18.

Income Taxes

JMP Group LLC’s election to be taxed as a corporation for United States federal income tax purposes was approved by the Internal Revenue Service with an effective date of

January 1, 2019.

The income derived from its previously untaxed pass-through entities will now be taxed at a U.S. federal and state corporate rate, along with the Company’s corporate subsidiaries.

The components of the Company’s income tax expense (benefit) for the years ended

December 31, 2019

and

2018

are as follows:

(In thousands)	Year Ended December 31,
	2019			2018
Federal	$	248		$	1,044
State		45			246
Total current income tax expense		293			1,290

Federal		(5,487	)		(233	)
State		(1,633	)		110
Total deferred income tax expense (benefit)		(7,120	)		(123	)
Total income tax expense (benefit)	$	(6,827	)	$	1,167

As of

December 31, 2019

and

2018

, the components of deferred tax assets and liabilities have been recorded in other assets and other liabilities in the Statements of Financial Condition and are as follows:

(In thousands)	As of December 31,
	2019			2018
Deferred tax assets:
Equity based compensation	$	59		$	846
Interest expense limitation		59			1,169
Reserves and allowances		222			1,556
California Enterprise Zone credit		304			304
Federal and other state net operating loss		4,928			161
Accrued compensation and related expenses		2,502			-
Deferred compensation		636			847
Available for sale securities		1,752			-
Investment in partnerships		1,922			-
Tax basis difference - CLOs		1,689			-
Lease liability		6,823			-
Other		510			1,012
Total deferred tax assets		21,406			5,895
Deferred tax liabilities:
Investment in partnerships		(1,772	)		(1,376	)
Net unrealized gains on investments		(457	)		(629	)
Right of use assets		(5,275	)		-
Other		(1,141	)		-
Total deferred tax liabilities		(8,645	)		(2,005	)

Net deferred tax asset before valuation allowance		12,761			3,890

Valuation allowance		-			-
Net deferred tax assets	$	12,761		$	3,890

As of

December 31, 2019,

the Company has federal and various state (post-apportioned) net operating losses of

$18.0

million and

$20.0

million, respectively. The federal net operating losses have

expiration date and the various state net operating losses will begin to expire in

2034.

The Company also has tax credits generated under the California Enterprise Zone Program totaling

$0.3

million which expire between

2023

and

2026.

Management believes that the federal and state deferred tax assets will be realized based on positive evidence of significant reversing taxable temporary differences and forecasted income over the next few years.

A reconciliation of the statutory U.S. federal income tax rate to the effective tax rate for the years ended

December 31, 2019

and

2018

is as follows:

	Year Ended December 31,
	2019			2018
Tax at federal statutory tax rate		21.00	%		21.00	%
State income tax, net of federal tax benefit		11.78	%		-684.88	%
Non-CLO non-controlling interest		-0.01	%		-97.55	%
Adjustment for permanent items (Other)		-1.27	%		-147.19	%
PTP investment income		0.00	%		338.13	%
Adjustment for prior year taxes		-0.36	%		-487.11	%
Adjustment for change in tax status		25.01	%		0.00	%
Equity compensation shortfall		-5.12	%		-904.88	%
Effective tax rate		51.03	%		-1962.48	%

The difference between the statutory tax rate and the effective tax rate for the year ended

December 31, 2019

is primarily attributable to the change in tax status from non-taxable to taxable which resulted in JMP recognizing the initial temporary differences between book basis and tax basis of assets and liabilities. The set up of the deferred tax assets due to the conversion from a PTP to a C-Corp resulted in a substantial rate impact which caused a majority of the difference.

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates; with the limited exception of certain jurisdictions which do

not

have a significant adverse effect on the Company’s overall tax exposure. The Company recognizes tax benefits related to its tax positions only where the position is “more likely than

not”

to be sustained in the event of examination by tax authorities. The Company filed income tax returns with the federal government and various state and local income tax examinations for years prior to

2019

. There is

material state tax exposure as of

December 31, 2019