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Income Taxes | 12 Months Ended
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Dec. 31, 2018
Income Tax Disclosure [Abstract] |
Income Taxes | 17. Income Taxes 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 which 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. The SEC staff issued guidance on accounting for the tax effects of the TCJA that provided a one-year measurement period for companies to complete their accounting for the income tax impact from the TCJA enactment. As of December 31, 2017, we had not finalized our accounting for the tax effects of the TCJA; however, in accordance with the SEC staff guidance, because we were able to determine a reasonable estimate, we recorded a provisional estimate in our financial statements as described below. In connection with our initial 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 provisional amount for the effects of the TCJA which resulted in a $53.4 million tax benefit to our provision for income taxes in our consolidated statement of operations. This amount 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. During the third quarter of 2018, our analysis of the impact of the TCJA was complete and there were no material changes to the provisional amount recorded at December 31, 2017. Future guidance and additional information and interpretations with respect to the TCJA could impact our tax provision in future years. Current and Deferred Tax Provision The provision for (benefit from) income taxes consisted of the following (in thousands):
| Year Ended December 31,
| 2018 |  | 2017 |  | 2016
Current tax provision (benefit): |  |  |  |  |  |  |  |
U.S. federal | $ | — |  |  | $ | (1,495 | ) |  | $ | — |
State | 912 |  |  | 172 |  |  | 352 |
Total current | $ | 912 |  |  | $ | (1,323 | ) |  | $ | 352 |
Deferred tax provision (benefit): |  |  |  |  |  |  |  |
U.S. federal | $ | 6,197 |  |  | $ | (67,443 | ) |  | $ | (21,287 | )
State | (959 | ) |  | 7,683 |  |  | (3,669 | )
Total deferred | $ | 5,238 |  |  | $ | (59,760 | ) |  | $ | (24,956 | )
Provision for (benefit from) income taxes | $ | 6,150 |  |  | $ | (61,083 | ) |  | $ | (24,604 | )
The provision for (benefit from) income taxes for the years ended December 31, 2018, 2017 and 2016 resulted in effective tax rates on continuing operations of 17.4%, 143.3% and 27.5%, respectively. The following table reconciles these effective tax rates to the U.S. statutory rate of 21%, the rate in effect during 2018, and 35%, the rate in effect during 2017 and 2016 (in thousands):
| Year Ended December 31,
| 2018 |  | 2017 |  | 2016
Income taxes at U.S. federal statutory rate | $ | 7,415 |  |  | $ | (14,917 | ) |  | $ | (31,297 | )
Net state income taxes | 1,570 |  |  | (4,693 | ) | (2) | 416 |
Tax Cuts and Jobs Act | — |  |  | (53,442 | ) | (3) | — |
Noncontrolling interest | (1,793 | ) |  | (1,091 | ) |  | 3,204 |
Unrecognized tax benefits | (1,443 | ) | (1) | 9,566 |  | (4) | (2,078 | )
Valuation allowances and write off of tax attributes | (58 | ) |  | 247 |  |  | 85 |
Indemnification revenue / expense | (44 | ) |  | 692 |  |  | 3,006 |
Executive compensation limitation | 977 |  |  | 2,433 |  |  | 856 |
Stock | (455 | ) |  | (858 | ) | (5) | — |
Other | (19 | ) |  | 980 |  |  | 1,204 |
Provision for (benefit from) income taxes | $ | 6,150 |  |  | $ | (61,083 | ) |  | $ | (24,604 | )
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(1) | Reflects a decrease in our uncertain tax benefit, net of federal benefit, due to the settlement of tax audits and the expiration of a statute of limitations.
(2) | Includes a deferred state release, net of federal benefit, of $3.7 million due to the remeasurement of our uncertain tax benefits.
(3) | See “Tax Cuts and Jobs Act” above for further details.
(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) | Reflects the impact of adopting ASU 2016-09.
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,
| 2018 |  | 2017
Deferred tax assets: |  |  |  |  |
Net operating loss carryforwards | $ | 82,259 |  |  | $ | 53,950 |
Accrued liabilities | 5,726 |  |  | 6,407 |
Other | 9,407 |  |  | 5,181 |
| 97,392 |  |  | 65,538 |
Valuation allowances | (45,439 | ) |  | (300 | )
Total deferred tax assets | $ | 51,953 |  |  | $ | 65,238 |
Deferred tax liabilities: |  |  |  |  |
Property, plant and equipment | $ | (10,763 | ) |  | $ | (17,999 | )
Basis difference in the Partnership | (35,604 | ) |  | (143,322 | )
Other | (4,172 | ) |  | (1,860 | )
Total deferred tax liabilities | (50,539 | ) |  | (163,181 | )
Net deferred tax asset (liability) (1) | $ | 1,414 |  |  | $ | (97,943 | )
——————
(1) | The 2018 net deferred tax asset includes a $4.2 million deferred tax asset, which is reflected in other long-term assets in our consolidated balance sheets, and a $2.8 million deferred tax liability, which is reflected in deferred income taxes. The 2017 net deferred tax liability is presented as deferred income taxes in our consolidated balance sheets.
