INCOME TAXES
Atlas' effective tax rate was (416.8)%, 34.5%, and (48.3)% for the years ended December 31, 2016, 2015, and 2014, respectively. The table below reconciles the U.S. statutory marginal income tax rate to the effective tax rate ($ in '000s):
|
| | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2016 | | 2015 | | 2014 |
| Amount | | % | | Amount | | % | | Amount | | % |
Provision for taxes at U.S. statutory marginal income tax rate | $ | 179 |
| | 35.0 | % | | $ | 7,716 |
| | 35.0 | % | | $ | 4,058 |
| | 34.0 | % |
Provision for deferred tax assets deemed unrealizable (valuation allowance) | — |
| | — | % | | — |
| | — | % | | (9,446 | ) | | (79.1 | )% |
Nondeductible expenses | 24 |
| | 4.7 | % | | 124 |
| | 0.6 | % | | 136 |
| | 1.1 | % |
Tax-exempt income | (39 | ) | | (7.6 | )% | | (89 | ) | | (0.4 | )% | | — |
| | — | % |
State tax (net of federal benefit) | 28 |
| | 5.5 | % | | 118 |
| | 0.5 | % | | 11 |
| | 0.1 | % |
Tax net operating loss limitation write-down (excluding valuation allowance) | — |
| | — | % | | — |
| | — | % | | (519 | ) | | (4.3 | )% |
Nondeductible acquisition accounting adjustment | (2,204 | ) | | (430.5 | )% | | 329 |
| | 1.5 | % | | — |
| | — | % |
Change in statutory tax rate | — |
| | — | % | | (471 | ) | | (2.1 | )% | | — |
| | — | % |
Other | (122 | ) | | (23.9 | )% | | (111 | ) | | (0.6 | )% | | (7 | ) | | (0.1 | )% |
Provision for income taxes for continuing operations | $ | (2,134 | ) | | (416.8 | )% | | $ | 7,616 |
| | 34.5 | % | | $ | (5,767 | ) | | (48.3 | )% |
Income tax (benefit) expense consists of the following for the years ended December 31, 2016, 2015, and 2014 ($ in '000s): |
| | | | | | | | | |
Year Ended December 31, | 2016 | 2015 | 2014 |
Current tax (benefit) expense | $ | (2,586 | ) | $ | 7,790 |
| $ | 3,009 |
|
Deferred tax expense (benefit), net of change in valuation allowance | 452 |
| (174 | ) | (8,776 | ) |
Total | $ | (2,134 | ) | $ | 7,616 |
| $ | (5,767 | ) |
Upon the transaction forming Atlas on December 31, 2010, a yearly limitation as required by U.S. Internal Revenue Code of 1986 (as amended, "IRC") Section 382 that applies to changes in ownership on the future utilization of Atlas’ net operating loss carryforwards was calculated. The Insurance Subsidiaries’ prior parent retained those tax assets previously attributed to the Insurance Subsidiaries, which could not be utilized by Atlas as a result of this limitation. As a result, Atlas’ ability to recognize future tax benefits associated with a portion of its deferred tax assets generated during prior years has been permanently limited to the amount determined under IRC Section 382. The result is a maximum expected net deferred tax asset that Atlas has available after the merger, which is believed more-likely-than-not to be utilized in the future, after consideration of valuation allowance.
On July 22, 2013, due to shareholder activity, a "triggering event" as determined under IRC Section 382 occurred. As a result, under IRC Section 382, the use of the Company's net operating loss and other carryforwards will be limited as a result of this "ownership change” for tax purposes, which is defined as a cumulative change of more than 50% during any three-year period by shareholders owning 5% or greater portions of the Company's shares. Due to this triggering event, the Company estimates that it will retain total tax effected federal net operating loss carryforwards of approximately $14.5 million as of December 31, 2016.
The components of deferred income tax assets and liabilities as of December 31, 2016 and December 31, 2015 are as follows ($ in '000s):
|
| | | | | | |
| December 31, 2016 | December 31, 2015 |
Deferred tax assets: | | |
Losses carried forward | $ | 14,535 |
| $ | 12,656 |
|
Unpaid claims liabilities and unearned premiums | 8,546 |
| 8,122 |
|
Tax credits | 662 |
| 662 |
|
Investments | — |
| 36 |
|
Commissions | 1,269 |
| 1,306 |
|
All other | 2,184 |
| 1,457 |
|
Total gross deferred tax assets | 27,196 |
| 24,239 |
|
| | |
Deferred tax liabilities: | | |
Deferred policy acquisition costs | 4,628 |
| 3,582 |
|
Investments | 475 |
| — |
|
Fixed assets | 559 |
| 401 |
|
Intangible assets | 1,328 |
| 1,465 |
|
All other | 1,708 |
| 1,625 |
|
Total gross deferred tax liabilities | 8,698 |
| 7,073 |
|
Net deferred tax assets | $ | 18,498 |
| $ | 17,166 |
|
Amounts and expiration dates of the operating loss carryforwards as of December 31, 2016 are as follows ($ in '000s):
|
| | | | |
Year of Occurrence | Year of Expiration | Amount |
2001 | 2021 | $ | 5,007 |
|
2002 | 2022 | 4,317 |
|
2006 | 2026 | 7,825 |
|
2007 | 2027 | 5,131 |
|
2008 | 2028 | 1,949 |
|
2009 | 2029 | 1,949 |
|
2010 | 2030 | 1,949 |
|
2011 | 2031 | 4,166 |
|
2012 | 2032 | 9,235 |
|
2015 | 2035 | 1 |
|
Total | | $ | 41,529 |
|
Atlas has not established a valuation allowance for its gross future deferred tax assets as of December 31, 2016 or as of December 31, 2015. Based on Atlas’ expectations of future taxable income, its ability to change its investment strategy, as well as reversing gross future tax liabilities, management believes it is more likely than not that Atlas will fully realize the net future tax assets. The Company, therefore, released its remaining valuation allowance as of December 31, 2014.
Atlas accounts for uncertain tax positions in accordance with the income taxes accounting guidance. Atlas has analyzed filing positions in the federal and state jurisdictions where it is required to file tax returns, as well as the open tax years in these jurisdictions. Atlas believes that its federal and state income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain federal and state income tax positions have been recorded. Atlas would recognize interest and penalties related to unrecognized tax benefits as a component of the provision for federal income taxes. Atlas did not incur any federal income tax related interest income, interest expense or penalties for the years ended December 31, 2016, 2015, and 2014. The IRS completed its audit of tax year 2012 during the three month period ended March 31, 2016. No changes to tax year 2012 were made to our reported tax. Tax years 2013 and years thereafter are subject to examination by the Internal Revenue Service ("IRS").