INCOME TAXES

The Company and its non-U.S. subsidiaries file separate foreign income tax returns. Kingsway America Agency Inc. files a separate U.S. federal income tax return. Kingsway America II Inc. and its eligible U.S. subsidiaries file a U.S. consolidated federal income tax return ("KAI Tax Group"). The method of allocating federal income taxes among the companies in the KAI Tax Group is subject to written agreement, approved by each company's Board of Directors. The allocation is made primarily on a separate return basis, with current credit for any net operating losses or other items utilized in the U.S. consolidated federal income tax return. The Company's U.S. subsidiaries not included in the KAI Tax Group file separate U.S. federal income tax returns. As a result of its domestication to the U.S. on December 31, 2018, the Company will no longer file foreign income tax returns in 2019 and later years. Starting in 2019, the Company and all of its eligible U.S. subsidiaries will file a U.S. consolidated federal income tax return.

The Tax Cuts and Jobs Act (the "Tax Act") was enacted on December 22, 2017. The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to, (1) a permanent reduction in the U.S. federal corporate income tax rate to 21% and (2) eliminating the corporate alternative minimum tax ("AMT") and changing how existing AMT credits can be realized.

The Company is subject to the provisions of the ASC 740-10, Income Taxes, which requires that the effect on deferred income tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted. In December of 2017, the SEC staff issued Staff Accounting Bulletin 118 ("SAB 118"), which provides that companies that have not completed their accounting for the effects of the Tax Act but can determine a reasonable estimate of those effects should include a provisional amount based on their reasonable estimate in their financial statements.

Pursuant to SAB 118, the Company recorded provisional amounts for the estimated income tax effects of the Tax Act on deferred income taxes. The Company estimated that (1) the reduction in the corporate income tax rate decreased its net deferred income tax liability as of December 31, 2017 by $18.0 million and (2) the change in the AMT credit rules allowed the Company to reduce its valuation allowance against its gross deferred income tax assets by $0.1 million, for a combined Tax Act total of $18.1 million. The $18.1 million Tax Act amount was recorded as a decrease to income tax expense in the Company’s consolidated statements of operations for the year ended December 31, 2017. In addition, as result of the reduction in the corporate income tax rate, the Company provisionally reduced its December 31, 2017 net deferred income tax asset balance and the related net deferred income tax valuation allowance by $105.6 million, the net effect of which had no impact on the Company’s consolidated statements of operations for the year ended December 31, 2017.

Although the $18.1 million tax benefit represented what the Company believed was a reasonable estimate of the impact of the income tax effects of the Tax Act on the Company’s Consolidated Financial Statements as of December 31, 2017, it was considered provisional. In the fourth quarter of 2018, the Company finalized its calculation of the income tax effects of the Tax Act on its deferred income taxes by recording an additional tax benefit of $0.1 million.

Income tax expense (benefit) consists of the following:



(in thousands)	Years ended December 31,
	2018			2017

Current income tax expense	$	423		$	628
Deferred income tax benefit	(108		)	(17,316		)
Income tax expense (benefit)	$	315		$	(16,688	)

Income tax expense (benefit) varies from the amount that would result by applying the applicable U.S. corporate income tax rate of 21% in 2018 and 34% in 2017 to loss from continuing operations before income tax expense (benefit). The following table summarizes the differences:



(in thousands)	Years ended December 31,
	2018			2017
Income tax benefit at U.S. statutory income tax rate	$	(4,609	)	$	(4,255	)
Tax Act adjustment	(82		)	(18,052		)
Valuation allowance	4,562			3,169
Indefinite life intangibles	92			1,173
Change in unrecognized tax benefits	233			490
Compensation	(470		)	403
Investment income	747			—
Other	(158		)	384
Income tax expense (benefit) for continuing operations	$	315		$	(16,688	)

The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities are presented as follows:



(in thousands)	December 31,
	2018			2017
Deferred income tax assets:
Losses carried forward	$	180,012		$	185,574
Unpaid loss and loss adjustment expenses and unearned premiums	1,670			1,513
Intangible assets	2,538			2,484
Debt issuance costs	1,017			988
Investments	841			758
Deferred rent	727			807
Deferred revenue	783			183
Other	693			21
Valuation allowance	(171,456		)	(173,965		)
Deferred income tax assets	$	16,825		$	18,363
Deferred income tax liabilities:
Indefinite life intangibles	$	(16,660	)	$	(16,436	)
Depreciation and amortization	(16,121		)	(16,971		)
Fair value of debt	(6,528		)	(5,894		)
Land	(4,435		)	(4,435		)
Investments	(168		)	(1,853		)
Deferred acquisition costs	(1,450		)	(1,328		)
Other	—			(209		)
Deferred income tax liabilities	$	(45,362	)	$	(47,126	)
Net deferred income tax liabilities	$	(28,537	)	$	(28,763	)

