INCOME TAXES

6 Months Ended

Jun. 30, 2020

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES Prior to the IPO, all of the membership interests of the Predecessor were owned by a single member. Under applicable federal income tax provisions, the Predecessor’s legal existence as an entity separate from its sole owner was disregarded for U.S. federal income tax purposes. As a result, the Predecessor’s owner, Diamondback, was responsible for federal income taxes on its share of the Predecessor’s taxable income. Similarly, the Predecessor had no tax attributes such as net operating loss carryforwards because such tax attributes are treated for federal income tax purposes as attributable to the Predecessor’s owner.

In certain circumstances, GAAP requires or permits entities such as the Predecessor to account for income taxes under the principles of ASC Topic 740, “Income Taxes” (“ASC Topic 740”), notwithstanding the fact that the separate legal entity’s activity is attributed to its owner for income tax purposes. Accordingly, the Predecessor has applied the principles of ASC Topic 740 to its financial statements herein, for periods prior to the IPO, as if the Predecessor had been subject to taxation as a corporation. Consistent with the overall basis of presentation as described in Note 1—Organization and Basis of Presentation, for the three and six months ended June 30, 2019, net income for the period prior to the IPO reflects income taxes based on federal and state income tax rates, net of federal benefit, applicable to the Predecessor as if it had been subject to taxation as a corporation. In connection with the completion of the IPO, an adjustment of $31.1 million to equity of the Predecessor was recorded for the elimination of current and deferred tax liabilities related to the period prior to the IPO.

For the three and six months ended June 30, 2020, net income from continuing operations reflects income tax expense of $1.1 million and $4.9 million, respectively. For the three and six months ended June 30, 2019, net income of the Predecessor reflects income tax expense of $7.4 million and $18.2 million, respectively, and net income for the period subsequent to the IPO reflects income tax expense of $1.4 million. Total income tax expense for these periods differed from applying the U.S. statutory corporate income tax rate to pre-tax income primarily due to state income taxes, net of federal benefit, and due to net income attributable to the noncontrolling interest for the period subsequent to the IPO. For the three and six months ended June 30, 2020, the Partnership’s total income tax provision also included discrete income tax expense of approximately $0.3 million related to excess tax deficiencies on unit-based compensation.

The effective income tax rates for the three and six months ended June 30, 2020, were 8.0% and 6.8%, respectively. The effective income tax rates for the three and six months ended June 30, 2019, including periods prior to the IPO, were 15.7% and 18.5%, respectively. The decrease in the effective income tax rates for the three and six months ended June 30, 2020, as compared to the three and six months ended June 30, 2019, is primarily due to net income attributable to the noncontrolling interest in periods subsequent to the IPO.

For the three and six months ended June 30, 2020, the Partnership recorded an adjustment through unitholders’ equity to the carrying value of its investment in the Operating Company, resulting in a decrease in the Partnership’s deferred tax liability related to its investment in the Operating Company and a total net deferred tax asset balance for the Partnership at June 30, 2020. As a result of management’s assessment, including consideration of all available positive and negative evidence, management determined that it is more likely than not that the Partnership will realize its deferred tax assets at June 30, 2020.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. This legislation included a number of provisions applicable to U.S. income taxes for corporations, including providing for carryback of certain net operating losses, accelerated refund of minimum tax credits, and modifications to the rules limiting the deductibility of business interest expense. The Partnership has considered the impact of this legislation in the period of enactment and concluded there was not a material impact to the Partnership’s current or deferred income tax balances.