14. Income Taxes

The Partnership is a limited partnership under the Internal Revenue Code and, accordingly, earnings or losses, to the extent not included in LGWS, its taxable subsidiary, are included in the tax returns of the individual partners for federal and state income tax purposes. Net earnings for financial statement purposes may differ significantly from taxable income reportable to unitholders as a result of differences between the tax basis and financial reporting basis of assets and liabilities, in addition to the allocation requirements related to taxable income under the Partnership Agreement.

As a limited partnership, the Partnership is generally not subject to income tax. However, the Partnership is subject to a statutory requirement that non-qualifying income (for example, rent associated with personal property, service income and others) cannot exceed 10% of total gross income, determined on a calendar year basis under the applicable income tax provisions. If the amount of its non-qualifying income exceeds this statutory limit, the Partnership would be taxed as a corporation. Accordingly, certain activities that generate non-qualifying income are conducted through LGWS. LGWS is subject to federal and state income tax and pays income taxes related to the results of its operations. For the six months ended June 30, 2013, the Partnership’s non-qualifying income did not exceed the statutory limit.

The effective tax rate differs from the statutory rate due primarily to Partnership earnings that are generally not subject to federal and state income taxes at the Partnership level. The rate reconciliation is below:

	Three Months Ended June 30, 2013		Six Months Ended June 30, 2013
Income from continuing operations before income taxes	$	5,689	$	9,889
Income from continuing operations before income taxes of the Partnership excluding LGWS	5,559		9,659
Income from continuing operations before income taxes of LGWS	130		230
Federal income taxes at statutory rate	44		78
Increase due to:
State income taxes and other, net of federal income tax benefit	38		49
Valuation allowance adjustments	138		536
Total income tax expense	$	220	$	663

As of June 30, 2013, the Partnership had deferred income tax assets of $1.9 million, comprised of $0.7 million related to rent and $1.2 million related to property and equipment. The deferred tax assets were fully reserved against with a valuation allowance. In conjunction with the Partnership’s ongoing review of its actual results and anticipated future earnings, the Partnership continuously reassesses the possibility of releasing the valuation allowance on its deferred tax assets. It is reasonably possible that a significant portion of the valuation allowance will be released within the next twelve months. Since $1.2 million of deferred tax assets existed at the date of the contribution from the Predecessor Entity, $1.2 million of the valuation allowance was recorded as a charge against Partners’ Capital—affiliates in 2012, with any reduction of such portion of the valuation allowance to be recorded as a credit to Partners’ Capital—affiliates.