Entity information:
14. Income Taxes

The provisions (benefits) for income taxes for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Current: Federal
 
$
17,426

 
$
20,937

 
$
361

State
 
3,183

 
2,103

 
1,215

Foreign
 
584

 
1,462

 
644

Subtotal Current
 
21,193

 
24,502

 
2,220

Deferred: Federal
 
(9,461
)
 
26,735

 
(12,604
)
State
 
175

 
444

 
(99
)
Foreign
 
(1,167
)
 
(43
)
 
(399
)
Subtotal Deferred
 
(10,453
)
 
27,136

 
(13,102
)
Income tax (benefit) expense

$
10,740


$
51,638

 
$
(10,882
)


The US and foreign components of income (loss) from continuing operations before income taxes for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
US
 
$
(56,288
)
 
$
(71,626
)
 
$
(66,038
)
Foreign
 
16,537

 
25,833

 
19,415

Loss from continuing operations before income taxes
 
$
(39,751
)

$
(45,793
)
 
$
(46,623
)


The provision for (benefit from) income taxes differed from the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes due to the following items for the years ended December 31, 2017, 2016 and 2015 (in thousands):
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Tax provision (benefit) at federal statutory rate
 
$
(13,914
)
 
$
(16,027
)
 
$
(16,318
)
Permanent differences
 
500

 
1,635

 
(272
)
State tax (net of federal benefit)
 
2,374

 
1,843

 
1,068

Foreign rate differential
 
(1,461
)
 
1,504

 
287

Foreign withholding taxes (net of federal)
 
—

 
—

 
1,229

Executive and stock compensation
 
565

 
1,439

 
1,044

Adjustment to net operating losses
 
(7,574
)
 
—

 
(1,104
)
Increase (decrease) in valuation allowance
 
6,263

 
57,830

 
2,949

Transaction costs
 
2,258

 
1,189

 
473

Tax credits generated/utilized
 
(155
)
 
(386
)
 
(185
)
Transition to U.S. Tax Cuts and Jobs Act
 
21,079

 
—

 
—

Outside basis difference
 
1,144

 
2,655

 
—

Other
 
(339
)
 
(44
)
 
(53
)
Income tax (benefit) expense
 
$
10,740

 
$
51,638

 
$
(10,882
)


On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the "TCJA"), making significant changes to the Internal Revenue Code. Changes include, but are not limited to, reducing the federal corporate tax rate from 35% to 21%, creating a new limitation on deductible interest expense, eliminating the corporate alternative minimum tax (AMT), 100% expensing for certain business assets, repealing the Sec. 199 deduction, changing the rules related to uses and limitation of NOLs for tax years beginning after December 31, 2017 and a one-time transition tax on the mandatory deemed repatriation of foreign earnings.
The write down adjustment of deferred tax assets due to the rate change and reversal of deferred tax liabilities associated with unremitted earnings had no impact to the income tax provision due to the Company’s valuation allowance position for the HC2 U.S. consolidated filing group and for the Insurance Company. Similarly, for the other entities not included in the HC2 U.S. consolidated filing group with a full valuation allowance, the write down adjustment of deferred tax assets due to the rate change had no impact to the income tax provision. There are certain non-consolidated entities in a net deferred tax liability position for which the re-measurement of deferred taxes resulted in a tax benefit being recorded. In connection with the one-time transition tax on the mandatory deemed repatriation of foreign earnings, the Company is utilizing existing NOL carryforwards to settle the toll charge so there is no income tax provision impact.
As a result of the enactment of TCJA on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. SAB 118 provides that the measurement period is complete when a company’s accounting is complete, but should not extend beyond one year from the enactment date.
The Company has made a reasonable estimate of the impact to income taxes incurred. However, these estimates are incomplete because information has yet to be fully prepared or analyzed relating to the impact to our projections of future taxable income used in and analyzing realizability of the Insurance Company's deferred tax assets. There are specific insurance industry provisions, including changes in computations of life insurance reserves, amortization of policy acquisition expenses, and modifications to net operating loss ("NOLs") provisions. Provisional estimates have been included in our future taxable income projections for these insurance industry specific provisions to reflect application of the new tax law.
There are modifications to the determination of the tax basis of life insurance reserves and the change in the tax basis reserves as of January 1, 2018 will be spread over eight tax years (the "transition liability"). Although we have not completed our analysis of contract level reserve calculations, based upon the work completed, we have made a reasonable estimate of the transition liability and its impact on the deferred income tax balances. The estimate will be revised in the period that we have completed our analysis of the impact of the modifications on our life insurance reserves.

