Income Taxes
The Company’s provision (benefit) for income taxes is reflected as a component of income (loss) from continuing and discontinued operations and consists of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current tax expense (benefit): | | | | | |
Federal | $ | (1,559 | ) | | $ | 6,268 |
| | $ | 20,008 |
|
State | 246 |
| | 455 |
| | 2,350 |
|
Total current tax expense (benefit) | (1,313 | ) | | 6,723 |
| | 22,358 |
|
| | | | | |
Deferred tax expense (benefit): | | | | | |
Federal | (13,755 | ) | | 6,736 |
| | (21,633 | ) |
State | 2,506 |
| | (944 | ) | | (1,478 | ) |
Total deferred tax (benefit) | (11,249 | ) | | 5,792 |
| | (23,111 | ) |
Total income tax expense (benefit) from continuing operations | $ | (12,562 | ) | | $ | 12,515 |
| | $ | (753 | ) |
| | | | | |
Income tax (benefit) from discontinued operations | (2,224 | ) | | (1,537 | ) | | 17,527 |
|
Total tax expense (benefit) | $ | (14,786 | ) | | $ | 10,978 |
| | $ | 16,774 |
|
The Company accounts for its income taxes receivable or payable on a gross basis with offsetting permitted for balances booked by a filing entity in a single jurisdictional basis. The Company’s income taxes receivable as of December 31, 2017 of $9,588 is offset with an income tax payable balance of $1,142, resulting in a consolidated net receivable of $8,446. The Company’s income taxes receivable as of December 31, 2016 were $4,842 offset with an income tax payable balance of $1,617 resulting in a consolidated net receivable of $3,225.
The Company’s primary tax jurisdiction is the United States, which currently has a statutory income tax rate equal to 35%. On December 22, 2017, the U.S. government enacted Public Law no. 115-97, commonly referred to as the Tax Cuts and Jobs Act (Tax Act), which, among other things, reduces the federal income tax rate from 35% to 21% effective January 1, 2018, and requires mandatory deemed repatriation of foreign earnings. As a result of the Tax Act, we re-measured our net deferred tax liabilities and recognized a net tax benefit of $15,238. We estimate that our 2018 consolidated effective tax rate will be between 24% and 26%. We do not expect a significant near-term impact on cash paid for taxes, nor any impact from the mandatory deemed repatriation, as the Company does not have significant foreign operations.
The Company also operates in several state jurisdictions that have an average combined statutory rate equal to approximately 6.0%. Both the U.S. federal rate and the state statutory rates are before the consideration of rate reconciling items. A reconciliation of the expected federal income tax expense on income from continuing operations using the 35% federal statutory income tax rate to the actual income tax expense and resulting effective income tax rate is as follows for the periods indicated below:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income (loss) before income taxes from continuing operations | $ | (3,330 | ) | | $ | 49,140 |
| | $ | (2,904 | ) |
Federal statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Expected federal income tax expense at 35% | (1,166 | ) | | 17,199 |
| | (1,016 | ) |
Effect of change in U.S. federal tax rate effective 2018 | (15,238 | ) | | — |
| | — |
|
Effect of Reliance contingent liability valuation | 1,018 |
| | 446 |
| | (637 | ) |
Effect of state income tax expense, net of federal benefit | 219 |
| | (18 | ) | | (48 | ) |
Effect of permanent differences | (144 | ) | | 228 |
| | 58 |
|
Effect of changes in valuation allowance | 2,314 |
| | (641 | ) | | (1,142 | ) |
Effect of change in tax status | — |
| | (4,044 | ) | | — |
|
Effect of deferred true-ups | (5 | ) | | 118 |
| | (897 | ) |
Effect of income (loss) allocated to non-controlling interests | (400 | ) | | (380 | ) | | 2,331 |
|
Effect of return-to-accrual and other items | 840 |
| | (393 | ) | | 598 |
|
Tax (benefit) on income from continuing operations | $ | (12,562 | ) | | $ | 12,515 |
| | $ | (753 | ) |
| | | | | |
Effective tax rate | 377.2 | % | | 25.5 | % | | 25.9 | % |
For the year ended December 31, 2017, the Company’s effective tax rate on income from continuing operations was equal to 377.2%, which does not bear a customary relationship to statutory income tax rates. The effective tax rate for the year ended December 31, 2017 is higher than the U.S. statutory income tax rate of 35.0% primarily due to the $15,238 discrete tax benefit of the U.S. federal tax law change and resulting revaluation of the net deferred tax liability, partially offset by an increase in the valuation allowance on certain deferred tax assets and the impact of the Reliance contingent liability revaluation.
