Note E - Income Taxes

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the "U.S. Tax Act") was signed into law, which lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. As a result, the Company recorded a tax benefit of $9,572 related to the remeasurement of its deferred tax assets and liabilities at December 31, 2017. As of December 31, 2017, the Internal Revenue Service ("IRS") had not yet published all of the detailed regulations resulting from the enactment of the U.S. Tax Act; therefore, while the Company had not completed its accounting for the tax effects, it made a reasonable estimate of the tax effects on its existing deferred tax balances at December 31, 2017. The Company finalized its accounting for the tax effects of the U.S. Tax Act during 2018. No material adjustments to income tax expense (benefit) were recorded during 2018.

The U.S. Tax Act provides for a change in the methodology employed to calculate reserves for tax purposes. Beginning January 1, 2018, a higher interest rate assumption and longer payout patterns are used to discount these reserves. In addition, companies are no longer able to elect to use their own experience to discount reserves, but instead are required to use the industry-based tables published by the IRS annually. During 2017, the Company estimated the provisional tax impacts related to the change in methodology as $1,696. During 2018, the IRS published the discount factor tables and the Company calculated the tax impact of the methodology change and recorded an updated amount for deferred tax assets and an offsetting deferred tax liability of $2,262 at December 31, 2018. During 2019, the IRS published updated discount factor tables and the Company updated the tax impact. The deferred tax liability was amortized into income in the amount of $281 in 2019 in accordance with the 8-year inclusion described in the U.S. Tax Act. The deferred tax liability amortized into income in 2018 was revised to $228 compared to $323 as originally calculated in 2018 under the discount factor tables.

Deferred income taxes are calculated to account for 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. Significant components of the Company's deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows:

	2019			2018
Deferred tax liabilities:
Unrealized gain on fixed income and equity security investments	$	5,327		$	4,572
Deferred acquisition costs		2,821			2,552
Loss and loss expense reserves		2,701			3,583
Limited partnership investments		2,587			–
Accelerated depreciation		687			690
Other		1,361			1,509
Total deferred tax liabilities		15,484			12,906

Deferred tax assets:
Loss and loss expense reserves		11,460			9,999
Limited partnership investments		–			3,498
Unearned premiums discount		2,529			2,321
Other-than-temporary investment declines		39			625
Deferred compensation		1,181			580
Deferred ceding commission		1,037			1,173
Other		1,273			972
Total deferred tax assets		17,519			19,168

Net deferred tax assets	$	(2,035	)	$	(6,262	)

A summary of the difference between federal income tax expense (benefit) computed at the statutory rate and that reported in the consolidated financial statements as of December 31, 2019, 2018 and 2017 is as follows:

	2019			2018			2017

Statutory federal income rate applied to pre-tax income (loss)	$	1,821		$	(9,213	)	$	3,543
Tax effect of (deduction):
Tax-exempt investment income		(402	)		(253	)		(968	)
Change in enacted tax rates		–			–			(9,572	)
Other		(93	)		(331	)		(1,204	)
Federal income tax expense (benefit)	$	1,326		$	(9,797	)	$	(8,201	)

Federal income tax expense (benefit) as of December 31, 2019, 2018 and 2017 consists of the following:

	2019			2018			2017
Tax expense (benefit) on pre-tax income (loss):
Current	$	1,377		$	8,997		$	(4,335	)
Deferred		(51	)		(18,794	)		(3,866	)
	$	1,326		$	(9,797	)	$	(8,201	)

The provision for deferred federal income taxes as of December 31, 2019, 2018 and 2017 consists of the following:

	2019			2018			2017
Limited partnerships	$	1,143		$	(2,383	)	$	4,099
Discounts of loss and loss expense reserves		(2,269	)		(2,704	)		1,315
Reserves - salvage and subrogation and other		(74	)		427			56
Unearned premium discount		(208	)		(484	)		(1,767	)
Deferred compensation		(600	)		305			(168	)
Other-than-temporary investment declines		(411	)		695			(127	)
Deferred acquisitions costs and ceding commission		405			201			1,553
Change in enacted tax rates		–			–			(9,572	)
Unrealized gains / losses		1,837			(13,876	)		–
Other		126			(975	)		745
Provision for deferred federal income taxes	$	(51	)	$	(18,794	)	$	(3,866	)

The Company is required to establish a valuation allowance for any portion of the gross deferred tax asset that management believes will not be realized. Management has determined that no such valuation allowance was necessary at December 31, 2019 or 2018. As of December 31, 2019, calendar years 2018, 2017 and 2016 remain subject to examination by the IRS.

The Company has no uncertain tax positions as of December 31, 2019 or 2018. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense (benefit) and changes in such accruals would impact the Company's effective tax rate. There were no amounts accrued for the payment of interest at December 31, 2019, 2018 and 2017.