Income Taxes

12 Months Ended

Dec. 31, 2017

The Company’s income tax (benefit) provision consisted of the following components (in thousands):



	Successor					Predecessor
	Year Ended December 31, 2017			Period from October 2, 2016 through December 31, 2016		Period from January 1, 2016 through October 1, 2016		Year Ended December 31, 2015
Current
Federal	$	(8,719	)	$	—	$	—	$	—
State	(30		)	9		11		123
	(8,749		)	9		11		123
Deferred
Federal	—			—		—		—
State	—			—		—		—
	—			—		—		—
Total (benefit) provision	(8,749		)	9		11		123
Less: income tax provision attributable to noncontrolling interest	—			—		—		90
Total (benefit) provision attributable to SandRidge Energy, Inc.	$	(8,749	)	$	9	$	11	$	33

A reconciliation of the (benefit) provision for income taxes at the statutory federal tax rate to the Company’s actual income tax (benefit) provision is as follows (in thousands):



	Successor						Predecessor
	Year Ended December 31, 2017			Period from October 2, 2016 through December 31, 2016			Period from January 1, 2016 through October 1, 2016			Year Ended December 31, 2015
Computed at federal statutory rate	$	13,409		$	(116,891	)	$	504,283		$	(1,512,325	)
State taxes, net of federal benefit	(284		)	(3,696		)	10,512			(19,988		)
Non-deductible expenses	1,711			144			462			816
Non-deductible debt costs	—			—			22,694			10,228
Stock-based compensation	1,109			306			5,884			6,700
Net effects of consolidating the non-controlling interests’ tax provisions	—			—			—			218,196
Discharge of debt and other reorganization related items	1,018			—			359,278			—
Return to provision adjustments (1)	341,681			—			—			—
Impact of legislative changes	243,801			—			—			—
Release of valuation allowance	(8,719		)	—			—			—
Change in valuation allowance	(602,452		)	120,144			(903,102		)	1,296,405
Other	(23		)	2			—			1
Total (benefit) provision attributable to SandRidge Energy, Inc.	$	(8,749	)	$	9		$	11		$	33

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(1)	Primarily related to the Company’s decision to file its 2016 income tax returns using an alternate method than previously estimated with respect to its Chapter 11 related transactions. See additional discussion with respect to Internal Revenue Code (“IRC”) Section 382 below.

Deferred income taxes are provided to reflect the future tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The Company’s deferred tax assets have been reduced by a valuation allowance due to a determination made that it is more likely than not that some or all of the deferred assets will not be realized based on the weight of all available evidence. The Company continues to closely monitor and weigh all available evidence, including both positive and negative, in making its determination whether to maintain a valuation allowance. During the year ended December 31, 2017, the Company reduced the valuation allowance associated with deferred tax assets

related to alternative minimum tax (“AMT”) credits that became realizable as a result of a special tax election. Accordingly, the Company recorded an income tax benefit of $8.7 million in the year ended December 31, 2017. As a result of the significant weight placed on the Company’s cumulative negative earnings position, the Company continued to maintain the full valuation allowance against its remaining net deferred tax asset at December 31, 2017. As of December 31, 2017, 2016 and 2015, the balance of the valuation allowance was $0.5 billion, $1.1 billion, and $2.0 billion, respectively.

Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):



	December 31, 2017			December 31, 2016
Deferred tax liabilities
Investments(1)	$	171,517		$	275,128
Total deferred tax liabilities	171,517			275,128
Deferred tax assets
Property, plant and equipment	391,273			751,683
Derivative contracts	3,131			11,274
Allowance for doubtful accounts	986			1,487
Net operating loss carryforwards	217,259			527,079
Compensation and benefits	5,700			14,494
Tax Credits and other carryforwards	33,001			43,770
Asset retirement obligations	18,843			40,399
Other	2,273			4,663
Total deferred tax assets	672,466			1,394,849
Valuation allowance	(500,949		)	(1,119,721		)
Net deferred tax liability	$	—		$	—

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(1)	Includes the Company’s deferred tax liability resulting from its investment in the Royalty Trusts.

