Diamondback Energy Inc

11. INCOME TAXES

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. The Company is subject to corporate income taxes and the Texas margin tax. The Company and its subsidiaries, other than Viper, Viper LLC, and Rattler LLC, file a U.S. federal corporate income tax return on a consolidated basis. As discussed further below, Viper became a taxable entity for U.S. federal income tax purposes effective May 10, 2018, and as such files a U.S. federal corporate income tax return including the activity of its investment in Viper LLC. Viper’s provision for income taxes is included in the Company’s consolidated income tax provision and, to the extent applicable, in net income attributable to the non-controlling interest.

For periods subsequent to the Effective Date of the Rattler Merger, Rattler is a member of the group filing consolidated income tax returns with Diamondback Energy, Inc. and its subsidiaries. As such, Rattler’s current and deferred income taxes continue to be included in the Company’s consolidated income tax expense from continuing operations and, only for periods prior to the Rattler Merger, in net income attributable to the non-controlling interest.

The Company’s effective income tax rates were 21.5%,20.5% and 21.7% for the years ended December 31, 2023, 2022 and 2021, respectively. Total income tax expense for the year ended December 31, 2023 differed from amounts computed by applying the U.S. federal statutory tax rate to pre-tax income primarily due to state income taxes, net of federal benefit, partially offset by the impact of permanent differences between book and taxable income and tax benefit resulting from a reduction in the valuation allowance on Viper’s deferred tax assets for the year ended December 31, 2023. Total income tax expense for the year ended December 31, 2022 differed from amounts computed by applying the U.S. federal statutory tax rate to pre-tax income for the period primarily due to (i) state income taxes, net of federal benefit, partially offset by (ii) the impact of permanent differences between book and taxable income and (iii) tax benefit resulting from a reduction in the valuation allowance on Viper’s and QEP’s deferred tax assets for the year ended December 31, 2022. Total income tax expense for the year ended December 31, 2021 differed from amounts computed by applying the U.S. federal statutory tax rate to pre-tax income for the period primarily due to state income taxes, net of federal benefit.

The Inflation Reduction Act of 2022 (“IRA”) was enacted on August 16, 2022, which created a 15% corporate alternative minimum tax (“CAMT”) on the “adjusted financial statement income” of certain large corporations (generally, corporations reporting at least $1 billion of average adjusted pre-tax net income on their consolidated financial statements) as well as an excise tax of 1% on the fair market value of certain public company stock/unit repurchases for tax years beginning after December 31, 2022. Based on application of currently available guidance, the Company’s income tax expense for the year ended December 31, 2023 was not impacted by the CAMT. The Company’s excise tax during the year ended December 31, 2023 was immaterial and was recognized as part of the cost basis of the units repurchased.

The components of the Company’s consolidated provision for income taxes from continuing operations for the years ended December 31, 2023, 2022 and 2021 are as follows:

A reconciliation of the statutory federal income tax amount from continuing operations to the recorded expense is as follows:

The components of the Company’s deferred tax assets and liabilities as of December 31, 2023 and 2022 are as follows:

The Company had net deferred tax liabilities of approximately $2.4 billion and $2.0 billion at December 31, 2023 and 2022, respectively.

At December 31, 2023, the Company had approximately $369 million of federal NOLs and $4 million of federal tax credits expiring in 2037 and $221 million of federal NOLs with an indefinite carryforward life, including NOLs acquired from QEP and from Rattler. The Company principally operates in the state of Texas and is subject to Texas Margin Tax, which currently does not include an NOL carryover provision. The Company’s federal tax attributes, including those acquired from QEP and Rattler, are subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), which relates to tax attribute limitations upon the 50% or greater change of ownership of an entity during any three-year look back period. Other than as described below regarding realization of tax attributes acquired from QEP, the Company believes that the application of Section 382 of the Code will not have an adverse effect on future usage of the Company’s NOLs and credits.

On August 24, 2022, the Company completed the Rattler Merger. Management considered the likelihood that the federal net operating losses and other tax attributes acquired from Rattler will be utilized, including in light of Rattler’s inclusion in consolidated income tax returns with Diamondback for periods subsequent to the Rattler Merger, and in light of the annual limitation on utilization of tax attributes following Rattler’s ownership change pursuant to Section 382 of the Code. As a result of the assessment, including consideration of all available positive and negative evidence, management determined that it continues to be more likely than not that Rattler will realize its deferred tax assets as of December 31, 2023.

As of December 31, 2023, the Company had a valuation allowance of $11 million related to federal NOL and credit carryforwards acquired from QEP which are estimated not more likely than not to be realized prior to expiration. In addition, the Company had a valuation allowance of $107 million primarily related to certain state NOL carryforwards which the Company does not believe are realizable as it does not anticipate significant future operations in those states and a valuation allowance of $114 million related to Viper’s deferred tax assets, as discussed further below. Management’s assessment at each balance sheet date included consideration of all available positive and negative evidence including the anticipated timing of reversal of deferred tax liabilities and the limitations imposed by Section 382 of the Code on certain of the Company’s NOLs and other carryforwards. Management believes that the balance of the Company’s NOLs is realizable to the extent of future taxable income primarily related to the excess of book carrying value of properties over their respective tax bases. As of December 31, 2023, management determined that it is more likely than not that the Company will realize its remaining deferred tax assets.

At December 31, 2023, the Company’s net deferred tax liabilities include deferred tax assets of approximately $170 million related to Viper’s investment in Viper LLC. Deferred taxes are provided on the difference between Viper’s basis for financial accounting purposes and basis for federal income tax purposes in its investment in Viper LLC.

As of December 31, 2023, Viper had a valuation allowance of approximately $114 million related to deferred tax assets that Viper does not believe are more likely than not to be realized. During the years ended December 31, 2023 and 2022, Viper recognized deferred income tax benefit of $7 million and $50 million, respectively, related to a reduction in its valuation allowance, based on a change in judgment about the realizability of its deferred tax assets. Management’s assessment of all available evidence, both positive and negative, supporting realizability of Viper’s deferred tax assets as required by applicable accounting standards, resulted in recognition of tax benefit for the portion of Viper’s deferred tax assets considered more likely than not to be realized. The positive evidence assessed included recent cumulative income due in part to higher commodity prices and an expectation of future taxable income based upon recent actual and forecasted production volumes and prices. Viper retained a partial valuation allowance on its deferred tax assets due in part to potential future volatility in commodity prices impacting the likelihood of future realizability.

The following table sets forth changes in the Company’s unrecognized tax benefits:

The Company recognizes the tax benefit from a tax position only if it is more likely than not that it will be sustained upon examination by the taxing authorities, based upon the technical merits of the position. The Company’s federal and state income tax returns for the years ended December 31, 2020 through December 31, 2022 remain open for all purposes of examination by the IRS and major state taxing jurisdictions. However, certain earlier tax years remain open for adjustment to the extent of their NOL carryforwards available for future utilization. It is reasonably possible that significant changes to the reserve for uncertain tax positions may occur as a result of various audits and the expiration of the statute of limitations. Although the timing and outcome of tax examinations is highly uncertain, the Company does not expect the change in unrecognized tax benefit within the next 12 months would have a material impact to the financial statements.

The Company recognizes interest and penalties related to income tax matters as interest expense and general and administrative expenses, respectively. During the years ended December 31, 2023 and 2022, there was an insignificant amount of interest andno penalties related to each period associated with uncertain tax positions recognized in the Company’s consolidated financial statements.