INCOME TAXES

The Company files a consolidated federal income tax return with all eligible subsidiaries. Since we have less than an 80% interest in JIC, JIC is not eligible to file on a consolidated basis with UIHC.

The following table summarizes the provision for income taxes:



	Year Ended December 31,
	2019			2018			2017
Federal:
Current	$	58		$	(1,510	)	$	(1,147	)
Deferred	(4,520		)	(1,240		)	(9,911		)
Benefit for Federal income tax expense	(4,462		)	(2,750		)	(11,058		)

State:
Current	1,100			(654		)	496
Deferred	241			(1,229		)	1,327
Provision (benefit) for State income tax expense	1,341			(1,883		)	1,823
Benefit for income taxes	$	(3,121	)	$	(4,633	)	$	(9,235	)

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,
	2019			2018			2017
Expected income tax expense at federal rate	$	(6,847	)	$	(875	)	$	319
State tax expense, net of federal deduction benefit	(882		)	(1,205		)	366
Dividend received deduction	(195		)	(170		)	(294		)
Other permanent items	1,349			564			128
Prior period accrual adjustment	3,415			(1,391		)	(2,263		)
Municipal tax-exempt interest	(587		)	(735		)	(1,398		)
Valuation allowance	989			—			—
Change in enacted tax rate⁽¹⁾	—			—			(6,777		)
Change in special loss discount account	—			(821		)	—
Other, net	(363		)	—			684
Reported income tax expense (benefit)	$	(3,121	)	$	(4,633	)	$	(9,235	)

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

On December 22, 2017, the 2017 Tax Act was signed into law. At the time it was enacted, the Tax Act was subject to further clarification and interpretation by the U.S. Treasury Department and Internal Revenue Service. For example, the 2017 Tax Act changed the methodology used by insurance companies to calculate their insurance claims and reserves for tax purposes, including revaluing those tax basis liabilities as of January 1, 2018, based on a methodology and discount factors that had not been published. In November 2018, the U.S. Treasury issued proposed regulations providing the interest rate to be used in determining the tax-related discount on insurance claims and reserves. In June 2019, the U.S Treasury issued final regulations providing for updated discount factors to account for the revised interest rate to be used in determining the discount on insurance claims and reserves. The 2017 Tax Act provided a transitional deferred tax liability (taxes payable over an 8-year period). Since the established transition liability was completely offset by an increase in related deferred tax asset, the adjustment to the final amount when the factors were published in 2018 did not impact the Company’s effective tax rate. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 118 (SAB 118), initial changes in deferred taxes resulting from clarification and interpretation of the 2017 Tax Act were recorded in 2018, the period in which the guidance was published.

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.

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



	December 31,
	2019			2018
Deferred tax assets:
Unearned premiums	$	19,482		$	19,661
Unrealized loss	—			2,145
Tax-related discount on loss reserve	2,300			2,055
Dual consolidated loss carryforward	2,181			—
Net operating loss carryforward	8,709			—
Other	1,451			999
Total pre-allowance deferred tax assets	34,123			24,860
Valuation allowance	(989		)	—
Total deferred tax assets	33,134			24,860
Deferred tax liabilities:
Deferred acquisitions costs	(27,939		)	(26,966		)
Unrealized gain	(10,484		)	—
Intangible assets	(5,631		)	(7,397		)
Prepaid expenses	(762		)	(665		)
Investments	(152		)	(221		)
Fixed assets	(2,728		)	(1,864		)
Total deferred tax liabilities	(47,696		)	(37,113		)
Net deferred tax liability	$	(14,562	)	$	(12,253	)

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 considered taxable income (loss), reversals of temporary items, projected future taxable income and tax planning strategies in making this assessment. At December 31, 2019, we carried a valuation allowance of $842,000 related to net loss carryforwards and $147,000 related to equity compensation.

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 2015; therefore, only the 2016 through 2019 tax years remain subject to examination by taxing authorities. We are currently being examined by the Internal Revenue Service (IRS) regarding our 2016 income tax return and there are no issues or concerns to date.

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

As of December 31, 2019, we have not deemed any uncertain tax positions to be material at the consolidated level with regard to our tax returns.