| INCOME TAXES | NOTE 22. INCOME TAXES Current and Deferred Tax Provision Our provision for (benefit from) income taxes consisted of the following: Year Ended December 31, 2022 2021 2020 Current tax provision (benefit): U.S. federal $ — $ (1) $ (99) State 1,064 366 326 Total current 1,064 365 227 Deferred tax provision (benefit): U.S. federal 14,320 8,800 (17,246) State 909 1,579 (518) Total deferred 15,229 10,379 (17,764) Provision for (benefit from) income taxes $ 16,293 $ 10,744 $ (17,537) The provision for (benefit from) income taxes for the years ended December 31, 2022, 2021 and 2020 resulted in effective tax rates of 27%, 28% and 20% , respectively. The reconciliation of these effective tax rates to the U.S. statutory rate of Year Ended December 31, 2022 2021 2020 Income taxes at U.S. federal statutory rate $ 12,724 $ 8,182 $ (18,056) Net state income taxes 1,795 1,374 (817) Tax credits (26) (720) (1,256) Unrecognized tax benefits (1) 17 598 772 Valuation allowances and write off of tax attributes (2) (68) (167) 236 Executive compensation limitation 1,901 1,559 1,159 Stock 152 162 538 Other (202) (244) (113) Provision for (benefit from) income taxes $ 16,293 $ 10,744 $ (17,537) (1) Includes the expiration of statute of limitations. See “Unrecognized Tax Benefits” below for further details. (2) 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 our temporary differences that gave rise to deferred tax assets and deferred tax liabilities were as follows: December 31, 2022 2021 Deferred tax assets: Net operating loss carryforwards $ 191,916 $ 196,654 Interest expense limitation carryforward 19,327 — Accrued liabilities 4,979 4,527 Other 12,834 12,503 229,056 213,684 Valuation allowances (1) (607) (735) Total deferred tax assets 228,449 212,949 Deferred tax liabilities: Property, plant and equipment (8,386) (7,762) Basis difference in the Partnership (181,377) (151,469) Other (6,187) (6,975) Total deferred tax liabilities (195,950) (166,206) Net deferred tax asset (2) $ 32,499 $ 46,743 (1) See “Tax Attributes and Valuation Allowances” below for further details. (2) The 2022 net deferred tax assets are reflected in our consolidated balance sheets as deferred tax assets of $33.4 million and $47.9 million, respectively, and deferred tax liabilities of $0.9 million and $1.1 million, respectively. Both the 2022 and 2021 balances are based on a U.S. federal tax rate of 21%. Tax Attributes and Valuation Allowances Changes in our valuation allowance are as follows: Year Ended December 31, 2022 2021 2020 Balance at beginning of period $ (735) $ (1,027) $ (822) Additions to valuation allowance (88) — (205) Reductions to valuation allowance 216 292 — Balance at end of period $ (607) $ (735) $ (1,027) 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% stockholders. 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% over a rolling three–year period. 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 a 50% or more ownership change in our 5% stockholders. 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. The amount of our deferred tax assets considered realizable could be adjusted if projections of future taxable income are reduced or objective negative evidence in the form of a three–year cumulative loss is present or both. Should we no longer have a level of sustained profitability, excluding nonrecurring charges, we will have to rely more on our future projections of taxable income to determine if we have an adequate source of taxable income for the realization of our deferred tax assets, namely NOL, interest expense limitation and tax credit carryforwards. This may result in the need to record a valuation allowance against all or a portion of our deferred tax assets. At December 31, 2022, we had U.S. federal and state NOL carryforwards of $848.5 million and $314.8 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 2029 and 2023, respectively, though $629.2 million of the U.S. federal and $169.9 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 $0.6 million and $0.7 million as of December 31, 2022 and 2021, respectively. At December 31, 2022, we had a U.S. federal tax credit carryforward of $3.0 million. If not used, the federal tax credit carryforward will begin to expire in 2037. As of December 31, 2022, we had U.S. federal and state interest expense limitation carryforwards of $86.4 million and $26.5 million, respectively, included in our interest expense limitation deferred tax asset that are available to offset future taxable income. These carryforwards have no expiration. Unrecognized Tax Benefits Changes in our unrecognized tax benefits (including discontinued operations) are as follows: Year Ended December 31, 2022 2021 2020 Beginning balance $ 19,594 $ 18,892 $ 18,453 Additions based on tax positions related to current year 2,151 2,246 2,397 Additions based on tax positions related to prior years 6 632 — Reductions based on tax positions related to prior years (105) (138) (73) Reductions based on lapse of statute of limitations (1,995) (2,038) (1,885) Ending balance $ 19,651 $ 19,594 $ 18,892 We had $19.7 million, $19.6 million and $18.9 million of unrecognized tax benefits at December 31, 2022, 2021 and 2020, respectively, of which $1.1 million, $2.1 million and $2.9 million, respectively, would affect the effective tax rate if recognized and $7.9 million, $7.9 million and $7.9 million, respectively, would be reflected in income from discontinued operations, net of tax if recognized. We recorded $2.1 million, $2.2 million and $2.1 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 the years ended December 31, 2022, 2021 and 2020, 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. We recorded no potential expenses or releases of interest or penalties in our consolidated statements of operations during 2022, $0.1 million of potential interest expense and penalties during 2021, and releases of $0.1 million during 2020. Subject to the provisions of our tax matters agreement with Exterran Corporation, 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 both December 31, 2022 and 2021, we recorded an indemnification asset (including penalties and interest) of $7.9 million, which is related to unrecognized tax benefits in our consolidated balance sheets (see Note 26). 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. In 2020, the IRS completed their examination of our 2014 and 2015 tax years. Due to this audit being related to tax periods that commenced prior to the Spin–off, Exterran Corporation was also involved in the audit. The tax adjustments recorded from this audit did not have a material impact on our consolidated financial position or 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 not currently involved in any state audits. As of December 31, 2022, we believe it is reasonably possible that $2.7 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to December 31, 2023 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 that could materially differ from this estimate. Impact of New Legislation On August 16, 2022, President Biden signed into law the Inflation Reduction Act (Public Law Number 117–169). The legislation is expected to have an immaterial impact to our effective tax rate. |
