benefit) attributable to Apache limited partner	205,844			(891		)	—
Income tax benefit attributable to Preferred Unit limited partners	(1,879		)	—			—
State tax expense (benefit)⁽¹⁾	(2,610		)	818			1,058
Change in U.S. tax rate	—			—			1,843
Valuation allowance⁽¹⁾	130,988			(8,177		)	8,177
All other, net	97			4			—
Income tax expense (benefit)	$	64,900		$	(10,501	)	$	7,041

The net deferred tax assets reflect the tax impact of temporary differences between the asset and liability amounts carried on the balance sheet under GAAP and amounts utilized for income tax purposes. The net deferred tax assets consists of the following:



	December 31,
	2019			2018

	(In thousands)
Deferred tax assets:
Investment in partnership	$	103,195		$	65,851
Asset retirement obligation	451			220
Net operating losses	26,749			495
Property, plant, and equipment	5,679			—
Other	—			1,212
Total deferred tax assets	136,074			67,778
Valuation allowance	(135,024		)	—
Net deferred tax assets	1,050			67,778
Deferred tax liabilities:
Property, plant, and equipment	—			2,863
Other	1,050			—
Net deferred tax assets	$	—		$	64,915

In 2019, the Company recorded a valuation allowance of $135.0 million against its net deferred tax asset. This was primarily driven by the Company’s decision to impair its gathering, processing, and transmission asset groups. For further discussion of these impairments, please refer to Note 5—Property, Plant, and Equipment. The Company has assessed the future potential to realize these deferred tax assets and has concluded that it is more likely than not that these deferred tax assets will not be realized.

The Company reconciles its effective tax rate to its net loss before income taxes. This includes net loss before income taxes attributable to both the controlling and noncontrolling interests. As such, the Company’s effective tax rate includes adjustments to remove income (loss) attributed to the noncontrolling interests. In 2019 and 2018, the Company recorded a tax expense adjustment of $205.8 million and tax benefit adjustment of $0.9 million, respectively, associated with income and losses allocated to Apache.

On June 12, 2019, Altus Midstream issued and sold the Preferred Units in a private offering. Concurrently, the Preferred Units were established as a new class of partnership unit representing limited partner interests in Altus Midstream pursuant to the terms of the Amended LPA, and the purchasers were admitted as limited partners of Altus Midstream. The Company recorded a tax benefit adjustment of $1.9 million associated with income allocated to the noncontrolling Preferred Unit limited partners of Altus Midstream. For further details on the terms of the Preferred Units and the rights of the holders thereof, refer to Note 12—Series A Cumulative Redeemable Preferred Units.

On the Closing Date, Altus Midstream completed the Business Combination. Prior to the Business Combination, the Altus Midstream Operating entities were treated as disregarded subsidiaries of Apache Corporation, a C-corporation, for federal income tax purposes. As a result, federal taxable income associated with Altus Midstream Operating had historically been included in

Pursuant to the Contribution Agreement, Apache contributed the Altus Midstream Entities and the Pipeline Options to Altus Midstream LP. Net operating losses associated with Altus Midstream Operating’s activities prior to the Closing Date remained with Apache. After the Business Combination, Altus Midstream Operating continued to be treated as disregarded entities for federal income tax purposes. The entities’ new regarded parent is Altus Midstream LP, a partnership for federal income tax purposes. As such, Altus Midstream LP will not be subject to U.S. federal income taxes and will instead pass through its taxable income or loss to its partners, Apache and Altus. As a result of the change in ownership structure, Altus was required to calculate a federal deferred tax asset based on its investment in Altus Midstream LP. A $62.5 million increase in the Company’s net deferred tax asset was a direct result of the reverse recapitalization and recorded as a component of equity.

Altus is also subject to the Texas margin tax. Unlike federal income taxes, the Texas margin regime assesses tax on corporations, limited liability companies, limited partnerships, and disregarded entities. As such, the Company records deferred tax assets and liabilities for Texas margin tax based on the differences between the financial statement carrying value and tax basis of assets and liabilities on the balance sheet. The reverse recapitalization did not have a material impact on the Company’s state income tax provision. The Texas margin tax associated with Apache's share of the liability is recorded as a component of the noncontrolling interest.

On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law. Under the Act, the U.S. corporate income tax rate was reduced from 35 percent to 21 percent effective January 1, 2018. As a result of the decrease in the corporate income tax rate, the Company recorded a $1.8 million deferred tax expense in 2017 related to the remeasurement of the Company’s December 31, 2017 deferred tax asset.

The Company has a federal net operating loss carryforward of $127.4 million, which has an indefinite carryforward period. The Company has recorded a full valuation allowance against the federal net operating loss because it is probable that this attribute will not be realized.

The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes,” which prescribes a minimum recognition threshold a tax position must meet before being recognized in the financial statements. Tax positions generally refer to a position taken in a previously filed income tax return or expected to be included in a tax return to be filed in the future that is reflected in the measurement of current and deferred income tax assets and liabilities. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	December 31,
	2019			2018

	(In thousands)
Balance at beginning of year	$	—		$	—
Additions based on tax positions related to the prior year	—			—
Additions based on tax positions related to the current year	(2,057		)	—
Reductions for tax positions of prior years	—			—
Balance at end of year	$	(2,057	)	$	—

The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense. Each quarter the Company assesses the amounts provided for and, as a result, may increase (expense) or reduce (benefit) the amount of interest and penalties. The Company has recorded no interest or penalties associated with its unrecognized tax benefit. Uncertain tax positions may change in the next twelve months; however, the Company does not expect any possible change to have a significant impact on the results of operation or financial position. If incurred, Altus will record income tax interest and penalties as a component of income tax expense. The contributor of Altus Midstream LP’s operating assets, Apache Corporation, is currently under IRS audit for the 2014 through 2017 tax years.