Note 15—Income Taxes

The Company files U.S. federal and state corporate income tax returns for PFSI and partnership returns for PennyMac. The Company’s federal tax returns are subject to examination for 2016 and forward and its state tax returns are generally subject to examination for 2015 and forward. PennyMac’s federal partnership returns are subject to examination for 2016 and forward, and its state tax returns are generally subject to examination for 2015 and forward. No returns are currently under examination.

As a result of the Reorganization, the Company recorded through equity a net deferred tax liability attributable to the noncontrolling interest in the amount of $320.5 million. Beginning from November 1, 2018, the Company’s income subject to the corporate federal and state income taxes will include the portion of its income formerly attributed to the noncontrolling interest. As a result, the Company has recognized an increase in its effective income tax rate.

The Reorganization was treated as an integrated transaction that qualifies as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code (“IRC”) and/or a transfer described in Section 351(a) of the IRC.

PFSI received a ruling from the California Franchise Tax Board in November 2018 which allows the Company to apply a reduced California statutory rate of 8.84% compared to the 10.84% rate previously applied by the Company. As a result, the Company recorded a tax benefit of $8.5 million due to remeasurement of deferred tax assets and tax liabilities.

The Company’s tax expense for the year ended December 31, 2017 was significantly impacted by the Tax Act. The Tax Act reduces the U.S. federal corporate tax rate to 21% from the previous maximum rate of 35%, effective January 1, 2018. Other than the change in the applicable federal rate, the changes introduced by the Tax Act did not have a significant impact on the 2018 tax expense.

In 2017, the Company recorded a tax benefit of $13.7 million due to a re-measurement of deferred tax assets and liabilities resulting from a decrease in the federal tax rate. The re-measurement of the deferred tax assets and liabilities is predominantly based on a reduction to the federal rate as described above which will result in lower tax expense when these deferred tax assets and liabilities are realized.

Revaluation of the deferred tax asset resulting from PennyMac unitholder exchanges under the tax receivable agreement resulted in the repricing of the Company’s corresponding liability under the tax receivable agreement. The Company recorded a reduction of $32.0 million in the Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under the tax receivable agreement for the year ended December 31, 2017 as a result of the Tax Act.

The following table details the Company’s provision for income taxes:


	Year ended December 31,
	2019		2018		2017
	(in thousands)
Current expense:
Federal	$	17,661	$	12	$	(81)
State		8,071		274		56
Total current expense		25,732		286		(25)
Deferred expense:
Federal		85,296		23,395		14,674
State		25,451		(427)		9,738
Total deferred expense		110,747		22,968		24,412
Total provision for income taxes	$	136,479	$	23,254	$	24,387

The following table is a reconciliation of the Company’s provision for income taxes at statutory rates to the provision for income taxes at the Company’s effective tax rate:


	Year ended December 31,
	2019		2018		2017
Federal income tax statutory rate	21.0	%	21.0	%	35.0	%
Less: Income attributable to noncontrolling interest	—	%	(12.3)	%	(22.0)	%
State income taxes, net of federal benefit	5.6	%	2.3	%	2.2	%
Tax rate revaluation	(0.6)	%	(2.2)	%	(8.0)	%
Other	(0.2)	%	(0.1)	%	0.1	%
Effective income tax rate	25.8	%	8.7	%	7.3	%

The components of the Company’s provision for deferred income taxes are as follows:


	Year ended December 31,
	2019		2018		2017
	(in thousands)
Mortgage servicing rights	$	91,592	$	46,064	$	—
Net operating loss		23,445		(14,902)		(9,675)
Compensation accruals		(12,286)		(3,596)		—
Additional tax basis in partnership from exchanges of partnership units into the Company's common stock		4,269		(1,391)		—
Reserves and losses		(2,945)		(1,848)		—
Other		6,106		(1,302)		—
Tax credits		566		(57)		76
Investment in PennyMac		—		—		34,011
Total provision for deferred income taxes	$	110,747	$	22,968	$	24,412

As the result of the Company’s reclassification of the noncontrolling interest to paid-in capital pursuant to the Reorganization on November 1, 2018, beginning in 2018, the provision for deferred taxes reflects each individual adjustment item in PFSI’s underlying investment in PennyMac. The provision for deferred income taxes for the year ended December 31, 2017 primarily relates to PFSI’s investment in PennyMac partially offset by the Company’s generation and utilization of a net operating loss and generation of tax credits. The provision for income taxes attributable to PFSI’s investment in PennyMac primarily relates to MSRs that PennyMac received pursuant to sales of mortgage loans held for sale at fair value and carried interest from the Investment Funds.

The components of Income taxes payable are as follows:


	December 31,
	2019		2018
	(in thousands)
Income taxes currently (receivable) payable	$	(6,506)	$	218
Deferred income tax liability, net		511,075		400,328
Income taxes payable	$	504,569	$	400,546

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented below:


	December 31,
	2019		2018
	(in thousands)
Deferred income tax assets:
Compensation accruals	$	41,038	$	28,752
Additional tax basis in partnership from exchanges of partnership units into the Company's common stock		39,897		44,165
Reserves and losses		29,534		26,589
Net operating loss carryforward		1,658		25,104
Tax credits carryforward		50		616
Gross deferred tax assets		112,177		125,226
Deferred income tax liabilities:
Mortgage servicing rights		608,635		517,042
Other		14,617		8,512
Gross deferred tax liabilities		623,252		525,554
Net deferred income tax liability	$	511,075	$	400,328

The Company recorded a deferred tax asset of $1.7 million related to California and other states’ net operating loss carryforwards, which were mostly incurred in 2018 and expire in 2038, and are expected to be fully utilized in 2020. All of the federal net operating loss carryforward has been fully utilized in 2019. The Company has tax credits of $0.1 million, which generally have no expiration date.

At December 31, 2019 and 2018, the Company had no unrecognized tax benefits and does not anticipate any unrecognized tax benefits. Should the recognition of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such expenses in the Company’s income tax accounts. No such accruals existed at December 31, 2019 and 2018.