For the year ended December 31, 2016, the Company’s effective tax rate was unfavorably impacted by the establishment of valuation allowances totaling $57.8 million, primarily attributed to management’s conclusion that it was more-likely-than-not that the deferred tax assets of our HC2 U.S. consolidated group and the Insurance Company would not be realized.

Deferred income taxes reflect the net income tax effect of temporary differences between the basis of assets and liabilities for financial reporting purposes and for income tax purposes. Net deferred tax balances are comprised of the following as of December 31, 2017 and 2016 (in thousands):
 
 
December 31,
 
 
2017
 
2016
Deferred tax assets
 
$
210,250

 
$
257,231

Valuation allowance
 
(133,504
)
 
(138,044
)
Deferred tax liabilities
 
(85,825
)
 
(133,383
)
Net deferred taxes
 
$
(9,079
)

$
(14,196
)

 
 
December 31,
 
 
2017
 
2016
Allowance for bad debt
 
$
223

 
$
151

Basis difference in intangibles
 
(11,623
)
 
(11,924
)
Equity investments
 
5,650

 
6,877

Net operating loss carryforwards
 
49,018

 
43,080

Basis difference in fixed assets
 
(2,851
)
 
(8,616
)
Deferred compensation
 
14,046

 
11,375

Foreign tax credit
 
1,190

 
1,190

Capital loss carryforwards
 
2,194

 
1,381

Insurance company investments
 
(59,307
)
 
(86,811
)
Foreign earnings
 
—

 
(11,748
)
UK trading loss carryforward
 
49,690

 
50,151

Unrealized gain/loss in OCI
 
102

 
3,930

Insurance claims and reserves
 
57,030

 
95,883

Value of insurance business acquired ("VOBA")
 
9,071

 
16,712

Start-up cost
 
1,240

 
1,778

Deferred Acquisition Costs
 
5,739

 
5,248

Other
 
3,013

 
5,191

Valuation allowance
 
(133,504
)
 
(138,044
)
Total deferred taxes
 
$
(9,079
)
 
$
(14,196
)


Deferred tax assets refer to assets that are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets in essence represent future savings of taxes that would otherwise be paid in cash. The realization of the deferred tax assets is dependent upon the generation of sufficient future taxable income, including capital gains. If it is determined that the deferred tax assets cannot be realized, a valuation allowance must be established, with a corresponding charge to net income.

In accordance with ASC 740, the Company establishes valuation allowances for deferred tax assets that, in its judgment are not more likely-than-not realizable. These judgments are based on projections of future income or loss and other positive and negative evidence by individual tax jurisdiction. Changes in industry and economic conditions and the competitive environment may impact these projections. In accordance with ASC 740, during each reporting period the Company assesses the likelihood that its deferred tax assets will be realized and determines if adjustments to its valuation allowances are appropriate.

Management evaluated the need to maintain the valuation allowance against the deferred taxes of the HC2 Holdings, Inc. U.S. consolidated tax group ("the group") for each of the reporting periods based on the positive and negative evidence available. The objective negative evidence evaluated was the group’s historical operating results over the prior three-year period. The group is in a cumulative three year loss as of December 31, 2017 and is forecasting losses in the near future, which provide negative evidence that is difficult to overcome and would require a substantial amount of objectively verifiable positive evidence of future income to support the realizability of the group’s deferred tax assets. While positive evidence exists by way of unrealized gains in the Company’s investments, management concluded that the negative evidence now outweighs the positive evidence. Thus, it is more likely than not that the group’s U.S. deferred tax assets will not be realized.