For the year ended December 31, 2016, the Company’s effective tax rate on income from continuing operations was equal to 25.5%, which does not bear a customary relationship to statutory income tax rates. The effective tax rate for the year ended December 31, 2016 is lower than the U.S. statutory income tax rate of 35.0% primarily due to $4,044 of discrete tax benefits for the period, primarily related to the tax restructuring that resulted in a consolidated corporate tax group effective January 1, 2016.
For the year ended December 31, 2015, the Company’s effective tax rate on income from continuing operations was equal to 25.9%, which does not bear a customary relationship to statutory income tax rates. The effective tax rate for the year ended December 31, 2015 is lower than the U.S. statutory income tax rate of 35.0%, primarily due to taxable losses allocated to non-controlling interests, offset by a decrease in the valuation allowance on certain deferred tax assets, state tax benefits, and other permanent items.
The table below presents the components of the Company’s net deferred tax assets and liabilities as of the respective balance sheet dates:
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 20,018 |
| | $ | 22,741 |
|
Unrealized losses | 4,647 |
| | 8,513 |
|
Accrued expenses | 3,059 |
| | 6,790 |
|
Unearned premiums | 11,300 |
| | 15,326 |
|
Deferred revenue | 4,682 |
| | 5,899 |
|
Other deferred tax assets | 2,007 |
| | 3,669 |
|
Total deferred tax assets | 45,713 |
| | 62,938 |
|
Less: Valuation allowance | (4,303 | ) | | (1,991 | ) |
Total net deferred tax assets | 41,410 |
| | 60,947 |
|
| | | |
Deferred tax liabilities: | | | |
Property | 6,504 |
| | 5,845 |
|
Unrealized gains | 4,700 |
| | 10,855 |
|
Other deferred tax liabilities | 769 |
| | 363 |
|
Deferred acquisition cost | 32,423 |
| | 46,425 |
|
Advanced commissions | 14,265 |
| | 16,438 |
|
Intangibles | 5,493 |
| | 13,317 |
|
Total deferred tax liabilities | 64,154 |
| | 93,243 |
|
Net deferred tax liability | $ | 22,744 |
| | $ | 32,296 |
|
As of January 2016, Tiptree has established a U.S. federal consolidated income tax group and as such files on a consolidated basis, with certain exceptions such a Fortegra life insurance company and Luxury. Tiptree consolidated, and certain subsidiaries on a separate basis, file returns in various state jurisdictions, and as such may have state tax obligations. Additionally, as needed the Company will take all necessary steps to comply with any income tax withholding requirements.
As of December 31, 2017, the Company had total U. S. Federal net operating loss carryforwards (NOLs) of $65.8 million arising from continuing operations. The following table presents the U.S. Federal NOLs by tax year of expiration:
|
| | | |
| December 31, 2017 |
Tax Year of Expiration | |
2026 | $ | 86 |
|
2027 | 568 |
|
2028 | 246 |
|
2029 | 286 |
|
2030 | 149 |
|
2031 | 150 |
|
2032 | 189 |
|
2033 | 182 |
|
2034 | 1,893 |
|
2035 | 1,629 |
|
2036 | 47,537 |
|
2037 | 12,889 |
|
Total | $ | 65,804 |
|
In addition to the U.S. Federal NOL, Tiptree and its subsidiaries have NOLs in various state jurisdictions totaling $6.2 million. Valuation allowances have been established for net operating loss carryforwards and other deferred tax assets generated by Luxury, and certain state NOLs of $3,764, since management has concluded it is more likely than not they will expire unutilized based on existing positive and negative evidence. Management believes it is more likely than not the remaining NOLs and deferred tax assets will be utilized prior to their expiration dates. As a result of this assessment, as of December 31, 2017, the total consolidated valuation allowance for Tiptree was $4,303. As of December 31, 2016, the consolidated valuation allowance for Tiptree was $1,991. In 2017, the Company recorded a net increase in its valuation allowances equal to $2,312, compared with an increase in its valuation allowance of $1,026 in 2016.
As of December 31, 2017, the Company had no material unrecognized tax benefits or accrued interest and penalties. This is consistent with the tax years ending December 31, 2016 and December 31, 2015 as well. Federal tax years 2014 through 2017 were open for examination as of December 31, 2017.