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Note 23 - Income Taxes
 12 Months Ended
Dec. 31, 2021
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

23. INCOME TAXES

 

Cohen & Company Inc. is treated as a C corporation for United States federal income tax purposes. The components of income tax expense (benefit) included in the consolidated statements of operations for each year presented herein are shown in the table below.

 

INCOME TAX EXPENSE

(Dollars in Thousands)

 

  

For the Year Ended December 31,

 
  

2021

  

2020

  

2019

 

Current income tax expense (benefit)

            

Federal income tax expense (benefit)

 $-  $-  $(1)

Foreign income tax expense (benefit)

  188   122   156 

State and local income tax expense (benefit)

  269   86   - 
   457   208   155 

Deferred income tax expense (benefit)

            

Federal income tax expense (benefit)

  (531)  (7,430)  (324)

Foreign income tax expense (benefit)

  -   -   - 

State and local income tax expense (benefit)

  (1,540)  (1,447)  (354)
   (2,071)  (8,877)  (678)
             

Total

  (1,614)  (8,669)  (523)

 

The components of income (loss) before income taxes is shown below.

 

 

INCOME (LOSS) BEFORE INCOME TAXES

(Dollars in Thousands)

 

  

For the Year Ended December 31,

 
  

2021

  

2020

  

2019

 

Domestic

 $69,791  $30,317  $(4,400)

Foreign

  706   (533)  304 

Total

 $70,497  $29,784  $(4,096)

 

The Company had no prepaid taxes in the consolidated balance sheet as of December 31, 2021 and 2020, respectively.

 

The expected income tax expense /(benefit) using the federal statutory rate differs from income tax expense / (benefit) pertaining to pre-tax income / (loss) as a result of the following for the years ended December 31, 2021, 2020, and 2019.  

 

 

INCOME TAX RATE RECONCILIATION

(Dollars in Thousands)

 

  

For the Year Ended December 31,

 
  

2021

  

2020

  

2019

 

Federal statutory rate

 $14,804  $6,255  $(860)

Pass thru impact

  (12,774)  (5,092)  319 

Deferred tax valuation allowance

  (2,561)  (8,593)  216 

State and local tax

  (1,271)  (1,361)  (354)

Foreign tax

  188   122   156 

Total

 $(1,614) $(8,669) $(523)

 

Deferred tax assets and liabilities are determined based on the difference between the book basis and tax basis of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse. The recognition of deferred tax assets is reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.

 

  

The components of the net deferred tax asset (liability) are as follows.

 

 

DEFERRED TAX ASSET AND LIABILITY

(Dollars in Thousands)

 

  

As of December 31, 2021

  

As of December 31, 2020

 
  

Asset

  

Liability

  

Net

  

Asset

  

Liability

  

Net

 

Federal net operating loss carry-forward

 $19,678  $-  $19,678  $20,579  $-  $20,579 

State and local net operating loss carry-forward

  3,872   -   3,872   4,238   -   4,238 

Federal capital loss carry-forward

  17,192   -   17,192   7,311   -   7,311 

Unrealized gain on debt

  -   (5,679)  (5,679)  -   (5,670)  (5,670)

Investment in Operating LLC

  10,489   -   10,489   14,402   -   14,402 

Other

  1,060   (1,283)  (223)  312   -   312 

Gross deferred tax asset / (liability)

  52,291   (6,962)  45,329   46,842   (5,670)  41,172 

Less: valuation allowance

  (35,861)  -   (35,861)  (33,775)  -   (33,775)

Net deferred tax asset / (liability)

 $16,430  $(6,962) $9,468  $13,067  $(5,670) $7,397 

 

As of December 31, 2021, the Company had a federal net operating loss (“NOL”) of approximately $93,707, which will be available to offset future taxable income, subject to limitations described below. If not used, this NOL will begin to expire in 2029. The Company also had net capital losses (“NCLs”) in excess of capital gains of $81,868 as of December 31, 2021, which can be carried forward to offset future capital gains, subject to the limitations described below. If not used, this carryforward will begin to expire in 2022. No assurance can be made that the Company will have future taxable income or future capital gains to benefit from its NOL and NCL carryovers.

 

The Company has determined that its NOL and NCL carryovers are not currently limited by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). However, the Company may experience an ownership change as defined in that section (“Ownership Change”) in the future.  If an Ownership Change were to occur in the future, the Company’s ability to use its NOLs, NCLs, and certain recognized built-in losses to reduce its taxable income in a future year would generally be limited to an annual amount (the “Section 382 Limitation”) equal to the fair value of the Company immediately prior to the Ownership Change multiplied by the “long term tax-exempt interest rate.” In the event of an Ownership Change, NOLs and NCLs that exceed the Section 382 Limitation in any year will continue to be allowed as carryforwards for the remainder of the carryforward period, and such NOLs and NCLs can be used to offset taxable income for years within the carryforward period subject to the Section 382 Limitation in each year. However, if the carryforward period for any NOL or NCL were to expire before that loss is fully utilized, the unused portion of that loss would be lost.  See discussion of stockholder rights plan in note 21.

 

 

Notwithstanding the facts that the Company has determined that the use of its remaining NOL and NCL carryforwards are not currently limited by Section 382 of the Code, the Company recorded a valuation allowance for a substantial portion of its NOLs and NCLs when calculating its net deferred tax liability as of December 31, 2021. The valuation allowance was recorded because the Company determined it is not more likely than not that it will realize these benefits.

 

The Company recognized a significant deferred tax benefit in 2020.   The deferred tax benefit was a U.S. tax benefit, which was the result of the reduction in the valuation allowance applied against the Company's net operating loss carryforward ("NOL") and net capital loss carryforward ("NCL") tax assets.  Prior to 2020, the Company had concluded that due to its recent history of tax losses, it should only recognize its NOL asset to the extent the reversal of its deferred tax liability amounts could be scheduled against it.  For the NCL asset, the Company applied a full valuation allowance.  In 2020, the Company generated significant taxable income (both ordinary and capital) and expected to generate income going forward.  Accordingly, as of December 31, 2020, the Company adjusted the calculation of the valuation allowances applied against our carryforward assets. 

 

The Company also recognized a significant deferred tax benefit in 2021.  The deferred tax benefit was a U.S. tax benefit, which was the result of the reduction in the valuation allowance applied against the Company's net operating loss carryforward ("NOL") and net capital loss carryforward ("NCL") tax assets.  In 2021 the Company continued to generate significant taxable income (both ordinary and capital) which increased the Company's expected taxable income to be realized during relevant carryforward periods.  Therefore, in 2021, the Company reduced further the valuation allowances applied against its carryforward assets.  

 

The Company had no unrecognized tax benefits in the periods presented. 

 

The Company files tax returns in the U.S. federal jurisdiction, various states or local jurisdictions, the United Kingdom, Ireland, and France. With few exceptions, the Company is no longer subject to examination for years prior to 2016.