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Taxation
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Taxation
22 — Taxation

United States — The Hagerty Group is taxed as a pass-through ownership structure under provisions of the IRC and a similar section of state income tax law except for Hagerty Re, Broad Arrow and various foreign subsidiaries. Any taxable income or loss generated by The Hagerty Group is passed through to and included in the taxable income or loss of the Hagerty Group Unit Holders, including the Company. The Company is taxed as a corporation under the IRC and pays corporate, federal, state and local taxes with respect to income allocated from The Hagerty Group. The Company has a TRA with the Legacy Unit Holders that requires the Company to pay 85% of the tax savings that are realized as a result of increases in the tax basis in The Hagerty Group’s assets as a result of an exchange of Hagerty Group Units and Class V Common Stock for Class A Common Stock or cash.

Canada — Canadian entities are taxed as non-resident corporations and subject to income tax in Canada under provisions of the Canadian Revenue Agency.

United Kingdom — U.K. entities are taxed as corporations and subject to income tax in the U.K. under provisions of HM Revenue & Customs.

Bermuda — Hagerty Re has received an undertaking from the Bermuda government exempting it from all local income, withholding and capital gains taxes until March 31, 2035. At present time no such taxes are levied in Bermuda.

Hagerty Re made an irrevocable election under Section 953(d) of the U.S. IRC, as amended, to be taxed as a U.S. domestic corporation. As a result of this "domestic election", Hagerty Re is subject to U.S. taxation on its world-wide income as if it were a U.S. corporation. In accordance with an agreement between Hagerty Re and the Internal Revenue Service ("IRS"), Hagerty Re established an irrevocable letter of credit with the IRS in 2021.
Income (loss) before income tax expense includes the following components:

Year Ended December 31,
20222021
in thousands
United States$24,778 $(44,434)
Foreign(13,682)(10,169)
Total$11,096 $(54,603)

Total income tax expense (benefit) attributable to income (loss) for the years ended December 31, 2022 and 2021 consists of the following components:

Year Ended December 31,
20222021
in thousands
Current:
Federal$4,041 $3,753 
State3 — 
Foreign— (40)
$4,044 $3,713 
Deferred:
Federal$2,999 $3,038 
State(26)— 
Foreign— — 
2,973 3,038 
Total$7,017 $6,751 

Income tax expense (benefit) reflected in the financial statements differs from the tax computed by applying the statutory U.S. federal rate of 21% to "Net income (loss)" before taxes as follows:

Year Ended December 31,
20222021
in thousands (except percentages)
Income tax (benefit) expense at statutory rate$2,330 21 %$(11,467)21 %
State taxes(479)(4)%(163)0 %
Loss not subject to entity-level taxes8,727 79 %6,485 (12)%
Foreign rate differential(375)(3)%(276)1 %
Change in valuation allowance5,647 51 %2,759 (5)%
Change in fair value of warrant liability(8,799)(79)%8,933 (16)%
Permanent items852 8 %477 (1)%
Other, net(886)(8)%3 0 %
Income tax expense (benefit)$7,017 65 %$6,751 (12)%
Deferred tax assets and liabilities reflect temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount recognized for tax purposes, as adjusted for foreign currency translation. At December 31, 2022 and 2021, the tax effects of temporary differences that give rise to significant portions of the deferred tax provision are as follows:

December 31,
20222021
in thousands
Deferred tax assets
Discount on provision for losses and loss adjustment expenses$802 $557 
Unearned premiums9,886 7,345 
Accrued professional fees— 5 
Unrealized foreign currency gain229 70 
Excess tax basis159,337 168,014 
Net operating loss ("NOL") and other carryforwards17,197 6,492 
Other457 315 
Gross deferred tax asset187,908 182,798 
Less: valuation allowance(176,116)(174,821)
Total net deferred tax assets$11,792 $7,977 
Deferred tax liabilities
Deferred acquisition costs$(22,542)$(17,122)
Excise tax accrual(1,068)(1,279)
Unrealized foreign currency gain(229)(70)
Unrealized investment gain(37)(16)
Intangible assets(759)— 
Other(7)— 
Total deferred tax liabilities$(24,642)$(18,487)
Net deferred tax liability$(12,850)$(10,510)

Deferred tax assets are reduced by a valuation allowance when management believes it is more likely than not that some, or all, of the deferred tax assets will not be realized. After considering all positive and negative evidence of taxable income in the carryback and carryforward periods as permitted by law, the Company believes it is more likely than not that certain deferred tax assets will not be utilized. As a result, the Company had provided a valuation allowance of $176.1 million and $174.8 million as of December 31, 2022 and 2021, respectively.

Significant inputs and assumptions were used to estimate the future expected payments under the TRA, including the timing of the realization of the tax benefits and a tax savings rate of approximately 25.6%. The estimated value of the TRA recorded by the Company at the Closing was $3.5 million which was limited by the ability to currently utilize tax benefits and was recorded in "Other long-term liabilities" with an offsetting entry to "Additional paid-in capital" within the Consolidated Balance Sheets. The estimated value of the TRA recorded by the Company at December 31, 2022 was $3.2 million, a decrease of $0.3 million in value from the Closing, which was recorded in "Interest and other income (expense)" within the Consolidated Statements of Operations. The Company recorded a deferred tax asset for the difference between outside tax basis and book basis of the Company’s investment in assets of The Hagerty Group of $167.4 million at the Closing with an offsetting valuation allowance as it was more likely than not that the deferred tax asset will not be realized. These amounts were recorded to "Additional paid-in capital". At December 31, 2022, the deferred tax asset and offsetting valuation allowance is $159.3 million, adjusted from the Closing for net losses and nondeductible expenses.
The Company has income tax NOL carryforwards related to U.S. and foreign operations of approximately $93.5 million and $47.0 million as of December 31, 2022 and 2021, respectively. The Company has recorded a deferred tax asset of $17.2 million reflecting the benefit of these loss carryforwards as of December 31, 2022. Of the deferred tax assets, $10.4 million does not expire, and the remaining $6.8 million expires as follows:

in thousands
2036$396 
2037710 
2038848 
2039— 
20401,153 
20411,427 
2042$2,238 

The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction, as well as many state and foreign jurisdictions. As of December 31, 2022, tax years 2019, 2020 and 2021 are subject to examination by the tax authorities. With few exceptions, as of December 31, 2022, the Company is no longer subject to U.S. federal, state, local or foreign examinations for years before 2019.

The Canadian statute of limitation for tax year 2018 was open as of December 31, 2022 and remains open because the Company is currently under examination by the Canadian Revenue Agency for that year.

The calculation of our tax liabilities involves uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.

The Comapny records uncertain tax benefits ("UTB") as liabilities in accordance with ASC 740 and adjusts these liabilities when management's conclusion changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the UTB liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

As of December 31, 2022 and 2021, the Company did not have any unrecognized tax benefits and had no material accrued interest or penalties related to uncertain tax positions. If recorded, interest and penalties would be recorded within "Income tax benefit (expense)" in the Consolidated Statements of Operations.

In August 2022, the Inflation Reduction Act ("IRA") was enacted into law. Among the provisions in the IRA was a 15% corporate minimum tax effective for years beginning after December 31, 2022, and a 1% tax on share repurchases after December 31, 2022. The Company does not expect the tax provisions of the IRA to have a material impact on its results.