The Company maintains a valuation allowance for its gross deferred income tax assets of $171.5 million (U.S. operations - $171.5 million; Other - $0.0 million) and $174.0 million (U.S. operations - $167.6 million; Other - $6.4 million) at December 31, 2018 and December 31, 2017, respectively. The Company's businesses have generated substantial operating losses in prior years. These losses can be available to reduce income taxes that might otherwise be incurred on future taxable income; however, it is uncertain whether the Company will generate the taxable income necessary to utilize these losses or other reversing temporary differences. This uncertainty has caused management to place a full valuation allowance on its December 31, 2018 and December 31, 2017 net deferred income tax assets, excluding the deferred income tax liability, deferred state income tax assets, and deferred income tax assets relating to AMT credit amounts set forth in the paragraph below. In 2018 and 2017, the Company released into income zero and $0.4 million, respectively, of its valuation allowance, as a result of its acquisition of CMC, due to net deferred income tax liabilities that are expected to reverse during the period in which the Company will have deferred income tax assets available.

The Company carries net deferred income tax liabilities of $28.5 million at December 31, 2018, $8.0 million of which relates to deferred income tax liabilities that are scheduled to reverse in periods after the expiration of the KAI Tax Group's consolidated U.S. net operating loss carryforwards, $21.1 million of which relates to deferred income tax liabilities related to land and indefinite life intangible assets, $0.5 million of which relates to deferred state income tax assets, and $0.1 million of which relates to deferred income tax assets relating to AMT credits. The Company carries net deferred income tax liabilities of $28.8 million at December 31, 2017, $8.0 million of which relates to deferred income tax liabilities that are scheduled to reverse in periods after the expiration of the KAI Tax Group's consolidated U.S. net operating loss carryfowards, $20.9 million of which relates to deferred income tax liabilities related to land and indefinite life intangible assets, and $0.1 million of which relates to deferred income tax assets relating to AMT credits. The Company considered a tax planning strategy in arriving at its December 31, 2018 and December 31, 2017 net deferred income tax liabilities.

The Tax Act modified the U.S. net operating loss deduction, effective with respect to losses arising in tax years beginning after December 31, 2017. The Tax Act, however, did not limit the utilization, in 2018 and later tax years, of U.S. net operating losses generated in 2017 and prior tax years.

Amounts, originating dates and expiration dates of the KAI Tax Group's consolidated U.S. net operating loss carryforwards, totaling $845.7 million, are as follows:



Year of net operating loss	Expiration date	Net operating loss (in thousands)
2007	2027	53,909
2008	2028	53,696
2009	2029	506,552
2010	2030	85,215
2011	2031	42,189
2012	2032	32,152
2013	2033	29,913
2014	2034	6,932
2016	2036	15,517
2017	2037	19,628

In addition, not reflected in the table above, are net operating loss carryforwards of (i) $6.5 million relating to separate U.S. tax returns, which losses will expire over various years through 2037 and (ii) $1.6 million, relating to operations in Barbados which losses will expire over various years through 2027.

A reconciliation of the beginning and ending unrecognized tax benefits, exclusive of interest and penalties, is as follows:



(in thousands)	December 31,
	2018		2017
Unrecognized tax benefits - beginning of year	$	1,367	$	1,274
Gross additions - current year tax positions	—		—
Gross additions - prior year tax positions	14		93
Gross reductions - prior year tax positions	—		—
Gross reductions - settlements with taxing authorities	—		—
Impact due to expiration of statute of limitations	—		—
Unrecognized tax benefits - end of year	$	1,381	$	1,367

The amount of unrecognized tax benefits that, if recognized as of December 31, 2018 and December 31, 2017 would affect the Company's effective tax rate, was an expense of $0.2 million and $0.5 million, respectively.

As of December 31, 2018 and December 31, 2017, the Company carried a liability for unrecognized tax benefits of $1.4 million and $1.4 million, respectively, that is included in income taxes payable in the consolidated balance sheets. The Company classifies interest and penalty accruals, if any, related to unrecognized tax benefits as income tax expense. During the years ended December 31, 2018 and December 31, 2017, the Company recognized an expense for interest and penalties of $0.2 million and $0.5 million, respectively. At December 31, 2018 and December 31, 2017, the Company carried an accrual for the payment of interest and penalties of $1.1 million and $0.9 million, respectively, that is included in income taxes payable in the consolidated balance sheets.

The federal income tax returns of the Company's U.S. operations for the years through 2014 are closed for Internal Revenue Service ("IRS") examination. The Company's federal income tax returns are not currently under examination by the IRS for any open tax years. The federal income tax returns of the Company's Canadian operations for the years through 2013 are closed for Canada Revenue Agency ("CRA") examination. The Company's Canadian federal income tax returns are not currently under examination by the CRA for any open tax years.