Income Taxes

12 Months Ended

Dec. 31, 2020

INCOME TAXES

The Company files a consolidated federal income tax return with all eligible subsidiaries. Since we have less than an 80% interest in JIC, JIC is not eligible to file on a consolidated basis with UIHC.

The following table summarizes the provision for income taxes:


	Year Ended December 31,
	2020		2019		2018
Federal:
Current	$	(27,310)	$	58	$	(1,510)
Deferred	(6,611)		(4,520)		(1,240)
Benefit for Federal income tax expense	(33,921)		(4,462)		(2,750)

State:
Current	598		1,100		(654)
Deferred	(3,282)		241		(1,229)
Provision (benefit) for State income tax expense	(2,684)		1,341		(1,883)
Benefit for income taxes	$	(36,605)	$	(3,121)	$	(4,633)

The actual income tax expense differs from the expected income tax expense computed by applying the combined applicable effective federal and state tax rates to income before the provision for income taxes as follows:


	Year Ended December 31,
	2020		2019		2018
Expected income tax expense at federal rate	$	(27,741)	$	(6,847)	$	(875)
State tax expense, net of federal deduction benefit	(3,603)		(882)		(1,205)
Dividend received deduction	(141)		(195)		(170)
Other permanent items	600		1,349		564
Prior period accrual adjustment	2,230		3,415		(1,391)
Net operating loss carryback rate benefit (1)	(12,566)		—		—
Municipal tax-exempt interest	(280)		(587)		(735)
Change in valuation allowance	5,505		989		—
Change in special loss discount account	—		—		(821)
Change in tax credit carryforward	(721)		—		—
Other, net	112		(363)		—
Reported income tax benefit	$	(36,605)	$	(3,121)	$	(4,633)

(1) Pursuant to the recently enacted CARES Act.

On December 22, 2017, the 2017 Tax Act was signed into law. At the time it was enacted, the Tax Act was subject to further clarification and interpretation by the U.S. Treasury Department and Internal Revenue Service. For example, the 2017 Tax Act changed the methodology used by insurance companies to calculate their insurance claims and reserves for tax purposes, including revaluing those tax basis liabilities as of January 1, 2018, based on a methodology and discount factors that had not been published. In November 2018, the U.S. Treasury issued proposed regulations providing the interest rate to be used in determining the tax-related discount on insurance claims and reserves. In June 2019, the U.S Treasury issued final regulations providing for updated discount factors to account for the revised interest rate to be used in determining the discount on insurance claims and reserves. The 2017 Tax Act provided a transitional deferred tax liability (taxes payable over an 8-year period). Since the established transition liability was completely offset by an increase in related deferred tax asset, the adjustment to the final amount when the factors were published in 2018 did not impact the Company’s effective tax rate.

In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 118 (SAB 118), initial changes in deferred taxes resulting from clarification and interpretation of the 2017 Tax Act were recorded in 2018, the period in which the guidance was published.

Deferred income taxes, which are included in other assets or other liabilities as appropriate, reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

As of December 31, 2020, we had net operating loss (NOL) carryforwards. The amount and timing of realizing the benefits of NOL carryforwards depend on future taxable income and limitation imposed by tax laws. There is no expiration for $1,168,000 of our federal NOL and $90,963,000 of our state NOL. The remaining $17,143,000 of our federal NOL expires in 2040. The unused business tax credits of $1,686,000 will also expire in 2040.

The table below summarizes the significant components of our net deferred tax liability:


	December 31,
	2020		2019
Deferred tax assets:
Unearned premiums	$	16,404	$	19,482

Tax-related discount on loss reserve	4,027		2,300
R&D tax credit carryforward	1,686		—




Dual consolidated loss carryforward	6,511		2,181
Net operating loss carryforward	7,900		8,709

Other	1,189		1,451
Total pre-allowance deferred tax assets	37,717		34,123
Valuation allowance	(6,494)		(989)
Total deferred tax assets	31,223		33,134
Deferred tax liabilities:
Deferred acquisitions costs	(20,191)		(27,939)
Unrealized gain	(3,253)		(10,484)
Intangible assets	(4,553)		(5,631)
Prepaid expenses	(725)		(762)
Investments	(78)		(152)
Fixed assets	(5,618)		(2,728)
Outside basis in subsidiary	(974)		—
Total deferred tax liabilities	(35,392)		(47,696)
Net deferred tax liability	$	(4,169)	$	(14,562)

We had a valuation allowance of $6,494,000 and $989,000 at December 31, 2020 and 2019, respectively. In assessing the net realizable value of deferred tax assets, we consider whether it is more likely than not that we will not realize some portion or all of the deferred tax assets. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. We considered taxable income (loss), reversals of temporary items, projected future taxable income and tax planning strategies in making this assessment. The current year increase in valuation allowance predominately relates to the impact of current year results on management’s estimate that the net deferred tax assets of certain reinsurance subsidiaries will not be realizable.

The statute of limitations related to our consolidated Federal income tax returns and our Florida income tax returns expired for all tax years up to and including 2016; therefore, only the 2017 through 2020 tax years remain subject to examination by taxing authorities. During the year ended December 31, 2020, we were examined by the Internal Revenue Service (IRS) regarding our 2016 income tax return. This examination was closed by the IRS prior to December 31, 2020 with no material adjustment needed.

UPC Insurance’s reinsurance subsidiaries, which are based in the Cayman Islands and Bermuda, made an irrevocable election under section 953(d) of the U.S. Internal Revenue Code of 1986, as amended, to be treated as a domestic insurance company for U.S. Federal income tax purposes. As a result of this election, our reinsurance subsidiaries are subject to United States income tax on its worldwide income as if it were a U.S. corporation.

The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits for the year ended December 31, 2020:


	December 31, 2020
Balance at January 1	$	—
Additions based on tax positions related to current year	683
Balance at December 31	$	683

Included in the balance at December 31, 2020 was $683,000 of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. We do not anticipate a material change in the unrecognized tax benefits over the next 12 months.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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