The “Tax Cuts and Jobs Act” (the “TCJA”) enacted in December 2017 includes significant changes to the taxation of business entities, most of which are effective for taxable years beginning after December 31, 2017. These changes include, among others, a permanent reduction to the corporate income tax rate from a maximum 35% to a flat 21% rate, expansion of expensing capital expenditures for a period of time, new limitations on the utilization of net operating losses, and limitations on the deduction of interest expense and executive compensation. Based on our analysis of the TCJA and guidance currently available we recorded an income tax expense of approximately $243.8 million in the period ended December 31, 2017, which was completely offset by a decrease in the corresponding valuation allowance. The provisional amount primarily related to the remeasurement of our gross deferred tax assets and liabilities existing at December 31, 2017 at the appropriate tax rate expected to exist at the time of their reversal. We continue to evaluate the impact of the TCJA and while adjustments to certain deferred tax assets may occur in 2018 due to additional guidance or changes in estimates, we do not expect a material adjustment to our existing net deferred tax balance.

IRC Section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. As a result of the Chapter 11 reorganization and related transactions, the Company experienced an ownership change within the meaning of IRC Section 382 on October 4, 2016. The Company analyzed alternatives available within the IRC to taxpayers in Chapter 11 bankruptcy proceedings in order to minimize the impact of the October 4, 2016 ownership change on its tax attributes and previously planned to elect an available alternative upon filing its 2016 U.S. federal income tax return that would not subject existing tax attributes to an immediate IRC Section 382 limitation, but which would have resulted in a full limitation should a subsequent ownership change occur within two years of the emergent date ownership change. Alternatively, upon filing its 2016 U.S. federal income tax return, the Company elected a method that did subject tax attributes including net operating losses (“NOLs”) existing at October 4, 2016 to an annual limitation but provided more certainty with respect to the future availability of the Company’s existing NOLs. This limitation is expected to result in a significant portion of our NOL carryforwards expiring unused. As such, the Company’s deferred tax asset associated with NOLs and corresponding valuation allowance are materially less at December 31, 2017 compared to December 31, 2016. The election and resulting limitation did not result in an income tax expense as the Company’s net deferred tax asset had previously been reduced to zero by a valuation allowance. Additionally, the limitation did not result in a tax liability for the tax years ended December 31, 2016 or December 31, 2017.

As of December 31, 2017, the Company had approximately $4.7 million of alternative minimum tax credits available that do not expire. However, due to a special tax election available, the AMT credits are reflected as a current receivable as of December 31, 2017. In addition, the Company had approximately $805.3 million of federal net operating loss carryovers, net of NOLs expected to expire unused due to the 2016 IRC Section 382 limitation, that expire during the years 2025 through 2037.

At December 31, 2017 and 2016, the Company had an insignificant liability for unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	Successor					Predecessor
	Year Ended December 31, 2017			Period from October 2, 2016 through December 31, 2016		Period from January 1, 2016 through October 1, 2016
Unrecognized tax benefit at January 1	$	84		$	81	$	81
Changes to unrecognized tax benefits related to a prior period	2			3		—
Lapse of statute of limitations	(38		)	—		—
Unrecognized tax benefit at December 31	$	48		$	84	$	81

Consistent with its policy to record interest and penalties on income taxes as a component of the income tax provision, the Company has included insignificant amounts of accrued gross interest with respect to unrecognized tax benefits in its accompanying consolidated statements of operations during the years ended December 31, 2017, 2016 and 2015. The Company expects a lapse in statute of limitation to eliminate its gross unrecognized tax benefits balance within the next 12 months.

The Company’s only taxing jurisdiction is the United States (federal and state). The Company’s tax years 2014 to present remain open for federal examination. Additionally, tax years 2005 through 2013 remain subject to examination for the purpose of determining the amount of federal net operating loss and other carryforwards. The number of years open for state tax audits varies, depending on the state, but is generally from three to five years.