| Income Taxes | 20. Income Taxes Current and Deferred Tax Provision The provision for (benefit from) income taxes consisted of the following (in thousands): Year Ended December 31, 2019 2018 2017 Current tax provision (benefit): U.S. federal $ 75 $ — $ (1,495 ) State 377 912 172 Total current $ 452 $ 912 $ (1,323 ) Deferred tax provision (benefit): U.S. federal $ (35,597 ) $ 6,197 $ (67,443 ) State (4,000 ) (959 ) 7,683 Total deferred $ (39,597 ) $ 5,238 $ (59,760 ) Provision for (benefit from) income taxes $ (39,145 ) $ 6,150 $ (61,083 ) The provision for (benefit from) income taxes for the years ended December 31, 2019 , 2018 and 2017 resulted in effective tax rates on continuing operations of (67.0)% , 17.4% and 143.3% , respectively. The following table reconciles these effective tax rates to the U.S. statutory rate of 21% , the rate in effect during 2019 and 2018 , and 35% , the rate in effect during 2017 (in thousands): Year Ended December 31, 2019 2018 2017 Income taxes at U.S. federal statutory rate $ 12,276 $ 7,415 $ (14,917 ) Net state income taxes (1) 1,172 1,570 (4,693 ) Tax credits (1,295 ) (244 ) — Tax Cuts and Jobs Act (2) — — (53,442 ) Noncontrolling interest — (1,793 ) (1,091 ) Unrecognized tax benefits (3)(4) (1,958 ) (1,443 ) 9,566 Valuation allowances and write off of tax attributes (5) (50,219 ) (58 ) 247 Indemnification revenue / expense 42 (44 ) 692 Executive compensation limitation 1,102 977 2,433 Stock 66 (455 ) (858 ) Other (331 ) 225 980 Provision for (benefit from) income taxes $ (39,145 ) $ 6,150 $ (61,083 ) —————— (1) Includes a deferred state release, net of federal benefit, of $3.7 million due to the remeasurement of our uncertain tax benefits in 2017 . (2) See “Tax Cuts and Jobs Act” below for further details. (3) Reflects a decrease in our uncertain tax benefit, net of federal benefit, due to settlements of tax audits and expiration of statute of limitations in 2019 and 2018 . (4) Reflects an increase in our uncertain tax benefit, net of federal benefit, due to appellate court decisions in 2017 which required us to remeasure certain of our uncertain tax positions. (5) See “Tax Attributes and Valuation Allowances” below for further details. Deferred income tax balances are the direct effect of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the taxes are actually paid or recovered. The tax effects of temporary differences that gave rise to deferred tax assets and deferred tax liabilities were as follows (in thousands): December 31, 2019 2018 Deferred tax assets: Net operating loss carryforwards $ 116,378 $ 82,259 Accrued liabilities 3,486 5,726 Other 12,479 9,407 132,343 97,392 Valuation allowances (1) (822 ) (45,439 ) Total deferred tax assets $ 131,521 $ 51,953 Deferred tax liabilities: Property, plant and equipment $ (6,440 ) $ (10,763 ) Basis difference in the Partnership (81,645 ) (35,604 ) Other (8,083 ) (4,172 ) Total deferred tax liabilities (96,168 ) (50,539 ) Net deferred tax asset (2) $ 35,353 $ 1,414 —————— (1) See “Tax Attributes and Valuation Allowances” below for further details. (2) The 2019 and 2018 net deferred tax asset are reflected in our consolidated balance sheets as deferred tax assets of $36.6 million and $4.3 million , respectively, and deferred tax liabilities of $1.3 million and $2.8 million , respectively. Both the 2019 and 2018 balances are based on a U.S. federal tax rate of 21%. Tax Attributes and Valuation Allowances Pursuant to Sections 382 and 383 of the Code, utilization of loss and credit carryforwards are subject to annual limitations due to any ownership changes of 5% owners. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. The Hanover/Universal merger in 2007 resulted in such an ownership change but the Spin-off in 2015 did not result in such an ownership change for Archrock. In 2018, the common stock we issued in the Merger caused a new ownership change to occur for Archrock. The limitations from this ownership change may cause us to pay U.S. federal income taxes earlier; however, we do not currently expect that any loss carryforwards or credit carryforwards will expire as a result of any 382 or 383 limitations. Our ability to utilize loss carryforwards and credit carryforwards against future U.S. federal taxable income and future U.S. federal income tax may be limited in the future if we have another 50% or more ownership change in our 5% shareholders. We record valuation allowances when it is more likely than not that some portion or all of our deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the appropriate taxing jurisdictions in the future. If we do not meet our expectations with respect to taxable income, we may not realize the full benefit from our deferred tax assets, which would require us to record a valuation allowance in our tax provision in future years. As of each reporting date, we consider new evidence to evaluate the realizability of our net deferred tax asset position by assessing the available positive and negative evidence. Changes to the valuation allowance are reflected in the statement of operations. In 2018, the change in ownership and tax step up from the consideration given in the Merger caused us to record a $156.0 million deferred tax asset, which resulted in an overall $52.2 million net deferred tax asset, of which $46.6 million and $5.6 million related to continuing operations and discontinued operations, respectively. As of December 31, 2018, we had incurred a three-year cumulative book loss, which outweighed the positive evidence of projected future taxable income. Based on the weight of the evidence, we concluded that a $50.8 million valuation allowance was required, of which $45.2 million and $5.6 million were recorded to continuing operations and discontinued operations, respectively. The tax impact from the Merger was accounted for as an equity transaction; therefore, the valuation allowance was recorded as a decrease to additional paid-in capital. As of December 31, 2019 , we achieved a three-year cumulative book income, and together with other positive and negative evidence, we concluded that there is sufficient positive evidence of projected future taxable income to release the $50.8 million valuation allowance previously required for our overall net deferred tax asset position. This release was offset by a $0.6 million increase in the valuation allowance on our state NOL deferred tax asset. The overall impact of the change in the valuation allowance was recorded as a $50.2 million benefit from income taxes in our consolidated