Both the 2017 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. Due to the change in ownership and tax step up from the consideration given in the Merger, we recorded 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. We evaluated the realizability of our resulting net deferred tax asset position by assessing the available positive and negative evidence. 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 and so the valuation allowance was recorded as a decrease to additional paid-in capital. Changes to the valuation allowance in subsequent annual periods will be reflected in the statement of operations. At December 31, 2018, we had U.S. federal and state NOL carryforwards of $357.3 million and $143.9 million, respectively, included in our NOL deferred tax asset that are available to offset future taxable income. If not used, the federal and state carryforwards will begin to expire in 2025 and 2020, respectively. Additionally, $115.4 million of the U.S. federal and $23.5 million of state NOL carryforwards have no expiration date. In connection with the state NOL deferred tax asset we recorded a valuation allowance of $0.2 million as of December 31, 2018. Stock Employee share-based compensation attributable to the exercise of stock options and vesting of restricted stock is deductible by us for tax purposes. Prior to the adoption of ASU 2016-09 For post-2005 tax years, to the extent the tax stock deductions exceeded the previously accrued deferred tax benefit for these items the additional tax benefit was not recognized until the deduction reduced current taxes payable. For pre-2006 tax years, the additional tax benefit was included in our NOL deferred tax asset with a corresponding valuation allowance negating the benefit. At December 31, 2016, the post-2005 tax benefit not included in our NOL deferred tax asset was $0.6 million and the pre-2006 tax benefit included in our NOL deferred tax asset with an offsetting valuation allowance was $0.6 million. Subsequent to the adoption of ASU 2016-09 The additional tax benefit associated with tax stock deductions that exceeds the previously accrued deferred tax benefit is recognized discretely in the period it occurs regardless of its impact on current taxes payable. Upon the adoption of ASU 2016-09, we recognized the $0.6 million post-2005 tax benefit in our NOL deferred tax asset and released the valuation allowance on our pre-2006 tax benefit. The tax impact of both adjustments, as well as the forfeiture modifications, was reported as a $1.2 million cumulative effect adjustment to retained earnings. Unrecognized Tax Benefits A reconciliation of the beginning and ending amount of unrecognized tax benefits (including discontinued operations) is shown below (in thousands):
| Year Ended December 31,
| 2018 |  | 2017 |  | 2016
Beginning balance | $ | 21,400 |  |  | $ | 9,665 |  |  | $ | 11,998 |
Additions based on tax positions related to current year | 1,893 |  |  | 2,002 |  |  | 271 |
Additions based on tax positions related to prior years(1) | 450 |  |  | 9,887 |  |  | 862 |
Reductions based on settlement payments to (refunds from) government authorities | (3,461 | ) |  | (154 | ) |  | (3,466 | )
Reductions based on tax positions related to prior years | (20 | ) |  | — |  |  | — |
Reductions based on lapse of statute of limitations | (702 | ) |  | — |  |  | — |
Ending balance | $ | 19,560 |  |  | $ | 21,400 |  |  | $ | 9,665 |
——————
(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 $19.6 million, $21.4 million and $9.7 million of unrecognized tax benefits at December 31, 2018, 2017 and 2016, respectively, of which $8.8 million, $9.6 million and $3.1 million, respectively, would affect the effective tax rate if recognized. Also included in the balance of unrecognized tax benefits at December 31, 2018, 2017 and 2016 are $6.9 million, $6.4 million and $6.6 million, respectively, which would be reflected in income from discontinued operations, net of tax if recognized. We recorded $2.2 million, $1.6 million and $0.2 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, 2018, 2017 and 2016, 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 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. We recorded an immaterial amount of potential interest expense and penalties related to unrecognized tax benefits associated with uncertain tax positions in our consolidated statement of operations during the year ended December 31, 2016. 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, 2018 and 2017, we recorded a $7.1 million and $6.4 million indemnification asset (including penalties and interest), 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 2018 and 2016, we settled certain state audits which resulted in refunds of $1.7 million and $5.6 million, respectively, and reductions in previously-accrued uncertain tax benefits of $3.5 million in each year. As of December 31, 2018, 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, 2018, we believe it is reasonably possible that approximately $3 million to $7 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to December 31, 2019 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.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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