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Income Taxes

12 Months Ended

Dec. 31, 2020

12. INCOME TAXES

The components of the income tax provision for the years ended December 31, 2020 and 2019 include the following:

	2020			2019
	(in thousands)
Current income tax expense (benefit)	$	(42	)	$	-
Deferred income taxes		-			-

	$	(42	)	$	-

The current income tax benefit for the year ended December 31, 2020 represents a refund of alternative minimum tax credit carryovers received in 2020.

The Company incurred net losses for each of the years ended December 31, 2020 and 2019, and the Company has recorded valuation allowances for its net deferred tax assets for each of those years. Accordingly, the Company has not recognized a benefit for income taxes in the accompanying financial statements. Income tax benefit using the Company’s effective income tax rate differs from the U.S. federal statutory income tax rate due to the following:

	2020			2019
	(in thousands)
Income tax benefit at federal statutory rate	$	(1,361	)	$	(115	)
State income tax benefit, net of federal impact		(35	)		(32	)
Change in state tax rate, net of federal benefit		(32	)		331
Change in value of warrant		5			(74	)
Percentage depletion carryover		(3	)		9
Prior year true up		154			52
Other		(53	)		23
Increase (decrease)in valuation allowance		1,283			(194	)

Income tax expense (benefit)	$	(42	)	$	-

The components of deferred tax assets and liabilities as of December 31, 2020 and 2019 are as follows:

	2020			2019
	(in thousands)
Deferred tax assets:
Net operating loss carryover ⁽¹⁾	$	5,154		$	4,098
Property and equipment		3,939			3,468
Percentage depletion and contribution carryovers ⁽¹⁾		1,855			1,833
Alternative minimum tax credit carryover ⁽¹⁾		-			42
Equity method investment and other		246			615
Deferred compensation liability		7			41
Asset retirement obligations		315			181
Stock-based compensation		115			68
Lease obligations		32			44

Total deferred tax assets		11,663			10,390

Deferred tax liabilities:
Lease assets		(28	)		(40	)

Total deferred tax liabilities		(28	)		(40	)

Net deferred tax assets		11,635			10,350
Less valuation allowance		(11,635	)		(10,350	)

Net deferred tax asset	$	-		$	-

⁽¹⁾

In December 2017, the Company paid down debt through the issuance of common stock. This issuance represented a 49.3% ownership change in the Company. This change in ownership, combined with other equity events, triggered loss limitations under Internal Revenue Code (“I.R.C.”) Section 382. As a result, the Company wrote-off $29.8 million of gross deferred tax assets in 2017, and an additional $2.4 million in gross deferred tax assets in 2018. Since the Company has maintained a valuation allowance against these tax assets there is no impact to the consolidated statement of operations in either year.

As of December 31, 2020, the Company has approximately $8.9 million in net operating loss carryovers (after limitations) for federal income tax purposes. The net operating losses are not subject to limitation under I.R.C. Section 382 and carry forward indefinitely.

I.R.C. Section 382 of the Internal Revenue Code limits the Company’s ability to utilize the tax deductions associated with its oil and gas properties to offset taxable income in future years, due to the existence of a Net Unrealizable Built-In Loss (“NUBIL”) at the time of the change in control. Such a limitation will be effective for a five-year period subsequent to the change in control. In the event the Company has Recognized Built-In Losses (“RBIL”) during the five-year period, those losses will be limited; losses exceeding the annual limitation are carried forward as RBIL carryovers. As of December 31, 2020, the Company has approximately $9.2 million of RBIL carryovers, which carry forward indefinitely subject to the annual limitation.

The Company recognizes, measures, and discloses uncertain tax positions whereby tax positions must meet a “more-likely-than-not” threshold to be recognized. During the years ended December 31, 2020 and 2019, no adjustments were recognized for uncertain tax positions.

The Company files income tax returns in U.S. federal and multiple state jurisdictions. The Company is subject to tax audits in these jurisdictions until the applicable statute of limitations expires. The Company is no longer subject to U.S. federal tax examinations for tax years prior to 2016. The Company is open for various state tax examinations for tax years 2015 and later. The Company’s policy is to recognize potential interest and penalties accrued related to uncertain tax positions within income tax expense. For the years ended December 31, 2020 and 2019, the Company did not recognize any interest or penalties in its statement of operations, nor did it have any interest or penalties accrued in its balance sheet at December 31, 2020 and 2019 related to uncertain tax positions.

- 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.

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