Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes

Income Taxes

10. Income Taxes

The components of the income tax benefit (expense) provision are as follows:

	2022		2021		2020
Current:
Federal	$	(483)	$	1,065	$	—
State		(644)		(205)		(71)
Total current		(1,127)		860		(71)
Deferred
Federal		285		8,561		1,433
State		—		852		327
Total deferred		285		9,413		1,760
Income tax (expense) benefit	$	(842)	$	10,273	$	1,689

The tax effects of cumulative temporary differences that give rise to significant deferred tax assets and deferred tax liabilities are presented below. The valuation allowance relates to deferred tax assets for which it is more likely than not that the tax benefit will not be realized.

	December 31,		December 31,
	2022		2021
Deferred tax assets
Accrued expenses and other	$	1,230	$	1,080
Unrealized gain/loss on investments		1,296		—
Stock-based compensation		1,626		1,753
Deferred revenue		49,053		37,108
Goodwill		6,378		357
Operating lease liabilities		1,071		1,126
Loss and loss adjustment reserves		16,392		11,971
Net operating losses		100,920		87,802
Disallowed interest		5,676		5,098
Research and development capitalized costs		521		—
Valuation allowance		(117,568)		(88,613)
Total deferred tax assets		66,595		57,682
Deferred tax liabilities
Property and equipment		(87)		(50)
Intangibles		(3,614)		(10,660)
Operating lease right-of-use assets		(1,026)		(1,091)
Deferred policy acquisition costs		(1,907)		(857)
Reinsurance balance due		(59,794)		(44,197)
Internally developed software		(590)		(1,180)
Total deferred tax liabilities		(67,018)		(58,035)
Net deferred tax liabilities	$	(423)	$	(353)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial accounting purposes and the amounts used for income tax purposes and the tax effect of the tax loss carryforwards. The Company has recorded a valuation allowance due to the uncertainty surrounding the ultimate realizability or recoverability of such assets. Management evaluates, on an annual basis, both the positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable and the amount of the valuation allowance. In its evaluation, the Company considered its cumulative losses as significant negative evidence. Based upon a review of the four sources of income identified within ASC 740, Accounting for Income Taxes, the Company determined that the negative evidence outweighed the positive evidence. At such time as it is determined that it is more likely than not the deferred tax assets are realizable, the valuation allowance will be reduced. The valuation allowance increased by $29.0 million for the year ended December 31, 2022 from $88.6 million at December 31, 2021, to $117.6 million at December 31, 2022.

As of December 31, 2022, the Company had net operating loss carryforwards for federal tax purposes of approximately $410.9 million and $250.1 million for state income tax purposes, respectively, which may be used to offset future taxable income. The net operating loss carryforwards for federal tax purposes generated prior to January 1, 2018, will begin to expire in 2031, and the net operating loss carryforwards for state tax purposes began to expire in 2023. The net operating loss with an unlimited carryforward period is $313.2 million for federal tax purposes and $60.1 million for state tax purposes. Utilization of net operating loss and tax credit carryforwards are subject to certain limitations under Sections 382–384 of the Internal Revenue Code of 1986, as amended, in the event of a change in the Company’s ownership, as defined in current income tax regulations. The Company has determined that it has

experienced a limited number of ownership changes in its history but does not expect the resulting limitations to impose any significant constraints on the benefit of its tax attributes. Additional ownership changes may occur in the future.

A reconciliation of the income tax benefit (expense) provision to the amounts computed by applying the statutory federal income tax rate to earnings before income taxes is shown as follows:

	2022		2021		2020
Tax computed at federal statutory rate	$	32,701	$	24,492	$	11,702
State tax, net of federal tax benefit		4,879		5,531		2,097
Loss on impairment		(3,836)		—		—
Equity compensation		(3,939)		12,821		1,148
Officer compensation		(860)		(5,306)		(176)
Debt transactions		4,808		(1,791)		824
Enacted tax rate changes		90		123		159
Return to provision		(6,533)		(648)		502
Valuation allowance		(27,724)		(25,296)		(13,764)
Other		(428)		347		(803)
Income tax benefit (expense)	$	(842)	$	10,273	$	1,689

The U.S. federal statutory tax rate is 21%, while the Company’s effective tax rate for 2022, 2021 and 2020 was (0.5)%, 8.8%, and 3.0%, respectively. The difference for all years is due primarily to the tax benefit of pre-tax book losses being offset by the valuation allowance. The Company also recorded deferred tax benefits in 2021 and 2020, resulting from the release of a portion of the Company’s valuation allowance due to new deferred tax liabilities arising from certain stock acquisitions.

The Company files federal and state income tax returns. The Company is not currently under examination but is open to audit by the I.R.S. and state tax authorities for tax years beginning in 2012. The resolutions of any examinations are not expected to be material to these financial statements. As of December 31, 2022, there are no penalties or accrued interest recorded in the financial statements.

The Company had no uncertain tax position reserves as of December 31, 2022 and 2021.

On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022. Based upon our analysis of the Inflation Reduction Act of 2022 and subsequently released guidance, we do not believe that its provisions will have a material impact on our financial statements.

For tax years beginning on or after January 1, 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminates the option to currently deduct research and development expenses and requires taxpayers to capitalize and amortize them over five years for research activities performed in the United States and 15 years for research activities performed outside the United States pursuant to IRC Section 174. Although Congress is considering legislation that would repeal or defer this capitalization and amortization requirement, it is not certain that this provision will be repealed or otherwise modified.