USD Partners LP - 10-K filing on 2016-03-10

Income Taxes

12 Months Ended

Dec. 31, 2015

INCOME TAXES

U.S. Federal and State Income Taxes

We are treated as a partnership for federal and most state income tax purposes, with each partner being separately taxed on their share of our taxable income. One of our subsidiaries, USD Rail LP, has elected to be classified as an entity taxable as a corporation for U.S. federal income tax purposes. We are subject to state franchise taxes in some states, which are treated as income taxes under the applicable accounting guidance. Our U.S. federal income tax expense represents our annual effective income tax rate of 34% for the year ended December 31, 2015 as applied to the pretax book income of USD Rail LP. For the year ended December 31, 2014 , there was a net loss resulting in a loss carryforward for federal income tax purposes and an effective franchise tax rate of 0.50%. For the year ended December 31, 2013, due to the partnership status of USD Rail LP, we had no federal income taxes and an effective franchise tax rate of 0.50%.

Canadian Federal and Provincial Income Taxes

Our Canadian operations are conducted through entities that are subject to Canadian federal and provincial income taxes. The Canadian federal income tax rate on business income is currently 15%. In June 2015, the Canadian province of Alberta enacted a tax rate increase, effective July 1, 2015, which raised income tax rates on Alberta businesses from a previous rate of 10% to 11% for all of 2015, further increasing to 12% beginning January 1, 2016. As a result, we recognized income tax liabilities and expenses in our consolidated financial statements based upon these recently enacted income tax rates. Our current income tax expense related to income from our Canadian operations was computed using the combined federal and provincial income tax rate of 26% applicable to taxable income for 2015. We computed our deferred income tax expense, which is the result of temporary differences that are expected to reverse in the future, at the combined federal and provincial income tax rate of 27% applicable in 2016 and thereafter. Our Canadian income tax expense represents our annual effective tax rates of 26% for the year ended December 31, 2015 as applied to the pretax book income of our Canadian operations. For the years ended December 31, 2014 and 2013, there was a net loss in our Canadian operations resulting in a loss carryforward.

Consolidated Income Tax Expense

Components of our income tax expense are presented below:



	Years Ended December 31,
	2015		2014		2013
	(in thousands)
Current income tax expense
U.S. federal income taxes	$	45	$	—	$	—
State income taxes	154		156		30
Canadian federal and provincial income taxes	4,742		30		—
Total current income tax expense	4,941		186		30
Deferred income tax expense
Canadian federal and provincial income taxes	814		—		—
Total deferred income tax expense	814		—		—
Total income tax expense	$	5,755	$	186	$	30

The components of our income (loss) before income taxes and a reconciliation between income tax expense based on the U.S. statutory income tax rate and our effective income tax expense are presented below:



	Years Ended December 31,
	2015			2014			2013
	(in thousands)
Domestic	$	3,222		$	(2,374	)	$	(1,527	)
Foreign	20,226			(5,118		)	(284		)
Total income (loss) before income taxes	$	23,448		$	(7,492	)	$	(1,811	)

Income tax expense (benefit) at the U.S. statutory rate	$	7,972		$	(2,547	)	$	(634	)
Income attributable to partnership not subject to income tax	247			933			536
Foreign income tax rate differential	(2,303		)	313			28
Other	135			—			10
State income taxes	125			156			30
Change in valuation allowance	(421		)	1,331			60
Total income tax expense	$	5,755		$	186		$	30

Our deferred income taxes reflect the income tax effect of differences between the carrying amounts of our assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Major components of deferred income tax assets and liabilities associated with our operations are as follows:



	December 31,
	2015			2014
	(in thousands)
Deferred income tax assets
Deferred revenues	$	1,245		$	1,939
Capital and operating loss carryforwards	424			1,496
Valuation allowance	(970		)	(1,391		)
	699			2,044
Deferred income tax liabilities
Prepaid expense	673			1,098
Property and equipment	775			946
	1,448			2,044
Net deferred income tax liability	$	749		$	—

During the year ended December 31, 2015, we utilized all of our available loss carryforward of $0.7 million at December 31, 2014 for U.S. federal income tax purposes. The Canadian loss carryforward was approximately $4.9 million and $8.5 million at December 31, 2015 and 2014, respectively, and will begin expiring in 2033. The Canadian loss carryforward includes operating losses generated by USD Rail Canada ULC, which is treated as a disregarded entity for U.S. federal income tax purposes and as a corporation for Canadian federal and provincial income tax purposes. Due to the dual nature of USD Rail Canada ULC, as it relates to the taxation of its income, the Canadian operating loss carryforward does not give rise to a deferred income tax asset as the U.S. federal income tax benefit from the operating loss carryforward has been fully utilized. We have not recognized a benefit for remaining losses associated with our U.S. and Canadian operations, as we currently consider it to be more likely than not that the benefit from the loss carryforward will not be realized.

The income tax returns filed by USD for the periods from January 1, 2009, through December 31, 2014, are subject to examination by the taxing authorities. The results of such examinations may affect us as the results of any findings could be passed down to us. Income tax returns for our Canadian operations filed for the periods ended December 31, 2014 and 2013, are subject to examination by the taxing authorities. At December 31, 2015 and 2014, neither we nor our Canadian operations were under examination. We did not have any unrecognized income tax benefits or any income tax reserves for uncertain tax positions as of December 31, 2015 and 2014.