statements of operations and a $50.2 million increase in deferred tax assets in our consolidated balance sheets, of which $44.6 million and $5.6 million were recorded to continuing operations and discontinued operations, respectively. At December 31, 2019 , we had U.S. federal and state NOL carryforwards of $506.7 million and $202.1 million , respectively, included in our NOL deferred tax asset that are available to offset future taxable income. If not used, the federal and state NOL carryforwards will begin to expire in 2025 and 2020 , respectively, though $267.4 million of the U.S. federal and $54.3 million of the state NOL carryforwards have no expiration date. In connection with the state NOL deferred tax asset, we recorded a valuation allowance of $0.8 million and $0.2 million as of December 31, 2019 and 2018 , respectively. At December 31, 2019 , we had U.S. federal tax credit carryforwards of $1.5 million . If not used, the federal tax credit carryforwards will begin to expire in 2037. Unrecognized Tax Benefits A reconciliation of the unrecognized tax benefit (including discontinued operations) activity is shown below (in thousands): Year Ended December 31, 2019 2018 2017 Beginning balance $ 19,560 $ 21,400 $ 9,665 Additions based on tax positions related to current year 2,227 1,893 2,002 Additions based on tax positions related to prior years (1) 2,047 450 9,887 Reductions based on settlement refunds from government authorities (4,414 ) (3,461 ) (154 ) Reductions based on tax positions related to prior years (51 ) (20 ) — Reductions based on lapse of statute of limitations (916 ) (702 ) — Ending balance $ 18,453 $ 19,560 $ 21,400 —————— (1) Appellate court decisions during the year ended December 31, 2017 required us to remeasure certain of our uncertain tax positions and increase our unrecognized tax benefit for these positions in 2017. We had $18.5 million , $19.6 million and $21.4 million of unrecognized tax benefits at December 31, 2019 , 2018 and 2017 , respectively, of which $3.2 million , $6.9 million and $8.0 million , respectively, would affect the effective tax rate if recognized and $8.3 million , $6.9 million and $6.4 million , respectively, would be reflected in income from discontinued operations, net of tax if recognized. We recorded $2.1 million , $2.2 million and $1.6 million of potential interest expense and penalties related to unrecognized tax benefits associated with uncertain tax positions (including discontinued operations) in our consolidated balance sheets as of December 31, 2019 , 2018 and 2017 , respectively. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as reductions in income tax expense. During the year ended December 31, 2019 , we recorded a $0.1 million release of potential interest expense and penalties, and during the years ended December 31, 2018 and 2017 , we recorded $0.7 million and $1.4 million , respectively, of potential interest expense and penalties in our consolidated statements of operations. Subject to the provisions of the tax matters agreement between Exterran Corporation and us, both parties agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing. As of December 31, 2019 and 2018 , we recorded an indemnification asset (including penalties and interest) of $8.5 million and $7.1 million , respectively, related to unrecognized tax benefits in our consolidated balance sheets. We and our subsidiaries file consolidated and separate income tax returns in the U.S. federal jurisdiction and in numerous state jurisdictions. U.S. federal income tax returns are generally subject to examination for up to three years after filing the returns. Due to our NOL carryforwards, our U.S. federal income tax returns can be examined back to the inception of our NOL carryforwards; therefore, expanding our examination period beyond 20 years. During the second quarter of 2017, the IRS commenced an examination of our U.S. federal income tax return for the 2014 tax year. During the third quarter of 2018, the IRS expanded the audit to include the 2015 tax year. Due to this audit being related to tax periods that commenced prior to the Spin-off, Exterran Corporation is also involved in this audit. We do not expect any tax adjustments from this audit to have a material impact on our consolidated financial position or consolidated results of operations. State income tax returns are generally subject to examination for a period of three to five years after filing the returns. However, the state impact of any U.S. federal audit adjustments and amendments remains subject to examination by various states for up to one year after formal notification to the states. We are currently involved in several state audits. During the years ended December 31, 2019 and 2018 , we settled certain state audits, which resulted in refunds of $2.4 million and $1.7 million , respectively, and reductions in previously-accrued uncertain tax benefits of $4.4 million and $3.5 million , respectively. As of December 31, 2019 , we did not have any state audits underway that we believe would have a material impact on our consolidated financial position or consolidated results of operations. As of December 31, 2019 , we believe it is reasonably possible that $2.6 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to December 31, 2020 due to the settlement of audits or the expiration of statutes of limitations or both. However, due to the uncertain and complex application of the tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities, which could materially differ from this estimate. Tax Cuts and Jobs Act In December 2017, the TCJA was enacted and significantly reformed the Code. The TCJA included a number of U.S. tax law changes that impact us, most notably the reduction in the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. In connection with our analysis of the TCJA, we remeasured our deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future. At December 31, 2017, we recorded a $53.4 million tax benefit to our provision for income taxes in our consolidated statements of operations, which consisted of a $57.7 million tax benefit due to reducing our continuing operations net deferred tax liability, a $4.6 million tax detriment due to reducing our discontinued operations deferred tax asset and a $0.3 million tax benefit due to reducing our other comprehensive income net deferred tax liability. Future guidance and additional information and interpretations with respect to the TCJA could impact our tax provision in future years. |
