12. Income Taxes

Income Tax (Benefit) Expense

Components of income tax (benefit) expense were as follows (in thousands):

Reconciliation

The reconciliation of income taxes computed at the U.S. federal statutory tax rate to our income tax (benefit) expense is as follows (in thousands):

Our effective tax rate for the years 2020, 2019 and 2018 differed from the applicable federal statutory rate of 21.0% primarily due to the impact of the valuation allowance on our deferred tax assets, which is discussed below.  As a result, effective tax rates for the years presented above are not meaningful.

Deferred Tax Assets and Liabilities

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities were as follows (in thousands):

Income Taxes Receivable, Refunds and Payments

As of  December 31, 2020, we do not have any current income taxes receivable.  As of December 31, 2019, we had current income taxes receivable of $1.9 million which was received in 2020 and related to a net operating loss (“NOL”) carryback claim for the year 2017 that we carried back to prior years.   During 2019, we received refunds of $51.8 million related to our NOL carryback claims for the years 2012, 2013 and 2014 that were carried back to prior years. Additionally, we received $4.5 million in interest income associated with the refunds in 2019. These carryback claims, in addition to the 2017 claim, were made pursuant to IRC Section 172(f) (related to rules regarding “specified liability losses”), which permits certain platform dismantlement, well abandonment and site clearance costs to be carried back 10 years.  During the years ending December 31, 2020 and 2019, we did not make any tax payments of significance.

Net Operating Loss and Interest Expense Limitation Carryover

The table below presents the details of our net operating loss and interest expense limitation carryover as of December 31, 2020 (in thousands):

Valuation Allowance

During 2020 and 2019, we recorded a decrease in the valuation allowance of $32.1 million and $63.3 million, respectively, related to federal and state deferred tax assets.  Deferred tax assets are recorded related to net operating losses and temporary differences between the book and tax basis of assets and liabilities expected to produce tax deductions in future periods.  The realization of these assets depends on recognition of sufficient future taxable income in specific tax jurisdictions in which those temporary differences or net operating losses are deductible.   In assessing the need for a valuation allowance on our deferred tax assets, we consider whether it is more likely than not that some portion or all of them will not be realized.  

Throughout 2020, the Company has been assessing the realizability of our deferred tax assets by considering positive factors such as, when considering the Company’s results for the twelve months ended December 31, 2018, 2019 and 2020, the Company has cumulative pre-tax income during this three year period.  Based on the assessment, we determined that the Company’s ability to maintain long-term profitability despite near-term changes in commodity prices and operating costs demonstrated that a portion of the Company’s net deferred tax assets would more likely than notbe realized.  During 2020, we released $32.1 million of the valuation allowance, resulting in an income tax benefit in 2020 primarily as a result of the enactment of the Coronavirus Aid, Relief and Economic Security Act (“Cares Act”) on March 27, 2020 and the issuance by the United States Treasury Department (Treasury) of final and proposed regulations under Internal Revenue Code (“IRC”) Section 163(j) on July 28, 2020 that provided additional guidance and clarification to the business interest expense limitation  The portion of the valuation allowance remaining relates to state net operating losses, charitable contributions carryover and the disallowed interest limitation carryover under IRC section 163(j).  As of  December 31, 2020, the Company’s valuation allowance was $22.4 million.

Uncertain Tax Positions

The table below sets forth the beginning and ending balance of the total amount of unrecognized tax benefits.  During 2019, the settlement of our net operating loss carryback claims with the IRS effectively allowed us to also settle our uncertain tax position which resulted in a change in our unrecognized tax benefits and materially impacted our income tax benefit.

Reconciliation of the balances of our uncertain tax positions are as follows (in thousands):

Years open to examination

The tax years from 2017 through 2020 remain open to examination by the tax jurisdictions to which we are subject.

 W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)