11.Income Taxes

A summary of the income tax expense (benefit) in the Consolidated Statements of Operations is shown below.

 

The income tax (benefit) expense attributable to the consolidated results of operations is different from the amounts determined by multiplying income before federal income taxes by the statutory federal income tax rate. The sources of the difference and the tax effects of each were as follows for the periods indicated.

 

 

The deferred income tax asset (liability) represents the tax effects of temporary differences attributable to the Company’s consolidated federal tax return group. Its components were as shown in the following table for the periods indicated.

 

The Company believes, based upon consideration of objective and verifiable evidence, including its historical positive earnings and its future expectations, that the Company’s taxable income in future years will be sufficient to realize all federal deferred tax assets.

The Company believes that the positions taken on its income tax returns for open tax years will be sustained upon examination by the Internal Revenue Service (“IRS”).  Therefore, the Company has not recorded any liability for uncertain tax positions under ASC 740, Income Taxes.

 

During the years ended December 31,  2017 and December 31, 2016 there were no material changes to the amount of the Company’s unrecognized tax benefits or to any assumptions regarding the amount of its ASC 740 liability.

As of December 31,  2017 and December 31, 2016, the Company had no unrecognized tax benefits, and none which if recognized would affect the effective tax rate. The Company does not currently anticipate significant changes in the amount of unrecognized income tax benefits during the next twelve months.

The Company records interest and penalties associated with audits as a component of income before income taxes. Penalties are recorded in underwriting, operating and other expenses, and interest expense is recorded in interest expenses in the Consolidated Statements of Operations. The Company had no interest and penalties related to income taxes accrued as of December 31,  2017 and 2016.  

 The Company’s U.S. federal tax return for the years ended December 31, 2015, 2014 and 2013 respectively, were examined by the IRS.  This examination relates to the refund claim for the 2015 Net Operating Loss that was carried back to prior years, which triggered a review by the Joint Committee on Taxation. The review was completed during 2017 and no adjustments were noted as part of the review. All tax years prior to 2014 are closed.

 

In the Company’s opinion, adequate tax liabilities have been established for all open years. However, the amount of these tax liabilities could be revised in the near term if estimates of the Company’s ultimate liability are revised.

 

On December 22, 2017, the TCJA was enacted, which significantly amends the Internal Revenue Code of 1986. The TCJA, among other things, reduces the corporate tax rate from a statutory rate of 35% to 21%, imposes additional limitations on net operating losses and executive compensation, allows for the full expensing of certain capital expenditures and enacts other changes impacting the insurance industry.    Tax related changes are recorded through the Statement of Operations for the year ended December 31, 2017.  The December 31, 2017 net deferred tax liability has been measured at the 21% tax rate.

 

The TCJA modified the provisions applicable to the determination of the tax basis of unpaid loss reserves.  These modifications impact the payment pattern and applicable interest rate.  The TCJA instructed the Treasury to provide discount factors and other guidance necessary to determine the necessary transition adjustment.  This information has not been released; accordingly, we have applied the law existing prior to the enactment of the TCJA.  These provisions would have no effect on the net deferred tax liability as of December 31, 2017 or the total tax expense for the year ended December 31, 2017. 

 

SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (which we refer to as SAB 118) describes three scenarios associated with a company’s status of accounting for income tax reform. Under the SAB 118 guidance, we have determined that we are able to make reasonable estimates for certain effects of tax reform.  As of the date of this Annual Report on Form 10-K, we are continuing to evaluate the accounting impactions of the TCJA as we continue to assemble and analyze all the information required to prepare and analyze these effects and await additional guidance from the U.S. Treasury Department, IRS or other standard-setting bodies.  Additionally, we continue to analyze other information and regulatory guidance and accordingly we may record additional provisional amounts or adjustments to provisional amounts in future periods.