Income Taxes

12 Months Ended

Dec. 31, 2019

10.	Income Taxes

The components of the Company’s income tax provision for the years ended December 31, 2019 and 2018 are as follows:

	Year Ended December 31,
	2019			2018
Current income tax benefit	$	(14,678	)	$	(814,609	)
Deferred income tax expense (benefit)		21,664			(1,120,719	)
Provision for income taxes	$	6,986		$	(1,935,328	)

The Company’s U.S. federal statutory income tax rate applicable to ordinary income was 21% for the years ended December 31, 2019 and 2018. The income tax provision differs from that computed by applying federal statutory rate to loss before income taxes for the years ended December 31, 2019 and 2018; those income tax rate differences are summarized as follows:

	Year Ended December 31,
	2019			2018
Expected tax provision at federal statutory rate	$	(48,713	)	$	(1,534,437	)
Tax exempt interest income		(48,428	)		(49,051	)
Dividends received deduction		(21,421	)		(23,438	)
Non-deductible conversion costs		136,439			-
Change in enacted tax rates		-			(343,929	)
Other		(10,891	)		15,527
Provision for income taxes	$	6,986		$	(1,935,328	)

Deferred income taxes are provided for temporary differences between the consolidated and combined financial statements and the tax basis of the Company’s assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. At December 31, 2019 and 2018, the Company’s deferred income taxes consisted of the following:

	December 31,
	2019		2018
Deferred tax assets:
Discount of unearned premiums	$	487,274	$	530,428
Discount of advance premiums		85,139		55,638
Discount of losses and loss adjustment expenses		978,379		1,113,670
Guaranty fund assessment		40,890		36,027
Net operating loss carryforward		756,063		811,703
Capital loss carryforward		-		34,558
Unrealized loss on investments		-		250,592
Other		14,754		28
Total deferred tax assets		2,362,499		2,832,644
Deferred tax liabilities:
Deferred acquisition costs		542,742		836,891
TCJA transitional adjustment		224,943		314,446
Unrealized gain on investments		678,322		—
Accrual of bond market discount		19,070		3,338
Other		5,838		1,878
Total deferred tax liabilities		1,470,915		1,156,553
Deferred income taxes, net	$	891,584	$	1,676,091

At December 31, 2019 and 2018, the Company had unused net operating loss (“NOL”) carryforwards of $3,600,298 and $3,865,253, respectively, which will begin to expire in 2038, if unused. At the time of the conversions and merger, the Company had unused NOLs of $4,313,198, which are subject to limitations under Section 382 of the Internal Revenue Code and are limited in the amount that can be utilized in any one year. The Company also has AMT credits of $14,754, which are expected to be fully utilized by 2021. Refer to Note 16, Subsequent Events, for the effects on the NOL carryforwards resulting from the Coronavirus Aid, Relief, and Economic Security Act.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets 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 those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax planning strategies in making this assessment. At December 31, 2019 and 2018, management determined that it is more likely than not that all of the deferred tax assets will be realized by the Company in future years. Accordingly, the Company did not record a valuation allowance against its deferred tax assets at December 31, 2019 and 2018.

The Company has applied the provisions of ASC 740, Income Taxes, for the years ended December 31, 2019 and 2018. ASC 740 prescribes a recognition threshold and measurement attribute with respect to uncertainty in income tax positions. In applying ASC 740, the Company has evaluated its various tax positions taken during the years ended December 31, 2019 and 2018. The Company has determined that based solely on the technical merits, each tax position on a current and deferred basis has a more-likely-than-not probability that the tax position will be sustained by taxing authorities. The Company is not presently under audit by any taxing authority and there are no other uncertainties and events that are reasonably possible in the next year that would cause a significant change in the amount of unrecognized tax benefits.

The Company did not recognize any interest and penalties in the accompanying consolidated and combined statements of operations for the years ended December 31, 2019 and 2018, respectively.

Additionally, as part of the enactment of the Tax Cuts and Jobs Act (“TCJA”) on December 22, 2017, property and casualty insurance companies are required to use Internal Revenue Service (“IRS”) prescribed factors to determine the loss discount. From the date of the passage of the new law, the IRS is using a corporate bond yield curve to determine the discount factors and property and casualty insurance companies are no longer allowed to use their own historical payment patterns to determine their discount factors. Transition rules require that property and casualty insurance companies recalculate the 2017 reserve discount as if the 2018 tax reform rules had been in effect at the time of the passage of the new law, compare it to the actual 2017 reserve discount, and amortize the difference into taxable income over eight years beginning in 2018. As a result of this comparison, the Company recorded as a component of deferred income taxes at December 31, 2017 a resulting tax-effected difference amount of $201,439, for which the pre-tax amount of $959,235 is being amortized into taxable income beginning in 2018. During 2019, the IRS issued additional regulations related to the 2017 reserve discount resulting in an adjusted pre-tax amount of $1,249,684. At December 31, 2019 and 2018, the deferred tax liability related to the TCJA transitional adjustment was $224,943 and $314,446, respectively, and is included as a component of deferred income taxes.

POSITIVE PHYSICIANS HOLDINGS, INC. 10-K