Mammoth Energy Services, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2019

The components of income tax expense (benefit) attributable to the Company for the year ended December 31, 2019, 2018 and 2017, respectively, are as follows (in thousands):



	Year Ended December 31,
	2019			2018		2017
U.S. current income tax expense	$	386		$	25,656	$	804
U.S. deferred income tax (benefit) expense	(21,761		)	25,372		(27,764		)
Foreign current income tax expense	30,172			75,381		36,565
Foreign deferred income tax (benefit) expense	(20,878		)	26,854		(6,773		)
Total	$	(12,081	)	$	153,263	$	2,832

A reconciliation of the statutory federal income tax amount to the recorded expense is as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017
(Loss) income before income taxes, as reported	$	(91,125	)	$	389,228		$	61,796
Bargain purchase gain, net of tax	—			—			(4,012		)
(Loss) income before income taxes, as taxed	(91,125		)	389,228			57,784
Statutory income tax rate	21		%	21		%	35		%
Expected income tax (benefit) expense	(19,136		)	81,738			20,224
Change in tax rate	—			(103		)	(21,309		)
Tax reform - unrepatriated foreign earnings	—			—			(9,727		)
Foreign income tax rate differential	9,387			39,080			6,286
Foreign earnings not in reported income	12,581			46,834			22,054
Foreign tax credits	(26,141		)	(89,677		)	(29,551		)
Withholding taxes	3,635			13,930			—
Goodwill impairment	6,506			675			—
Other permanent differences	1,873			12,370			503
State tax expenses	2,364			5,394			39
Return to provision	(15,156		)	6,071			—
Other	—			680			(1,192		)
Change in valuation allowance	12,006			36,271			15,505
Total	$	(12,081	)	$	153,263		$	2,832

The Company's effective tax rate was 13.3% for the year ended December 31, 2019 compared to 39.4% for the year ended December 31, 2018 and 4.9% for the year ended December 31, 2017. The decrease in effective tax rate from 2018 to 2019 is primarily the result of a decline in earnings for the Company's Puerto Rico operations as well as return to provision adjustments and goodwill impairment. The increase in effective tax rate from 2017 to 2018 is primarily the result of a tax rate change recorded in 2017 related to the Tax Act as discussed below. Additionally, the Company's tax rate was affected by the mix of earnings between the U.S. and Puerto Rico, increased foreign tax credits resulting from increased profitability in foreign jurisdictions, changes in valuation allowance on excess foreign tax credit carryforwards and withholding taxes on foreign source income, as well as other items, such as equity compensation expense and certain non-deductible expenses.

On December 22, 2017, the United States enacted the Tax Act. The Tax Act significantly changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate from 35% to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. Under the accounting rules, companies were required to recognize the effects of changes in tax laws and tax rates on deferred tax assets and liabilities in 2017, the period in which the new legislation was enacted. The effects of the Tax Act on the Company included (i) remeasurement of deferred taxes and (ii) recognition of liabilities for taxes on mandatory deemed repatriation. As a result of the Tax Act, the Company recorded a credit of $31.0 million during the fourth quarter of 2017. This amount, which is included in (benefit) provision for income taxes in the consolidated statements of comprehensive (loss) income, consists of two components: (i) a $21.3 million credit resulting from the remeasurement of the Company's net deferred tax liabilities in the U.S. based on the new lower corporate income tax rate, and (ii) a $9.7 million credit related to a reversal of deferred liabilities for unrepatriated foreign earnings. The SEC staff issued Staff Accounting Bulletin No. 118 in December 2017, which allowed registrants to record provisional amounts for effects of the Tax Act during a one-year measurement period. The Company completed its analysis of the Tax Act during the fourth quarter of 2018 and recorded a nominal adjustment to its provisional estimates.

Deferred tax liabilities attributable to the Company consisted of the following (in thousands):



	Year Ended December 31,
	2019			2018
Deferred tax assets:
Allowance for doubtful accounts	$	1,189		$	1,180
Lease asset	11,105			—
Deferred compensation	—			1,032
Accrued liabilities	950			3,428
Net operating loss carryover	4,180			467
Foreign tax credits	76,060			51,776
Other	1,633			1,627
Valuation allowance	(63,783		)	(51,776		)
Deferred tax assets	31,334			7,734

Deferred tax liabilities:
Property and equipment	$	(55,180	)	$	(63,181	)
Intangible assets	—			(4,936		)
Withholding taxes	—			(17,419		)
Lease liability	(11,151		)	—
Other	(1,876		)	(1,507		)
Deferred tax liabilities	(68,207		)	(87,043		)
Net deferred tax liability	$	(36,873	)	$	(79,309	)

Reflected in accompanying balance sheet as:
Deferred income tax asset	$	—		$	—
Deferred income tax liability	(36,873		)	(79,309		)
Total	$	(36,873	)	$	(79,309	)

During the years ended December 31, 2019 and 2018, the Company recorded changes in its valuation allowance of $12.0 million and $36.3 million, respectively, related to excess foreign tax credits that are not expected to be utilized. The Company has foreign tax credits carryforwards of $76.1 million as of December 31, 2019. These credits have a 10 year carryforward period and begin to expire in 2028.

The Company maintains a partial valuation allowance related to U.S. foreign tax credit carryforwards, as it cannot objectively assert that these deferred tax assets are more likely than not to be realized. All available positive and negative evidence was weighed to determine whether a valuation allowance was necessary. The more significant evidential matter is the higher foreign tax rate applied to foreign source income in comparison to the U.S. Federal tax rate of 21%. As a result, the Company’s has foreign tax credits in excess of the corresponding U.S. income tax liability for which the foreign tax credits are allowed as an offset and, therefore, are not likely to be realized.

At December 31, 2019, the Company had federal net operating loss carryforwards of $17.8 million that are not subject to expiration, however are limited to 80% of taxable income in any carryforward period.

At December 31, 2019, the Company had undistributed earnings in its Puerto Rico foreign branch. The distribution of these undistributed earnings is subject to a withholding tax in Puerto Rico and since the Company intends to make these distributions in the future, the withholding tax has been accrued.

As of December 31, 2019, the Company had no uncertain tax positions or interest and penalties that qualify for either recognition or disclosure in the financial statements.

The Company’s U.S. federal tax returns for tax years 2016 through 2019 remain subject to examination by the tax authorities. The Company's state and local income tax returns for tax years 2015 through 2019 remain subject to examination, with few exceptions, by the respective tax authorities. Puerto Rico tax returns for tax years 2017 through 2019 and Canada tax returns for the tax years 2014 through 2019 remain open to examination by the respective tax authorities.