Northern Oil and Gas, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

INCOME TAXES

12 Months Ended

Dec. 31, 2014

NOTE 10 INCOME TAXES

The Company utilizes the asset and liability approach to measuring deferred tax assets and liabilities based on temporary differences existing at each balance sheet date using currently enacted tax rates. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

In 2013, the State of North Dakota lowered its corporate income tax rate. The impact of this rate change was to lower the Company’s deferred state income tax expense by approximately $0.5 million during the year ended December 31, 2013.

The income tax provision for the year ended December 31, 2014, 2013, and 2012 consists of the following:

	2014		2013			2012
Current Income Taxes	$	3,259,445	$	(8,386	)	$	17,772
Deferred Income Taxes
Federal		87,625,430		29,826,000			39,850,000
State		8,482,125		1,950,000			3,134,000
Total Expense	$	99,367,000	$	31,767,614		$	43,001,772

The following is a reconciliation of the reported amount of income tax expense for the years ended December 31, 2014, 2013, and 2012 to the amount of income tax expenses that would result from applying the statutory rate to pretax income.

Reconciliation of reported amount of income tax expense:

	2014			2013			2012
Income Before Taxes and NOL	$	263,112,945		$	84,834,650		$	115,286,396
Federal Statutory Rate		X 35	%		X 35	%		X 35	%
Taxes Computed at Federal Statutory Rates		92,090,000			29,692,000			40,350,000
State Taxes, Net of Federal Taxes		5,404,300			909,614			2,086,772
Non-Deductible Compensation		1,872,700			1,166,000			565,000
Reported Provision	$	99,367,000		$	31,767,614		$	43,001,772

At December 31, 2014, the Company had a net operating loss carryforward for federal income tax purposes of $516.5 million. If unutilized, the federal net operating losses will expire in 2027-2034. At December 31, 2014, the Company had an alternative minimum tax credit for federal income tax purpose of $3.3 million. This credit carryforward does not expire.

The components of the Company’s deferred tax asset (liability) were as follows:

	Year Ended December 31,
	2014			2013
Deferred Tax Assets
Current:
Share Based Compensation	$	1,141,000		$	1,834,000
Accrued Interest		1,238,000			1,241,000
Derivative Instruments		-			7,094,000
Accrued Expenses		986,000			-
Other		683,000			391,000
Total Current		4,048,000			10,560,000

Non-Current:
Net Operating Loss (NOLs) and Tax Credit Carryforwards		194,227,445			316,266,000
Other		94,000			69,000
Total Non-Current		194,321,445			316,335,000
Total Deferred Tax Asset	$	198,369,445		$	326,895,000

Deferred Tax Liabilities
Current:
Derivative Instruments		(47,877,000	)		-
Other		(110,000	)		(129,000	)
Total Current	$	(47,987,000	)	$	(129,000	)

Non-Current:
Crude Oil and Natural Gas Properties and Other Property		(343,657,000	)		(432,596,000	)
Derivative Instruments		(9,076,000	)		(413,000	)
Total Non-Current		(352,733,000	)		(433,009,000	)

Total Deferred Tax Liability		(400,720,000	)		(433,138,000	)

Total Net Deferred Tax Liability	$	(202,350,555	)	$	(106,243,000	)

Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.

The Company has no liabilities for unrecognized tax benefits.

The Company’s policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the years ended December 31, 2014, 2013 and 2012, the Company did not recognize any interest or penalties in its statements of comprehensive income, nor did it have any interest or penalties accrued in its balance sheet at December 31, 2014 and 2013 relating to unrecognized benefits.

The tax years 2014, 2013, 2012 and 2011 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which the Company is subject.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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