12.	Income Taxes

Deferred tax assets and liabilities reflect the effects of tax losses, credits, and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The current and deferred portions (in thousands) of federal, foreign and state income tax benefit or expense are as follows:

	For the Year Ended December 31,
	2019			2018
Federal income tax (expense) benefit:
Current tax benefit (expense)	$	279		$	5,932
Deferred tax (expense) benefit		(5,395	)		(1,159	)
Total federal income tax (expense) benefit	$	(5,116	)	$	4,773
Foreign income tax benefit (expense):
Current tax benefit (expense)	$	25		$	(53	)
Deferred tax (expense) benefit		(15	)		3
Total foreign income tax benefit (expense)	$	10		$	(50	)
State and other income tax (expense) benefit:
Current tax expense	$	(709	)	$	(3	)
Deferred tax benefit (expense)		262			(590	)
Total state and other income tax expense	$	(447	)	$	(593	)
Total income tax (expense) benefit	$	(5,553	)	$	4,130

We experienced an effective income tax expense rate of

17.5%

for the year ended

December 31, 2019,

compared to a negative effective income tax expense rate of

118.6%

for the year ended

December 31, 2018.

Our effective income tax expense rate for the year ended

December 31, 2019

was below the statutory rate principally as a result of the release of federal valuation allowances. Our negative effective income tax expense rate for the year ended

December 31, 2018

was significantly below the statutory rate principally as a result of our settlement during

2018

of an IRS examination of our

2008

tax return and the carryback of its resulting net operating losses to pre-

2008

tax years. The settlement resulted in a decrease in our federal tax valuation allowance and net reductions in our accruals of interest on liabilities for uncertain tax positions and unpaid taxes.

We report income tax-related interest and penalties (including those associated with both our accrued liabilities for uncertain tax positions and unpaid tax liabilities) within our income tax line item on our consolidated statements of operations. We likewise report the reversal of income tax-related interest and penalties within such line item to the extent we resolve our liabilities for uncertain tax positions or unpaid tax liabilities in a manner favorable to our accruals therefor. For

2019,

we reported a net accrual of income tax-related interest and penalties of

$0.1

million within our income tax line item, and, for

2018,

we reported a net reversal of income tax-related interest and penalties of

$1.2

million within our income tax line item.

December 2014,

we reached a settlement with the IRS concerning the tax treatment of net operating losses we incurred in

2007

and

2008

and carried back to obtain refunds of federal income taxes paid in earlier years dating back to

2003.

2015,

we filed an amended return claim that, if accepted, would have eliminated the

$7.4

million assessment (and corresponding interest and penalties) under a negotiated provision of the

December 2014

IRS settlement. The IRS filed a lien (as is customarily the case) associated with the assessment. Subsequently, an IRS examination team denied our amended return claims, and we filed a protest with IRS Appeals. Following correspondence and conferences held with IRS Appeals, we received and accepted a settlement offer from IRS Appeals in

June 2018

that reduced our

$7.4

million net unpaid income tax assessment referenced above to

$3.7

million (such

$3.7

million remaining unpaid assessment relating to the

2006

year to which we had originally carried back the aforementioned net operating losses). In

July 2018,

we paid

$5.4

million to the IRS to cover the

$3.7

million unpaid income tax assessment and most of the interest that had accrued thereon. Subsequently, during the

three

months ended

September 30, 2018,

the IRS refunded

$0.5

million of our

$5.4

million payment, and in

2019,

we paid

$0.7

million to the IRS to cover the interest on the

2006

income tax liability. Although we have paid all assessed income taxes related to this matter, we still have an outstanding accrued liability for failure-to-pay penalties (and accrued interest thereon) related to this matter. We are pursuing complete abatement of the failure-to-pay penalties of

$0.9

million, and once this matter is resolved through either abatement or payment, we expect the IRS to remove the aforementioned lien in due course.

