Note 13 - Income Taxes

6 Months Ended

Jun. 30, 2024

Notes to Financial Statements

Income Tax Disclosure [Text Block]

(13) Income Taxes

The Inflation Reduction Act ("IRA") was enacted into law in August 2022.  The IRA imposes a 15% alternative minimum tax on corporations whose average annual adjusted financial statement income during the most recently completed three-year period exceeds $1.0 billion. We do not fall within the category of “applicable corporations” and are therefore exempt from payment of an alternative minimum tax.

Tax Provision

The provision for income tax benefit (expense) for the periods indicated was as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2024		2023			2024			2023
	(in thousands)					(in thousands)
Current
Federal	$	188	$	(5	)	$	(27	)	$	(120	)
State		37		(22	)		(44	)		(153	)
Deferred
Federal		1,491		331			(54	)		(3,096	)
Change in valuation allowance		-		(331	)		-			3,096
Total provision for income taxes	$	1,716	$	(27	)	$	(125	)	$	(273	)

GAAP treats Texas margins tax, a form of business tax imposed on an entity’s gross profit rather than its net income, like an income tax for financial reporting purposes.

Deferred income taxes as of the dates indicated consisted of the following:

	June 30,			December 31,
	2024			2023
	(in thousands)
Deferred tax assets:
NOL and capital loss carryforwards	$	5,798		$	6,014
Business interest expense		3,063			2,534
Start-up costs (crude oil and condensate processing facility)		212			254
ARO liability/deferred revenue		629			946
Other		81			54
Total deferred tax assets		9,783			9,802
Deferred tax liabilities:
Basis differences in property and equipment		(8,401	)		(8,366	)
Total deferred tax liabilities		(8,401	)		(8,366	)
		1,382			1,436
Deferred tax assets (liabilities), net	$	1,382		$	1,436

Deferred Income Taxes

Balances for deferred income tax represent the effects of temporary differences between carrying amounts and the actual income tax basis of our assets and liabilities; the balances also reflect NOL carryforwards. We record the balances based on tax rates we expect to be in effect when paid. NOL carryforwards and deferred tax assets represent amounts available to reduce future taxable income.

Valuation Allowance.  As of each reporting date, management considers new evidence, both positive and negative, to determine the realizability of deferred tax assets.  This assessment (of whether there is more than a 50% probability that our deferred tax asset is realizable) depends on the generation of future taxable income before the expiration of any NOL carryforwards. During the year ended  December 31, 2023, the valuation allowance was reduced to zero based upon the expected utilization of the net deferred tax asset as a result of positive evidence that was evaluated, including recent earnings history and expectations for future taxable income.

At   June 30, 2024, there were no uncertain tax positions for which a reserve or liability was necessary. 

NOL Carryforwards

Under IRC Section 382, a corporation that undergoes an “ownership change” is subject to limitations on using pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of stockholders who own more than 5% (after applying certain look-through rules) increases by more than fifty percent [50% over such stockholders’ lowest percentage ownership during the testing period (generally three years)]. Based on the tax rule, ownership changes occurred in 2005 and 2012. The 2005 ownership change related to a series of private placements; the 2012 ownership change related to a reverse acquisition.

The 2005 and 2012 ownership changes limit the use of pre-change NOL carryforwards to offset future taxable income. The annual use limitation generally equals the value of the common stock, on an aggregate basis, when the ownership change occurred multiplied by a specified tax-exempt interest rate. The 2012 ownership change will subject approximately $16.3 million in NOL carryforwards generated before the ownership change to an annual use limitation of approximately $0.6 million per year. We  may use any unused portions of the limitation in subsequent years. Because of the yearly restriction, approximately $6.7 million in NOL carryforwards generated before the 2012 ownership change will expire unused and are excluded in the NOL carryforward presented below. NOL carryforwards generated after the 2012 ownership change but before 2018 are not subject to an annual use limitation; we can use these NOL carryforwards for 20 years in addition to NOL carryforward amounts generated before the ownership change. NOL carryforwards generated beginning in 2018  may only be used to offset 80% of taxable income and are carried forward indefinitely.

NOL Carryforwards Available for Use. NOL carryforwards that remained available for future use for the periods indicated were as follow (amounts shown are net of NOLs that will expire unused because of the IRC Section 382 limitation):

	Net Operating Loss Carryforward
	Pre-			Post-
	Ownership			Ownership
	Change			Change			Total
	(in thousands)
Balance at December 31, 2022	$	5,147		$	45,624		$	50,771
Net operating losses used and expired		(638	)		(21,493	)		(22,131	)
Balance at December 31, 2023	$	4,509		$	24,131		$	28,640
Net operating losses used and expired		(638	)		(390	)		(1,028	)
Balance at June 30, 2024	$	3,871		$	23,741		$	27,612