NOTE 12 – INCOME TAXES

Significant components of the income tax provision are as follows for the periods presented (in thousands):

	For the Years Ended December 31,
	2017		2016		2015
Current:
Federal	$	53,962	$	50,645	$	61,830
State and local		8,278		8,105		7,402
Total current expense (benefit)		62,240		58,750		69,232
Deferred:
Federal		851		4,106		(775	)
State and local		458		617		82
Total deferred expense (benefit)		1,309		4,723		(693	)
Income tax expense	$	63,549	$	63,473	$	68,539

The following table reconciles the statutory federal income tax rate to the Company’s effective income tax rate for the periods presented:

	For the Years Ended December 31,
	2017			2016			2015
Expected provision at federal statutory tax rate		35.0	%		35.0	%		35.0	%
Increases (decreases) resulting from:
State income tax, net of federal tax benefit		3.2	%		3.2	%		3.4	%
Effect of change in tax rate		2.8	%		—			0.1	%
Disallowed meals & entertainment		0.4	%		0.3	%		0.2	%
Disallowed compensation		0.4	%		0.4	%		1.1	%
Excess tax benefit		(3.4	%)		—			—
Other, net		(1.1	%)		0.1	%		(0.6	%)
Total income tax expense (benefit)		37.3	%		39.0	%		39.2	%

During the year ended December 31, 2017, the Company’s excess income tax benefit of $5.8 million was reflected as an income tax benefit in the consolidated statements of income as a component of the provision for income taxes as a result of the adoption of the accounting guidance for share-based payment transactions. See “–Note 2 (Significant Accounting Policies – Recently Adopted Accounting Pronouncements)” for more information.

Recent changes in federal tax law and applicable statutory rates have affected the Company’s balances of deferred income tax assets and liabilities. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. Under US GAAP, the effect of a change in tax law is recorded discretely as a component of the income tax provision related to continuing operations in the period of enactment. The effect of the change in tax law resulted in a reduction to the Company’s net deferred income tax assets of $4.7 million and a corresponding offset to income tax expense in the consolidated statement of income for the year ended December 31, 2017.

In addition, during the year ended December 31, 2017, the Company recorded another discrete item as a credit to income tax expense of $1.2 million resulting from anticipated recoveries of income taxes paid for the 2014-2015 tax years.

Additional factors giving rise to the differences in the Company’s effective tax rate, when compared to statutory rates in the current and prior years, include non-deductible executive compensation, tax-exempt interest income, and the current expansion outside of Florida into non-income taxing state jurisdictions.

The Company accounts for income taxes using a balance sheet approach. As of December 31, 2017 and 2016, the significant components of the Company’s deferred income taxes consisted of the following (in thousands):

	As of December 31,
	2017			2016
Deferred income tax assets:
Unearned premiums	$	19,916		$	26,861
Advanced premiums		1,275			1,314
Unpaid losses and LAE		385			374
Share-based compensation		3,894			3,256
Accrued wages		288			297
Allowance for uncollectible receivables		224			284
Additional tax basis of securities		33			51
Capital loss carryforwards		822			759
Other comprehensive income		2,544			3,982
Other		84			131
Total deferred income tax assets		29,465			37,309
Valuation allowance		(523	)		(133	)
Deferred income tax assets, net of valuation allowance		28,942			37,176
Deferred income tax liabilities:
Deferred policy acquisition costs, net		(18,205	)		(24,812	)
Prepaid expenses		(435	)		(504	)
Fixed assets		(881	)		(880	)
Other		(135	)		(306	)
Total deferred income tax liabilities		(19,656	)		(26,502	)
Net deferred income tax asset	$	9,286		$	10,674

At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred income tax assets when it is more likely than not that all, or some portion, of the deferred income tax assets will not be realized. A valuation allowance would be based on all available information including the Company’s assessment of uncertain tax positions and projections of future taxable income and capital gain from each tax-paying component in each jurisdiction, principally derived from business plans and available tax planning strategies.

Management believes that it is more likely than not that a portion of the benefit relating to the state capital loss carryforward will not be realized. In recognition of this risk, the Company has provided an additional valuation allowance during 2017 of $297 thousand on the balance of the deferred income tax asset as of December 31, 2017. If management’s assumptions change and determine the Company will be able to realize these capital loss carryforwards, the income tax benefits related to any reversal of the valuation allowance on deferred income tax assets as of December 31, 2017, will be accounted for as a future reduction in income tax expense.

The Company has adopted Accounting for Uncertainty in Income Taxes (“ASC 740”) which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740 provides a threshold for the financial statement recognition and measurement of an income tax position taken or expected to be taken in an income tax return. The Company’s policy is to classify interest and penalties related to unrecognized tax positions, if any, in its provision for income taxes. As of December 31, 2017 and 2016, the Company determined that no uncertain tax liabilities are required.

The Company filed a consolidated federal income tax return for the tax years ended December 31, 2016, 2015 and 2014 and intends to file the same for the tax year ended December 31, 2017. The tax allocation agreement between the Company and the Insurance Entities provide that they will incur income taxes based on a computation of taxes as if they were stand-alone taxpayers. The computations are made utilizing the financial statements of the Insurance Entities prepared on a statutory basis of accounting and prior to consolidating entries which include the conversion of certain balances and transactions of the statutory financial statements to a U.S. GAAP basis.

The Company files its income tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company’s 2014 through 2016 tax years are subject to examination by the Internal Revenue Service and various tax years remain open to examination in certain state jurisdiction. In February 2018, the Company received notification from the Internal Revenue Service for an examination of the 2015 tax return.