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10. INCOME TAXES
 9 Months Ended
Sep. 30, 2015
Income Tax Disclosure [Abstract]  
INCOME TAXES

NOTE 10 – INCOME TAXES

 

Due to the Company’s net losses, there was no provision for income taxes for the nine months ended September 30, 2015 and 2014.

 

The difference between the income tax expense of zero shown in the statement of operations and pre-tax book net loss times the federal statutory rate of 34% is principally due to the increase in the valuation allowance.

 

Deferred income tax assets as of September 30, 2015 and December 31, 2014 are as follows (in thousands):

 

    As of     As of  
    September 30,     December 31,  
    2015     2014  
Deferred Tax Assets (Liabilities)            
Difference in depreciation, depletion, and capitalization methods – oil and natural gas properties   $ 1,695     $ 1,385  
Net operating losses     4,131       4,131  
Impairment – oil and natural gas properties     (1,122 )     (1,122 )
Other     753       623  
Total deferred tax asset     5,457       5,017  
                 
Less: valuation allowance     (5,457 )     (5,017 )
Total deferred tax assets   $ -     $ -  

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

 

Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, management has applied a full valuation allowance against its net deferred tax assets at September 30, 2015. The net change in the total valuation allowance for the nine months ended September 30, 2015 was an increase of $440,000.

 

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of September 30, 2015, the Company did not have any significant uncertain tax positions or unrecognized tax benefits. The Company did not have associated accrued interest or penalties, nor was any interest expense or penalties recognized during the period from February 9, 2011 (Inception) through September 30, 2015.

 

As of September 30, 2015, the Company has federal net operating loss carryforwards (“NOLs”) of approximately $57,390,000 and $49,922,000 (subject to limitations) for federal and state tax purposes, respectively. If not utilized, these losses will begin to expire beginning in 2032 and 2023, respectively, for federal and state purposes.

 

Utilization of NOL and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by the Internal Revenue Code (the “Code”), as amended, as well as similar state provisions. In general, an "ownership change" as defined by the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups.

 

Due to the impact of temporary and permanent differences between the book and tax calculations of net loss, the Company experiences an effective tax rate above the federal statutory rate of 34%.