INCOME TAXES

The following table summarizes the provision for income taxes:



	Year Ended December 31,
	2017			2016			2015
Federal:
Current	$	(1,147	)	$	(1,906	)	$	10,143
Deferred	(9,911		)	1,920			2,103
(Benefit) provision for Federal income tax expense	(11,058		)	14			12,246

State:
Current	496			1,001			2,054
Deferred	1,327			290			202
Provision for State income tax expense	1,823			1,291			2,256
(Benefit) provision for income taxes	$	(9,235	)	$	1,305		$	14,502

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,
	2017			2016			2015
Expected income tax expense at federal rate	$	319		$	2,381		$	14,671
State tax expense, net of federal deduction benefit	366			934			1,023
Dividend received deduction	(294		)	(217		)	—
Other permanent items	128			—			—
Prior period adjustment	(791		)	—			42
Accrual adjustments	(1,472		)	—			—
Section 847 payments	—			—			(693		)
Municipal tax-exempt interest	(1,398		)	(1,011		)	—
Change in enacted tax rate⁽¹⁾	(6,777		)	—			—
Other, net	684			(782		)	(541		)
Reported income tax (benefit) expense	$	(9,235	)	$	1,305		$	14,502

⁽¹⁾ Pursuant to the recently enacted 2017 Tax Act legislation.

On December 22, 2017, the 2017 Tax Act was signed into law. One of the provisions of the 2017 Tax Act reduced the corporate federal income tax rate from 35% to 21% effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 addresses situations where accounting for certain income tax effects of the Tax Act under ASC 740 may be incomplete upon issuance of an entity’s financial statements and provides a one-year measurement period from the enactment date to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the following:

•Income tax effects of those aspects of the 2017 Tax Act for which accounting under ASC 740 is complete,


•	Provisional estimate of income tax effects of the 2017 Tax Act to the extent accounting is incomplete but a reasonable estimate is determinable and


•	If a provisional estimate cannot be determined, ASC 740 should still be applied on the basis of tax law provisions that were in effect immediately before the enactment of the 2017 Tax Act.

We revalued all deferred tax assets and liabilities to recognize the tax rate that is expected to apply when the tax effects are ultimately recognized in future periods. The impact of revaluing the deferred tax assets and liabilities from 35% to 21% was a reduction to income tax expense of $6,777,000, as disclosed in the table above. This revaluation adjustment included a $1,549,000 reduction related to the deferred tax liability associated with the net unrealized gains on our investment portfolio, which was originally recorded as a component of other comprehensive income and not through the tax provision. The remainder was associated with our other deferred tax assets and liabilities identified in the table below.

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 noted above, the federal deferred tax assets and liabilities at December 31, 2017, have been revalued to reflect the new 21% federal corporate income tax rate under the 2017 Tax Act.

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



	December 31,
	2017			2016
Deferred tax assets:
Unearned premiums	$	17,459		$	19,113
Tax-related discount on loss reserve	1,113			1,479
Bad debt expense	90			54
Other-than-temporary impairment	16			27
Investments	304			—
AMT credit carryforward	226			—
Other	89			507
Total deferred tax assets	19,297			21,180
Deferred tax liabilities:
Unrealized gain	(2,822		)	(642		)
Deferred acquisitions costs	(21,549		)	(19,586		)
Capitalized software	(204		)	(1,505		)
Intangible asset	(10,883		)	(3,371		)
Prepaid expenses	(535		)	—
Investments	(17		)	—
Fixed assets	(689		)	—
Other	(63		)	(895		)
Total deferred tax liabilities	(36,762		)	(25,999		)
Net deferred tax liability	$	(17,465	)	$	(4,819	)

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 consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

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 2013; therefore, only the 2014 through 2017 tax years remain subject to examination by taxing authorities. No taxing authorities are currently examining any of our federal or state income tax returns.

UPC Insurance’s reinsurance subsidiary, which is based in the Cayman Islands, 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 subsidiary is subject to United States income tax on its worldwide income as if it were a U.S. corporation.

As of December 31, 2017, we have not taken any uncertain tax positions with regard to our tax returns.