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9. Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

(9) Income Taxes

Income taxes consist of the following:

		Year Ended December 31,
		2019				2018				2017
		(In thousands)
Current federal tax expense		$	(574	)		$	(7,526	)		$	14,369
Current state tax expense			105				(2,064	)			3,305
Deferred federal tax expense			2,759				9,074				10,131
Deferred state tax expense			1,466				4,357				501
Income tax expense		$	3,756			$	3,841			$	28,306

Income tax expense for the years ended December 31, 2019, 2018 and 2017 differs from the amount determined by applying the statutory federal rate to income before income taxes as follows:

		Year Ended December 31,
		2019				2018				2017
		(In thousands)
Expense at federal tax rate		$	1,924			$	3,928			$	11,225
State taxes, net of federal income tax effect			1,027				1,718				1,831
Stock-based compensation			169				238				682
Non-deductible expenses			856				824				171
Effect of change in tax rate			–				–				15,117
Accounting method change			–				(2,100	)			–
Other			(220	)			(767	)			(720	)
		$	3,756			$	3,841			$	28,306

For the year ended December 31, 2018, we recorded income tax expense of $3.8 million which include a $2.1 million net tax benefit related to certain tax planning strategies and other adjustments. Without the benefit, income tax expense for 2018 would have been $5.9 million.

The tax effected cumulative temporary differences that give rise to deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows:

		December 31,
		2019				2018
		(In thousands)
Deferred Tax Assets:
Finance receivables		$	–			$	1,867
Accrued liabilities			307				256
NOL carryforwards			17,240				7,736
Built in losses			4,008				4,651
Pension accrual			1,927				1,552
Stock compensation			4,385				4,161
Lease liability			5,232				–
Other			164				356
Total deferred tax assets			33,263				20,579
							$
Deferred Tax Liabilities:			$
Finance receivables		$	(12,180	)		$	–
Deferred loan costs			(542	)			(1,137	)
Lease right-of-use assets			(4,855	)			–
Furniture and equipment			(206	)			(254	)
Total deferred tax liabilities			(17,783	)			(1,391	)
							$
Net deferred tax asset		$	15,480			$	19,188

We acquired certain net operating losses and built-in loss assets as part of our acquisitions of MFN Financial Corp. (“MFN”) in 2002 and TFC Enterprises, Inc. (“TFC”) in 2003. Moreover, both MFN and TFC have undergone an ownership change for purposes of Internal Revenue Code (“IRC”) Section 382. In general, IRC Section 382 imposes an annual limitation on the ability of a loss corporation (that is, a corporation with a net operating loss (“NOL”) carryforward, credit carryforward, or certain built-in losses (“BILs”)) to utilize its pre-change NOL carryforwards or BILs to offset taxable income arising after an ownership change.

In determining the possible future realization of deferred tax assets, we have considered future taxable income from the following sources: (a) reversal of taxable temporary differences; and (b) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into years in which net operating losses might otherwise expire.

Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not. A valuation allowance is recognized for a deferred tax asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. In making such judgements, significant weight is given to evidence that can be objectively verified. Although realization is not assured, we believe that the realization of the recognized net deferred tax asset of $15.5 million as of December 31, 2019 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of $15.5 million consists of approximately $11.5 million of net U.S. federal deferred tax assets and $4.0 million of net state deferred tax assets. The major components of the deferred tax asset are $21.2 million in net operating loss carryforwards and built in losses.

As of December 31, 2019, we had net operating loss carryforwards for state income tax purposes of $70.5 million. These state net operating losses begin to expire in 2024.

We recognize a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. We recognize potential interest and penalties related to unrecognized tax benefits as income tax expense. At December 31, 2019, we had no unrecognized tax benefits for uncertain tax positions.

We are subject to taxation in the US and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2016.