Management evaluated the need to maintain the valuation allowance against the deferred taxes of the Insurance Company for each of the reporting periods. Included in this assessment was the Insurance Company’s historical operating results over the prior three-year period. Additional positive and negative evidence was considered including the timing of the reversal of the deferred tax assets and liabilities, and projections of future income from the runoff of the insurance business. During 2017, the Insurance Company moved from a cumulative loss position over the previous three years to a cumulative income position for the first time since the Insurance Company established a full valuation allowance. Based on the weight of the positive and negative evidence, Management concluded that it is more likely than not that the Insurance Company’s net deferred tax assets will not be realized. Management continues to evaluate the Insurance Company’s cumulative income position and income trend as well as future projections of sustained profitability and whether this profitability trend constitutes sufficient positive evidence to support a reversal of our valuation allowance (in full or in part). 

Valuation allowances have been maintained against deferred tax assets of the European entities, including GMSL’s UK non-tonnage tax trading losses, and losses generated by certain businesses that do not qualify to be included in the HC2 Holdings, Inc. U.S. consolidated income tax return.

On December 24, 2015, the Company completed its acquisition of the long-term care and life insurance businesses, United Teacher Associates Insurance Company ("UTA") and CGI, pursuant to an agreement ("Stock Purchase Agreement") with subsidiaries of American Financial Group, Inc. ("AFG"). The Company made a joint election with AFG under Section 338(h)(10) to treat the stock purchase as an asset purchase for U.S. Federal income tax purposes. The Company's resulting step-down in the tax basis of the invested assets of UTA and CGI (primarily fixed income securities) is reflected in the above deferred tax liability of $99.6 million for differences between the fair value and tax basis of the insurance company investments. The Company estimates that none of the goodwill that was recorded will be deductible for income tax purposes.
As of December 31, 2017, the Company had foreign operating loss carryforwards of approximately $295.1 million. Of the foreign NOLs, $221.2 million were generated by GMSL’s historical non-tonnage tax operations.

At December 31, 2017, the Company has U.S. net operating loss carryforwards available to reduce future taxable income in the amount of $100.4 million, of which $77.8 million is subject to an annual limitation under Section 382 of the Internal Revenue Code. Additionally, the Company has $108.3 million of U.S. net operating loss carryforwards from its subsidiaries that do not qualify to be included in the HC2 U.S. consolidated income tax return.

Pursuant to the rules under Section 382, the Company believes that it underwent an ownership change on May 29, 2014. This conclusion is based on an analysis of Schedule 13D and Schedule 13G filings over the prior three years made with the SEC and the impact resulting from the May 29 preferred stock issuance. Due to the Section 382 limit resulting from the ownership change, approximately $146.2 million of the Company’s net operating losses will expire unused. The $146.2 million in expiring NOLs have been derecognized in the consolidated financial statements as of December 31, 2014. The remaining pre-change NOL’s of $46.1 million recorded in the consolidated financial statements are subject to an annual limitation under IRC Sec. 382 of approximately $2.3 million.

On November 4, 2015, HC2 issued 8,452,500 shares of its stock in a primary offering which the Company believes resulted in a Section 382 ownership change resulting in an additional annual limitation to the cumulative NOL carryforward of the HC2 U.S. consolidated tax group. The amount of the annual limitation is based on a number of factors, including the value of HC2’s stock and the amount of unrealized gains on the date of the ownership change.

The Company follows the provision of ASC 740 which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. The Company is subject to challenge from various taxing authorities relative to certain tax planning strategies, including certain intercompany transactions as well as regulatory taxes.

The Company did not have any unrecognized tax benefits as of December 31, 2017, 2016 and 2015, related to uncertain tax positions.

The Company conducts business globally, and as a result, HC2 or one or more of its subsidiaries files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. Tax years 2002-2017 remain open for examination.

The Company is currently under examination in various domestic and foreign tax jurisdictions. The open tax years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, character, timing or inclusion of revenue and expenses or the applicability of income tax credits for the relevant tax period. Given the nature of tax audits, there is a risk that disputes may arise.