11.Income Taxes

A summary of the income tax expense (benefit) in the Consolidated Statements of Operations is shown below.


	Years Ended December 31,
	2016		2015		2014
Current Income Taxes:
Federal	$	26,927	$	(15,384)	$	24,389
State		89		40		177
		27,016		(15,344)		24,566
Deferred Income Taxes:
Federal		1,681		552		(602)
State		—		—		—
		1,681		552		(602)
Total income tax expense (benefit)	$	28,697	$	(14,792)	$	23,964

The income tax (benefit) expense attributable to the consolidated results of operations is different from the amounts determined by multiplying income before federal income taxes by the statutory federal income tax rate. The sources of the difference and the tax effects of each were as follows for the periods indicated.


	Years Ended December 31,
	2016		2015		2014
Federal income tax expense (benefit), at statutory rate	$	32,649	$	(10,025)	$	29,162
Tax‑exempt investment income, net		(4,194)		(4,889)		(5,429)
State taxes, net		58		26		115
Nondeductible expenses		202		233		222
Other, net		(18)		(137)		(106)
Total income tax expense (benefit)	$	28,697	$	(14,792)	$	23,964

The deferred income tax asset (liability) represents the tax effects of temporary differences attributable to the Company’s consolidated federal tax return group. Its components were as shown in the following table for the periods indicated.


	Years Ended December 31,
	2016		2015
Deferred tax assets:
Discounting of loss reserves	$	5,984	$	6,668
Discounting of unearned premium reserve		28,286		27,542
Bad debt allowance		502		509
Employee benefits		7,995		7,922
Rent incentive		238		371
Depreciation		255		152
Other		—		—
Total deferred tax assets before valuation allowance		43,260		43,164
Valuation allowance for deferred tax assets		—		—
Total deferred tax assets		43,260		43,164
Deferred tax liabilities:
Deferred acquisition costs		(24,848)		(24,128)
Investments		(3,469)		(2,540)
Net unrealized gains on investments		(8,531)		(8,865)
Software development costs		(2,479)		(2,342)
Premium acquisition expenses		(850)		(856)
Other		—		(3)
Total deferred tax liabilities		(40,177)		(38,734)
Net deferred tax asset (liability)	$	3,083	$	4,430

The Company believes, based upon consideration of objective and verifiable evidence, including its historical positive earnings and its future expectations, that the Company’s taxable income in future years will be sufficient to realize all federal deferred tax assets.

The Company believes that the positions taken on its income tax returns for open tax years will be sustained upon examination by the Internal Revenue Service (“IRS”). Therefore, the Company has not recorded any liability for uncertain tax positions under ASC 740, Income Taxes.

During the years ended December 31, 2016 and December 31, 2015 there were no material changes to the amount of the Company’s unrecognized tax benefits or to any assumptions regarding the amount of its ASC 740 liability.

As of December 31, 2016 and December 31, 2015, the Company had no unrecognized tax benefits, and none which if recognized would affect the effective tax rate. The Company does not currently anticipate significant changes in the amount of unrecognized income tax benefits during the next twelve months.

The Company records interest and penalties associated with audits as a component of income before income taxes. Penalties are recorded in underwriting, operating and other expenses, and interest expense is recorded in interest expenses in the Consolidated Statements of Operations. The Company had no interest and penalties related to income taxes accrued as of December 31, 2016 and 2015.

The Company’s U.S. federal tax return for the years ended December 31, 2015, 2014 and 2013 respectively, are currently being examined by the IRS. This examination relates to the refund claim for the 2015 Net Operating Loss that was carried back to prior years, which triggered a review by the Joint Committee on Taxation. In the Company’s opinion, adequate tax liabilities have been established for all open years. However, the amount of these tax liabilities could be revised in the near term if estimates of the Company’s ultimate liability are revised.

The Company’s U.S. federal tax return for the year ended December 31, 2011 was examined by the IRS. The examination was completed during the quarter ending September 30, 2014 with no findings. Tax years prior to 2013 are closed.