Income Taxes

The Tax Cuts and Jobs Act (the "2017 Tax Act") was signed into law on December 22, 2017. The major components of the 2017 Tax Act, were effective January 1, 2018 and significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions and introducing new tax regimes. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. In response to U.S. tax reform, the Staff of the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB No. 118”) to provide guidance to registrants in applying ASC Topic 740 in connection with U.S. tax reform. SAB No. 118 provides that in the period of enactment, the income tax effects of U.S. tax reform may be reported as a provisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined), which would be subject to adjustment during a “measurement period.” The measurement period begins in the reporting period of the U.S. tax reform’s enactment and ends when a registrant has obtained, prepared and analyzed the information that was needed in order to complete the accounting requirements under ASC Topic 740. The primary impact of the 2017 Tax Act was the remeasurement of the Company’s deferred tax assets, based upon the new U.S. statutory corporate tax rate of 21% and the required change to the related valuation allowance. Due to the Company’s operating losses and full valuation allowance, the 2017 Tax Act did not materially impact the 2018 and 2017 operating results or income tax expense. As of December 31, 2018, the Company has finalized its analysis of the Act and determined that due to limitations on interest expense and net operating loss carryforwards, a $0.1 million deferred tax liability was recorded.

Empire and all of its subsidiaries file a consolidated income tax return. At December 31, 2018 and 2017, the estimated deferred income tax assets and liability were comprised of the following:




	12/31/2018			12/31/2017
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$87,181			$40,502
Stock—based compensation	1,911			2,097
Development costs	619			27,213
Deferred interest	11,494			—
Deferred compensation	590			68
Depreciation	5,604			376
Other	907			952
	108,306			71,208
Deferred tax liability:
Depreciation	(2,037		)	—
Net deferred tax assets	106,269			71,208
Valuation allowance	(106,378		)	(71,208		)
Deferred tax liability, net	$	(109	)	$	—

The valuation allowance increased approximately $35.2 million during the year ended December 31, 2018, primarily due to the increase in the net loss in 2018. The valuation allowance decreased approximately $17.7 million during the year ended December 31, 2017, primarily due to the impact of the remeasurement of the net deferred tax assets, based upon the new U.S. statutory corporate tax rate of 21%, offset by current year activity which increased the net deferred tax assets prior to their remeasurement for the new tax rate. Of the $354.2 million in net operating loss carryforwards, approximately $278.0 million is readily available as of December 31, 2018.

There are limits on the Company’s ability to use its current net operating loss carryforwards, potentially increasing the future tax liability of the Company if it were to generate taxable income. As of December 31, 2018, the Company had federal net operating loss carryforwards of approximately $152.1 million that expire between 2019 and 2037, approximately $249.1 million of New York State net operating loss carryforwards that expire between 2019 and 2038 and approximately $202.1 million of federal net operating losses that are subject to an unlimited carryforward due to the enactment of the 2017 Tax Act. The 2004 merger of the Company’s operations with Catskills Development LLC and the investment by Kien Huat in 2009 will limit the amount usable in any year of its net operating losses due to the change in control of the Company within the meaning of the tax laws such that approximately $55.1 million of the limited federal net operating losses may expire unused prior to the 2019 through 2037 expiration.

The Company is in the process of completing a tax cost segregation study related to the construction of Resorts World Catskills. Individual deferred tax items that directly or indirectly relate to tax depreciation, including net operating loss carryforwards, development costs, depreciation and the corresponding valuation allowance, have been estimated based on currently available tax information. The estimation of these individual deferred items has no material impact to the total deferred taxes reflected on the December 31, 2018 balance sheet or the December 31, 2018 tax expense. The Company expects to complete the study during 2019, as part of its filing of its 2019 Federal and New York State income tax returns.

The following is a reconciliation of the federal statutory tax rate to the Company’s effective tax rate:



	Year ended December 31,
	2018		2017		2016
Tax provision at federal statutory tax rate	21.0	%	35.0	%	35.0	%
Non-deductible interest	—	%	—	%	(0.3	)%
Permanent items	(0.3	)%	(3.1	)%	(3.5	)%
Tax reform	(0.1	)%	—	%	—	%
Change in valuation allowance	(20.7	)%	(31.9	)%	(31.2	)%
Effective tax rate	(0.1	)%	—	%	—	%

As of December 31, 2018, the Company does not have any uncertain tax positions. As a result, there are no unrecognized tax benefits as of December 31, 2018. If the Company was to incur any interest and penalties in connection with income tax deficiencies, the Company would classify interest within interest expense and classify penalties as selling, general and administrative expenses within the consolidated statement of operations.

The Company files tax returns in the U.S. federal jurisdiction, as well as in New York and Delaware. All of its federal and state tax filings as of December 31, 2017 have been timely filed. The Company is subject to U.S. federal or New York State income tax examinations by tax authorities for years after 2015 and 2014. During the periods open to examination, the Company has net operating loss and tax credit carryforwards that have attributes from closed periods. Since these net operating loss and tax credit carryforwards may be utilized in future periods, they remain subject to examination.