20. INCOME TAXES



Cohen & Company Inc. is treated as a C corporation for United States federal income tax purposes. The components of income tax expense (benefit) included in the consolidated statements of operations for each year presented herein are shown in the table below.



The components of income (loss) before income taxes is shown below.





As of December 31, 2017, the Company had net prepaid taxes of $0 included as a component of other assets in the consolidated balance sheets.  As of December 31, 2016, the Company had net prepaid taxes of $99 included as a component of other assets in the consolidated balance sheets.



The expected income tax expense /(benefit) using the federal statutory rate differs from income tax expense / (benefit) pertaining to pre-tax income / (loss) as a result of the following for the years ended December 31, 2017,  2016, and 2015.  







Deferred tax assets and liabilities are determined based on the difference between the book basis and tax basis of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse. The recognition of deferred tax assets is reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.



 

The components of the net deferred tax asset (liability) are as follows.





As of December 31, 2017, the Company had a federal net operating loss (“NOL”) of approximately $93,666, which will be available to offset future taxable income, subject to limitations described below. If not used, this NOL will begin to expire in 2028. The Company also had net capital losses (“NCLs”) in excess of capital gains of $142,536 as of December 31, 2017, which can be carried forward to offset future capital gains, subject to the limitations described below. If not used, this carry forward will begin to expire in 2019. No assurance can be made that the Company will have future taxable income or future capital gains to benefit from its NOL and NCL carryovers.



The Company has determined that its NOL and NCL carryovers are not currently limited by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). However, the Company may experience an ownership change as defined in that section (“Ownership Change”) in the future.



If an Ownership Change were to occur in the future, the Company’s ability to use its NOLs, NCLs, and certain recognized built-in losses to reduce its taxable income in a future year would generally be limited to an annual amount (the “Section 382 Limitation”) equal to the fair value of the Company immediately prior to the Ownership Change multiplied by the “long term tax-exempt interest rate.” In the event of an Ownership Change, NOLs and NCLs that exceed the Section 382 Limitation in any year will continue to be allowed as carry forwards for the remainder of the carry forward period, and such NOLs and NCLs can be used to offset taxable income for years within the carry forward period subject to the Section 382 Limitation in each year. However, if the carry forward period for any NOL or NCL were to expire before that loss is fully utilized, the unused portion of that loss would be lost.  See discussion of stockholder rights plan in note 18.



Notwithstanding the facts that the Company has determined that the use of its remaining NOL and NCL carry forwards are not currently limited by Section 382 of the Code, the Company recorded a valuation allowance for a significant portion of its NOLs and NCLs when calculating its net deferred tax liability as of December 31, 2017. The valuation allowance was recorded because the Company determined it is not more likely than not that it will realize these benefits.



In determining its federal income tax provision for 2017, the Company has assumed that it will retain the valuation allowance applied against its deferred tax asset related to the NOL and NCL carry forwards as of December 31, 2017. The Company’s determination that it is not more likely than not that it will realize future tax benefits from the NOLs and NCLs may change in the future. In the future, the Company may conclude that it is more likely than not that it will realize the benefit of all or a portion of the NOL and NCL carry forwards. If it makes this determination in the future, the Company would reduce the valuation allowance and record a tax benefit as a component of the consolidated statements of operations in the period it makes this determination. From that point forward, the Company would begin to record net deferred tax expense for federal and state income taxes as a component of its provision for income tax expense as it utilizes the NOLs and NCLs, for which the valuation allowance was removed.



The Company had no unrecognized tax benefits in the periods presented. 



The Company files tax returns in the U.S. federal jurisdiction, various states or local jurisdictions, the United Kingdom, and France. With few exceptions, the Company is no longer subject to examination for years prior to 2012.



Corporate Tax Reform

In December 2017, the U.S. congress passed the Tax Cuts and Jobs Act of 2017 (the “TCJA”).  Among other things, this law made substantial changes to the way U.S. corporations are taxed.  The Company is a U.S. corporation and therefore is impacted by these changes. 

Our preliminary estimate of the TCJA and the remeasurement of our deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the TCJA, changes to certain estimates and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the TJCA may require further adjustments and changes in our estimates. The final determination of the TCJA and the remeasurement of our deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the TCJA.



The following changes had a one-time impact on the Company which were recognized in the fourth quarter of 2017:





Pennsylvania Income Tax Assessment



In October 2013, the Company received a Pennsylvania corporate net income tax assessment from the Pennsylvania Department of Revenue in the amount of $4,683 (including penalties) plus interest related to a subsidiary of AFN for the 2009 tax year.  The assessment denied this subsidiary’s KOZ credit for that year.  The Company filed an administrative appeal of this assessment with the Pennsylvania Department of Revenue Board of Appeals, which was denied in June 2014.  The Company filed an appeal with the Pennsylvania Board of Finance and Revenue, which was also denied in May 2015.  The Company has filed an appeal with the Pennsylvania Commonwealth Court.  At a status conference held on October 3, 2017, the Commonwealth requested a 120-day extension of the deadline to file certain documents and/or set a date for trial.  The Company consented to this request and the Court granted the extension.  On February 5, 2018, the Commonwealth and the Company jointly requested an additional 120-day extension of the deadline.  The Court granted this request.



The Company has evaluated the assessment in accordance with the provisions of ASC 740 and determined not to record any reserve for this assessment.