Note 8 - Income Taxes

The provision for income taxes for the years ended December 31, 2018 and 2017 consists of the following:

(in thousands)	For the Year Ended
	December 31,
	2018			2017

Current income tax benefit	$	-		$	(74	)
Deferred income tax (benefit) expense		(260	)		7,080
Change in valuation allowance		260			(7,080	)

Total income tax benefit	$	-		$	(74	)

The effective income tax rate for the years ended December 31, 2018 and 2017 differed from the statutory U.S. federal income tax rate as follows:

	For the Year Ended
	December 31,
	2018			2017

Federal income tax rate		21.0	%		35.0	%
State income taxes, net of federal benefit		5.1			3.8
Permanent differences		(1.2	)		(20.5	)
Non-controlling interest in consolidated partnerships		(9.8	)		(0.8	)
True-up of prior year depletion in excess of basis		1.3			1.1
Stock-based compensation deficiency		1.1			3.1
Rate changes of prior year deferred		(1.0	)		(1.8	)
True-up of prior year deferred		4.0			(4.5	)
Effect of tax cuts and TCJA		-			91.0
Increase in valuation allowance and other		2.0			(107.7	)

Total effective income tax rate		22.5	%		(1.1	)%

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities at December 31, 2018 and 2017 are presented below:

(in thousands)	As of December 31,
	2018			2017

Deferred tax assets
Net operating loss carryforwards	$	8,066		$	6,407
Depletion carryforwards		2,185			1,934
Accrual and other		863			450
Stock-based compensation		449			476
Asset retirement obligations		4,640			1,944
Property, plant and equipment		2,340			2,972
Total deferred tax assets		18,543			14,183

Deferred tax liability
Interest in partnerships		(517	)		(790	)
Derivative and other		(1,056	)		(57	)

Less valuation allowance		(16,970	)		(13,336	)

Net deferred tax asset	$	-		$	-

The Company has net operating losses (“NOL”) of approximately $29.2 million available to reduce future years’ federal taxable income. The federal net operating losses generated before 2018 expire beginning in 2031 through 2037. While the 2018 net operating loss will never expire, it is available to offset only 80% of future years’ federal taxable income. The Company has various state NOL carryforwards available to reduce future years’ state taxable income, which are dependent on apportionment percentages and state laws that can change from year to year and impact the amount of such carryforwards. These state NOL will expire beginning in 2023 through 2037 depending upon each jurisdiction’s specific law surrounding NOL carryforwards. Tax returns are subject to audit by various taxation authorities. The results of any audits will be accounted for in the period in which they are determined.

The Company believes that the tax positions taken in the Company’s tax returns satisfy the more likely than not threshold for benefit recognition. Accordingly, no liabilities have been recorded by the Company. Any potential adjustments for uncertain tax positions would be a reclassification between the deferred tax asset related to the Company’s NOL and another deferred tax asset.

The Company’s policy is to classify accrued penalties and interest related to unrecognized tax benefits in the Company’s income tax provision. As of December 31, 2017, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the current year.

On December 22, 2017 the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. The TCJA makes broad and complex changes to the U.S. tax code applicable to certain items in 2017 as well as those applicable to 2018 and subsequent years.

ASC 740 requires the recognition of the tax effects of the of the TCJA for annual periods that include December 22, 2017. At December 31, 2017, the Company had made reasonable estimates of the effects on its existing deferred tax balances. The Company remeasured certain federal deferred tax assets and liabilities based upon the rates at which they are expected to reverse in the future, which is generally twenty one percent. The provisional amount recognized related to the remeasurement of its federal deferred tax balance was $6.0 million, which was subject to a valuation allowance at December 31, 2017.

The Company will continue to analyze the TCJA and future IRS regulations, refine its calculations and gain a more thorough understanding of how individual states are implementing this new law. This further analysis could potentially affect the measurement of deferred tax balances or potentially give rise to new deferred tax amounts.