Income Taxes
Total income tax expense (benefit) consists of the following components:
|
| | | | | | | | | | | |
| For the year ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In Thousands) |
Current | $ | 778 |
| | $ | 360 |
| | $ | — |
|
Deferred | 29,964 |
| | (52,909 | ) | | — |
|
Total income tax expense (benefit) | $ | 30,742 |
| | $ | (52,549 | ) | | $ | — |
|
For the year ended December 31, 2017, we had income tax expense of $30.7 million, including amounts related to current year alternative minimum tax and changes to our net deferred tax asset. The changes to our net deferred tax asset reflect a one-time non-cash charge of $13.6 million primarily due to the re-measurement of our deferred tax assets and liabilities in connection with the enactment of the Tax Cuts and Jobs Act (the Act) on December 22, 2017.
Provisional amounts
The Act reduces the statutory U.S. federal corporate income tax rate from 35% to 21%. We have not completed our full assessment of the tax effects of the enactment of the Act on our December 31, 2017 deferred tax balances; however, in certain cases, as described below, we have made reasonable estimates of the effects on our deferred tax balances. We recognized a $13.6 million income tax expense in the year ended December 31, 2017 for the items we could reasonably estimate. We are still analyzing the Act and refining our calculations, which could impact the measurement of our existing deferred tax asset related to share-based compensation. For tax years beginning after December 31, 2017, the Act expanded the number of individuals whose compensation is subject to a $1 million cap on tax deductibility and includes performance-based compensation in the calculation. As a result, the Company recorded a provisional amount to reduce the future tax benefit related to share-based compensation. We will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we incorporate additional guidance that may be issued by the U.S. Treasury Department, the IRS, or other standard-setting bodies.
For the year ended December 31, 2016, we had income tax benefit of $52.5 million primarily related to the release of the valuation allowance recorded against our federal and certain state net deferred tax assets. At December 31, 2016, we determined that positive evidence of sufficient quantity and quality outweighed negative evidence, and supported a conclusion that it was more-likely-than-not that the Company would realize its federal and certain state net deferred tax assets. As a result, at December 31, 2016, we released the valuation allowance previously recorded against federal and certain state net deferred tax assets and recorded the effects of the change in income from continuing operations, generating financial statement benefits of $58.2 million and $0.3 million related to net federal and certain state net deferred tax assets, respectively. The 2016 provision for income taxes also included amounts for current year alternative minimum tax and changes to our net deferred tax asset.
For the year ended December 31, 2015, we recorded income tax expense of $0.0 due to the recognition of a valuation allowance against our federal and state net deferred tax assets.
We are a U.S. taxpayer and are subject to the statutory U.S. federal corporate income tax rate of 35% for all prior years through December 31, 2017. We will be subject to the statutory U.S. federal corporate income tax rate of 21% for 2018 and all future periods. Our holding company files a consolidated U.S. federal and various state income tax returns on behalf of itself and its subsidiaries.
The following table presents a reconciliation between the federal statutory income tax rate and our effective income tax (benefit) rate:
|
| | | | | | | | |
| For the year ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Re-measurement from change in federal statutory rate
| 25.7 |
| | — |
| | — |
|
Share-based and other compensation | (4.7 | ) | | 9.7 |
| | — |
|
Warrant gain/loss | 1.8 |
| | 4.0 |
| | 1.6 |
|
Other | 0.4 |
| | 3.4 |
| | (0.8 | ) |
Valuation allowance | — |
| | (511.1 | ) | | (35.8 | ) |
Effective income tax rate | 58.2 | % | | (459.0 | )% | | — | % |
The components of our net deferred tax asset are summarized as follows:
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Deferred tax asset | (In Thousands) |
Net operating loss carry forwards | $ | 25,665 |
| | $ | 47,867 |
|
Share-based compensation | 6,122 |
| | 9,080 |
|
Unearned premium reserve | 5,306 |
| | 9,514 |
|
Deferred ceding commissions | 1,084 |
| | 1,999 |
|
Capitalized start-up costs | 517 |
| | 833 |
|
Unrealized loss on investments | — |
| | 711 |
|
Alternative minimum tax credit | — |
| | 360 |
|
Other | 2,061 |
| | 5,893 |
|
Total gross deferred tax asset | 40,755 |
| | 76,257 |
|
Less: valuation allowance | (7,160 | ) | | (6,941 | ) |
Total deferred tax asset | 33,595 |
| | 69,316 |
|
Deferred tax liability | | | |
Deferred acquisition costs | (8,185 | ) | | (12,456 | ) |
Capitalized software | (4,603 | ) | | (5,076 | ) |
Unrealized gain on investments | (434 | ) | | — |
|
Intangible assets | (82 | ) | | (137 | ) |
Other | (362 | ) | | (213 | ) |
Total deferred tax liability | (13,666 | ) | | (17,882 | ) |
Net deferred tax asset | $ | 19,929 |
| | $ | 51,434 |
|
At December 31, 2017, our net deferred tax asset decreased to $19.9 million from $51.4 million at December 31, 2016 due to the re-measurement of our deferred tax balances at the reduced statutory U.S. federal corporate income tax rate of 21% and the utilization of net operating loss carryforwards during 2017.
Provisional amounts
Following enactment of the Act, we re-measured our deferred tax balances based on the rate at which they are expected to reverse in the future, which is generally 21%. We have not, however, completed our full assessment of the impact the Act will have on our December 31, 2017 deferred tax balances. We are still analyzing certain aspects of the Act and refining our calculation on our deferred tax asset balance related to share-based compensation, which could potentially affect the measurement of these balances or potentially give rise to further increases or decreases to our deferred tax amounts. The provisional amount recorded primarily related to the re-measurement of our deferred tax assets and liabilities was $13.6 million.
At December 31, 2017, we had a federal net operating loss carryforward of $93.3 million which expires from 2030 to 2037, and state net operating loss carryforwards of $89.1 million, which expire in varying amounts during the years 2031 to 2037. Section 382 of the Internal Revenue Code imposes annual limitations on a corporation's ability to utilize its net operating loss carryforwards if it experiences an "ownership change." As a result of the acquisition of our insurance subsidiaries in 2012, $7.3 million of NOLs were subject to annual limitations of $0.8 million through 2016, and $0.3 million, thereafter, through 2029.
As a result of the adoption of ASU 2016-09 in the first quarter of 2017, we recognized a discrete tax benefit of $3.3 million associated with excess tax benefits for share-based compensation. As of December 31, 2017, our federal net operating loss carryforward balance included $2.2 million of excess share-based compensation previously excluded from the net deferred tax asset balance as of December 31, 2016.
We recorded valuation allowances of $7.2 million and $6.9 million at December 31, 2017 and 2016, respectively, to reflect the amounts of state net deferred tax assets that may not be realized. The valuation allowance at December 31, 2017 primarily relates to state net operating losses generated by NMIH, as NMIH operates at a loss and currently only generates revenue from its investment portfolio.
As of December 31, 2017 and 2016, we had no reserves for unrecognized tax benefits, and had taken no material uncertain tax positions that would have required recognition and measurement. It is our policy to classify interest and penalties related to unrecognized tax benefits as income tax expense.
We file income tax returns with the U.S. federal government and various state jurisdictions which are subject to potential examination by tax authorities. We are not currently under examination by federal or state jurisdictions. Our U.S. federal income tax returns for 2014 and subsequent years and state income tax returns for 2013 and subsequent years remain open by statute.