The following table reconciles our effective income tax expense or benefit rates for

2019

and

2018

	For the Year Ended December 31,
	2019			2018
Statutory expense rate		21.0	%		21.0	%
Increase (decrease) in statutory tax expense rate resulting from:
Federal valuation allowance		(4.4	)		(132.0	)
Global intangible low-taxed income		0.8			9.6
Interest and penalties related to uncertain tax positions and IRS settlement adjustment		0.6			(27.2	)
Foreign taxes, net of valuation allowance		(0.5	)		(8.2	)
Permanent and other prior year true ups and tax effect of non-controlling interest		(1.1	)		4.7
State taxes, net of valuation allowance		1.1			13.5
Effective expense (benefit) rate		17.5	%		(118.6	)%

As of

December 31, 2019

and

December 31, 2018

, the respective significant components (in thousands) of our deferred tax assets and liabilities were:

	As of December 31,
	2019			2018
Deferred tax assets:
Software development costs/fixed assets	$	—		$	108
Goodwill and intangible assets		113			895
Provision for loan loss		36,172			19,479
Equity-based compensation		792			748
Accrued expenses		386			307
Accruals for state taxes and interest associated with unrecognized tax benefits		108			87
Federal net operating loss carry-forward		18,643			44,485
Minimum tax credit carry-forward		520			1,015
Foreign net operating loss carry-forward		537			256
Other		40			151
State tax benefits, primarily from net operating losses		40,937			42,318
Deferred tax assets, gross	$	98,248		$	109,849
Valuation allowances		(39,161	)		(40,830	)
Deferred tax assets net of valuation allowance	$	59,087		$	69,019
Deferred tax liabilities:
Prepaid expenses and other	$	(1,217	)	$	(210	)
Software development costs/fixed assets		(176	)		—
Equity in income of equity-method investee		(1,154	)		(1,092	)
Credit card fair value election differences		(21,513	)		(21,021	)
Market discount on loans		(29,834	)		(21,749	)
Deferred costs		(542	)		(469	)
Convertible senior notes		(9,309	)		(22,106	)
Cancellation of indebtedness income		—			(1,882	)
Deferred tax liabilities, gross	$	(63,745	)	$	(68,529	)
Deferred tax (liabilities) assets, net	$	(4,658	)	$	490

We undertook a detailed review of our deferred taxes and determined that a valuation allowance was required for certain deferred tax assets in the U.S. for states and in the U.K. We reduce our deferred tax assets by a valuation allowance if it is more likely than

not

that some portion or all of a deferred tax asset will

not

be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. In making our valuation allowance determinations, we consider all available positive and negative evidence affecting specific deferred tax assets, including our past and anticipated future performance, the reversal of deferred tax liabilities, the length of carry-back and carry-forward periods, and the implementation of tax planning strategies. Because our valuation allowance evaluations require consideration of future events, significant judgment is required in making the evaluations, and our conclusions could be materially different should certain of our expectations

not

be met. Our valuation allowances totaled

$39.2

million and

$40.8

million at

December 31, 2019

and

December 31, 2018,

respectively.

Certain of our deferred tax assets relate to federal, foreign and state net operating losses, capital losses, and credits, and we have

other net operating losses, capital losses, or credit carryforwards other than those noted herein. We have recorded a federal deferred tax asset of

$18.0

million (based on federal net operating loss carryforwards of

$85.6

million, which expire in varying amounts between

2029

and

2037

). We have also recorded a federal deferred tax asset of

$0.6

million (based on federal capital loss carryovers of

$2.8

million, which expire in

2021

Our subsidiaries file federal, state and/or foreign income tax returns. In the normal course of our business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the U.S., the U.K., and various U.S. states and territories. With a few exceptions of a non-material nature and considering our

2008

-related settlement with the IRS discussed previously, we are

longer subject to federal, state, local, or foreign income tax examinations for years prior to

2015.

Reconciliations (in thousands) of our unrecognized tax benefits from the beginning to the end of

2019

and

2018

, respectively, are as follows:

	2019			2018
Balance at January 1,	$	(414	)	$	(373	)
Reductions based on tax positions related to prior years		13			51
Additions based on tax positions related to the current year		(83	)		(71	)
Interest and penalties accrued		(29	)		(21	)
Balance at December 31,	$	(513	)	$	(414	)

Further, our unrecognized tax benefits that, if recognized, would affect the effective tax rate are

not

material at only

$0.5

million and

$0.4

million at

December 31, 2019

, and

2018

, respectively.