8. INCOME TAXES
The components of income tax expense include the following:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
Federal: | | | | | | |
Current | | $ | 2,431 |
| | $ | 5,076 |
| | $ | 15,523 |
|
Deferred | | 810 |
| | (4,714 | ) | | 5,515 |
|
Federal income tax expense | | 3,241 |
| | 362 |
| | 21,038 |
|
State: | | | | | | |
Current | | 494 |
| | 674 |
| | 2,489 |
|
Deferred | | (150 | ) | | (494 | ) | | 562 |
|
State income tax expense | | 344 |
| | 180 |
| | 3,051 |
|
Total income tax expense | | $ | 3,585 |
| | $ | 542 |
| | $ | 24,089 |
|
The actual income tax expense differs from the “expected” income tax expense (computed by applying the combined applicable effective federal and state tax rates to income before income tax expense) as follows:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
Computed expected tax expense provision, at federal rate | | $ | 3,124 |
| | $ | 631 |
| | $ | 22,031 |
|
State tax, net of federal tax benefit | | 187 |
| | 50 |
| | 2,222 |
|
Tax-exempt interest | | (429 | ) | | (571 | ) | | (445 | ) |
Income subject to dividends-received deduction | | (76 | ) | | (219 | ) | | (109 | ) |
Return to provision | | 329 |
| | 183 |
| | 119 |
|
Rate changes | | 297 |
| | (38 | ) | | — |
|
Executive compensation | | 185 |
| | 382 |
| | 203 |
|
Meals and entertainment | | 76 |
| | 130 |
| | — |
|
Other | | (108 | ) | | (6 | ) | | 68 |
|
Total income tax expense | | $ | 3,585 |
| | $ | 542 |
| | $ | 24,089 |
|
The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to reducing the U.S. federal corporate tax rate from 35% to 21%. SAB No. 118 provides guidance on accounting for the tax effects of the Tax Act and a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under the FASB’s Accounting Standard Codification (“ASC”) 740 — Income Taxes (“ASC 740”). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. In connection with the Company’s analysis of the impact of the Tax Act, the Company recorded a discrete provisional net tax expense of $0.3 million for the year ended December 31, 2017. This estimated net expense primarily consists of the U.S. federal rate reduction from 35% to 21% applied to the net deferred tax asset.
The Company does not have a valuation allowance as of December 31, 2017 and 2016.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of operations and statements of comprehensive income (loss). For the years ended December 31, 2017, 2016 and 2015, the Company did not recognize any expense for accrued interest and penalties related to unrecognized tax benefits. For the years ended December 31, 2017, 2016 and 2015, the Company recognized income tax expense related to an uncertain tax position of $0, $0.4 million and $0.2 million, respectively.
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 the Company’s net deferred tax asset (liability) include the following:
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
Deferred tax assets: | | | | |
Unearned premiums | | $ | 9,543 |
| | $ | 13,975 |
|
Unpaid losses and loss adjustment expenses | | 1,050 |
| | 1,869 |
|
Accrued expenses | | 689 |
| | 692 |
|
Net operating loss carryforwards | | 1,567 |
| | 7 |
|
Deferred revenue | | — |
| | 2,637 |
|
Share-based compensation | | 255 |
| | — |
|
Other | | 123 |
| | 152 |
|
Total deferred tax assets | | 13,227 |
| | 19,332 |
|
| | | | |
Deferred tax liabilities: | | | | |
Deferred acquisition costs | | (11,742 | ) | | (17,493 | ) |
Depreciation and amortization | | (548 | ) | | (718 | ) |
Unrealized gains on investment securities | | (600 | ) | | (1,277 | ) |
Other | | (30 | ) | | (97 | ) |
Total deferred tax liabilities | | (12,920 | ) | | (19,585 | ) |
| | | | |
Deferred tax asset (liability), net | | $ | 307 |
| | $ | (253 | ) |
The Company files a federal income tax return and various state and local tax returns. The Company’s consolidated federal and state income tax returns for 2014 - 2016 are open for review by the Internal Revenue Service (“IRS”) and other state taxing authorities. Monarch Holding, a wholly owned subsidiary of Monarch Delaware, the Company’s consolidated VIE, was audited by the IRS for the tax year 2016 and there were no findings.