Income Taxes

12 Months Ended

Dec. 31, 2019

On December 22, 2017, the Tax Reform Act was signed into law. The legislation significantly changes U.S. tax law by, among other things, lowering the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.

Income tax expense consists of the following (in thousands):



	Year ended December 31,
	2019		2018
Current:
Federal	$	(1,900)	$	—
State	1,921		305
Total	$	21	$	305
Deferred:
Federal	$	—	$	(74)
State	—		(4)
Total	—		(78)
Total income tax expense	$	21	$	227

Basic paid no federal income taxes during the years 2019 and 2018. Basic received a federal income tax refund of $2.8 million as of the year ended December 31, 2019 as a result of a tax year 2017 election to monetize the remaining alternative minimum tax credit carryforward in lieu of accelerated tax depreciation, and as a result of amending our 2007 federal tax return under section 172(f) of the Internal Revenue Code of 186, which allowed us to carry-back and recover workers' compensation expenses in the years we had "NOL" for 10 years.

Reconciliation between the amount determined by applying the U.S. Federal corporate rate of 21% to income before income taxes (benefit) for the years ended December 31, 2019 and 2018 is as follows (in thousands):



	Year ended December 31,
	2019		2018
Income tax benefit at federal statutory rate	$	(19,190)	$	(30,318)
Meals and entertainment	674		707
State taxes, net of federal benefit	580		(2,250)
Changes in Valuation Allowance	15,824		28,167

Equity Compensation Shortfall	2,601		2,644
Tax Basis Adjustments	—		41

Change in Estimates & Other	(468)		1,236
Total	$	21	$	227

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):



	Year ended December 31,
	2019		2018
Deferred tax assets:
Operating loss carryforward	$	205,367	$	178,657
Goodwill and intangibles	19,350		23,088
Interest Expense Limitation	16,721		10,722
Accrued liabilities	11,139		11,804
Operating Lease - Lease Liability	3,299		—
Deferred compensation	2,889		4,028
Asset retirement obligation	2,344		589
Inventory	972		265
Deferred Debt Costs	902		1,680
Receivables allowance	500		418
Valuation Allowances	(210,808)		(174,497)
Total deferred tax assets	$	52,675	$	56,754
Deferred tax liabilities:
Property and equipment	$	(48,980)	$	(55,901)
Operating Lease - ROU Asset	(3,299)		—
Prepaid expenses	(396)		(853)
Total deferred tax liabilities	$	(52,675)	$	(56,754)
Net deferred tax liability	$	—	$	—

IRC Sections 382 and 383 provide an annual limitation with respect to the ability of a corporation to utilize its tax attributes against future U.S. taxable income in the event of a change in ownership. We believe Basic's emergence from Chapter 11 bankruptcy proceedings is considered a change in ownership for purposes of IRC Section 382. The limitation under the IRC is based on the value of the corporation as of the emergence date. The ownership changes, and resulting annual limitation, is not expected to result in the expiration of any net operating losses generated prior to the emergence date.

Basic provides a valuation allowance when it is more likely than not that some portion of the deferred tax assets will not be realized. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. Based on this evaluation, as of December 31, 2019, a valuation allowance of approximately $210.8 million has been recorded on the net deferred tax assets for all federal and state tax jurisdictions in order to measure only the portion of the deferred tax asset that more likely than not will be realized. As of December 31, 2018, a valuation allowance of $174.5 million was recorded against the net deferred tax assets not expected to be realized.

Interest is recorded in interest expense and penalties are recorded in income tax expense. Basic had no interest or penalties related to an uncertain tax positions during 2019. Basic files federal income tax returns and state income tax returns in Texas and other state tax jurisdictions.

As of December 31, 2019, Basic had approximately $900.7 million of net operating loss carryforwards ("NOL"), for federal income tax purposes, which begin to expire in 2032 and $341.4 million of net operating loss carryforwards for state income tax purposes which begin to expire in 2020.

On March 9, 2020, the C&J Transaction resulted in an ownership change under section 382 of the Internal Revenue Code, and will limit the Company’s usage of certain of its net operating losses and interest expense disallowance carryforwards in the future.