Income Taxes
We file a consolidated federal income tax return with Farm Bureau Life and FBL Financial Services, Inc. and certain of their subsidiaries. The companies included in the consolidated federal income tax return each report current income tax expense as allocated under a consolidated tax allocation agreement. This allocation typically results in profitable companies recognizing a tax provision as if the individual company filed a separate return and loss companies recognizing a benefit to the extent their losses contribute to reduce consolidated taxes.
Deferred income taxes have been established based upon the temporary differences between the financial statement and income tax bases of assets and liabilities. The reversal of the temporary differences will result in taxable or deductible amounts in future years when the related asset or liability is recovered or settled. A valuation allowance is required if it is more likely than not that a deferred tax asset will not be realized. In assessing the need for a valuation allowance we considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Based on the available positive and negative evidence regarding future sources of taxable income, we have determined that the establishment of a valuation allowance was not necessary at December 31, 2017 and 2016.
The Tax Act makes broad changes to the U.S. tax code that potentially impact our companies, including 1) reducing the federal statutory tax rate from 35% to 21%, 2) eliminating the corporate alternative minimum tax, 3) further limiting interest expense deductions, 4) changing the rules regarding use of net operating losses, and 5) allowing immediate expensing of capital assets acquired after September 27, 2017. Due to the reduced statutory tax rate, we were required to remeasure our deferred tax assets and liabilities using the lower rate at December 22, 2017, the date of enactment. This remeasurement resulted in a reduction of net deferred tax liabilities of $85.8 million, which includes $48.2 million related to deferred taxes previously recognized in accumulated other comprehensive income. This represents a provisional estimate of the impact of the Tax Act, as it is based on our current understanding of the legislation. As additional guidance is released, the estimate will be updated as necessary during 2018. No other provisions of the Tax Act had a significant impact on our 2017 income tax provisions.
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Income Tax Expenses (Credits) | | | | | |
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| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
| (Dollars in thousands) |
Taxes provided in consolidated statements of operations on: | | | | | |
Income before equity loss: | | | | | |
Current | $ | 34,301 |
| | $ | 36,461 |
| | $ | 40,578 |
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Deferred | (75,030 | ) | | 9,549 |
| | 6,840 |
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| (40,729 | ) | | 46,010 |
| | 47,418 |
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Equity loss, including low income housing tax credits | (15,804 | ) | | (15,498 | ) | | (15,706 | ) |
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Taxes provided in consolidated statements of changes in stockholders' equity: | | | | | |
Accumulated other comprehensive income | 43,448 |
| | 18,882 |
| | (77,473 | ) |
Class A and Class B common stock (1) | — |
| | (846 | ) | | (1,363 | ) |
| 43,448 |
| | 18,036 |
| | (78,836 | ) |
| $ | (13,085 | ) | | $ | 48,548 |
| | $ | (47,124 | ) |
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(1) | Beginning in 2017, accounting guidance requires tax benefits of equity-based compensation to be recorded through net income rather than directly to stockholders' equity. Accordingly, we do not expect to have a provision for taxes on Class A and B common stock for years after 2016. See Note 1 for further discussion of this accounting change. |
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Effective Tax Rate Reconciliation to Federal Income Tax Rate |
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| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
| (Dollars in thousands) |
Income before income taxes and equity loss | $ | 142,327 |
| | $ | 141,789 |
| | $ | 151,368 |
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Income tax at federal statutory rate (35%) | $ | 49,814 |
| | $ | 49,626 |
| | $ | 52,979 |
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Tax effect (decrease) of: | | | | | |
Tax-exempt dividend and interest income | (3,384 | ) | | (2,950 | ) | | (3,233 | ) |
Remeasurement of deferred taxes under the Tax Act | (85,797 | ) | | — |
| | — |
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Other items | (1,362 | ) | | (666 | ) | | (2,328 | ) |
Income tax expense | $ | (40,729 | ) | | $ | 46,010 |
| | $ | 47,418 |
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In 2015, the other items affecting the effective tax rate include a $1.8 million tax benefit resulting from the disposition of an equity method investment, for which the carrying value consisted solely of nondeductible goodwill. In 2017, the other items affecting the effective tax rate include $0.6 million in tax benefits from equity-based compensation deductions. Prior to 2017, these tax benefits were recorded to stockholders equity, so they did not impact the effective tax rate.
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Tax Effect of Temporary Differences Giving Rise to Deferred Income Tax Assets and Liabilities |
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| December 31, |
| 2017 | | 2016 |
| (Dollars in thousands) |
Deferred income tax assets: | | | |
Future policy benefits | $ | 21,926 |
| | $ | 30,340 |
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Accrued benefit and compensation costs | 3,435 |
| | 10,001 |
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Loss carryforwards | 3,452 |
| | 5,709 |
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Other | 2,669 |
| | 2,393 |
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| 31,482 |
| | 48,443 |
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Deferred income tax liabilities: | | | |
Fixed maturity and equity securities | 118,716 |
| | 131,655 |
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Deferred acquisition costs | 33,177 |
| | 62,599 |
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Value of insurance in force acquired | 958 |
| | 3,229 |
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Property and equipment | 5,883 |
| | 7,777 |
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Other | 4,660 |
| | 6,678 |
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| 163,394 |
| | 211,938 |
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Net deferred income tax liability | $ | 131,912 |
| | $ | 163,495 |
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Deferred tax assets and liabilities at December 31, 2016 are recorded at a 35% tax rate, the enacted tax rate at that time. Deferred taxes at December 31, 2017 are recorded at a 21% tax rate, as under the Tax Act this is the enacted rate that will be in effect when the temporary differences are expected to reverse.
We recognize the benefits of uncertain tax positions when the benefits are more-likely-than-not to be sustained. We had no reserve for uncertain tax positions at December 31, 2017 or 2016. We recognize interest related to uncertain tax positions in interest expense and related penalties in other expenses. We paid no such interest and penalties related to federal income taxes during 2017 or 2016. We do not expect any significant changes in the amount of our reserve for uncertain tax positions within the next twelve months. We are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for tax years prior to 2014.
At December 31, 2017, we had non-life net operating loss carryforwards for federal income tax purposes totaling $15.5 million, which expire beginning in 2032. We also had non-life net operating loss carryforwards in several state jurisdictions, with varying expiration dates. State deferred taxes are not generally provided on any temporary differences or carryforwards, as state taxes have historically been insignificant.
We invest in LIHTC, which generate pre-tax losses but after-tax gains as the related tax credits are realized. The timing of the realization of tax credits is subject to fluctuation from period to period due to the timing of housing project completions and the approval of tax credits. These tax credits, which are reported in equity income, totaled $14.2 million in 2017, $14.1 million in 2016 and $13.5 million in 2015.