Note 15 - Income Taxes

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

The Company and all of its eligible U.S. subsidiaries file a U.S. consolidated federal income tax return ("KFSI Tax Group"). The method of allocating federal income taxes among the companies in the KFSI 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 consolidated federal income tax return. The Company’s non-U.S. subsidiaries file separate foreign income tax returns.   

Income tax benefit consists of the following:

(in thousands)	Years ended December 31,
	2021			2020
Current income tax (benefit) expense	$	(2,372	)	$	345
Deferred income tax benefit		(5,272	)		(1,460	)
Income tax benefit	$	(7,644	)	$	(1,115	)

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

(in thousands)	Years ended December 31,
	2021			2020
Income tax benefit at U.S. statutory income tax rate	$	(1,215	)	$	(1,373	)
Valuation allowance		(4,822	)		(322	)
Indefinite life intangibles		215			215
Change in unrecognized tax benefits		(2,811	)		244
Non-deductible compensation		649			220
Investment income		(253	)		(269	)
State income tax		372			192
Indemnification receivable		590			(51	)
Non-taxable income		(524	)		(80	)
Other		155			109
Income tax benefit for continuing operations	$	(7,644	)	$	(1,115	)

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,
	2021			2020
Deferred income tax assets:
Losses carried forward	$	181,096		$	184,130
Unpaid loss and loss adjustment expenses and unearned premiums		3,864			3,911
Intangible assets		1,050			1,705
Debt issuance costs		789			835
Investments		1,198			145
Deferred rent		586			624
Deferred revenue		1,603			1,350
Management fees		—			550
Compensation		520			265
Other		131			660
Valuation allowance		(169,678	)		(173,202	)
Deferred income tax assets	$	21,159		$	20,973
Deferred income tax liabilities:
Indefinite life intangibles	$	(19,179	)	$	(17,483	)
Depreciation and amortization		(14,485	)		(14,632	)
Fair value of debt		(4,048	)		(6,716	)
Land		(4,482	)		(4,435	)
Intangible assets		(3,698	)		(452	)
Deferred revenue		(1,443	)		(1,239	)
Investments		(35	)		(1,716	)
Deferred acquisition costs		(2,295	)		(1,855	)
Other		(47	)		—
Deferred income tax liabilities	$	(49,712	)	$	(48,528	)
Net deferred income tax liabilities	$	(28,553	)	$	(27,555	)

The Company maintains a valuation allowance for its gross deferred income tax assets of $169.7 million (U.S. operations - $169.7 million; Other - less than $0.1 million) and $173.2 million (U.S. operations - $173.2 million; Other - less than $0.1 million) at December 31, 2021 and December 31, 2020, 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, 2021 and December 31, 2020 net deferred income tax assets, excluding the deferred income tax asset and liability amounts set forth in the paragraph below.

In 2021, the Company (i) released into income $2.0 million of its valuation allowance associated with business interest expense carryforwards with an indefinite life; (ii) released into income $3.3 million and $0.8 million of its valuation allowance, as a result of its acquisitions of PWI and Ravix, respectively, 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; and (iii) charged to expense $0.5 million for an increase in its valuation allowance, as a result of its acquisition of CMC, due to net deferred income tax liabilities that are not expected to reverse during the period in which the Company will have deferred income tax assets available.

In2020, the Company released into income $1.3 million of its valuation allowance associated with business interest expense carryforwards with an indefinite life and also released into income $0.5 million 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$28.6 million and $27.6 million at December 31, 2021 and December 31, 2020, respectively, that consists of:

• $8.2 million and $7.6 million of deferred income tax liabilities that are scheduled to reverse in periods after the expiration of the KFSI Tax Group's consolidated U.S. net operating loss carryforwards;

• $23.8 million and $21.9 million of deferred income tax liabilities related to land and indefinite life intangible assets;

• $3.3 million and $1.3 million of deferred income tax assets associated with business interest expense carryforwards with an indefinite life;

• $0.5 million and $0.6 million of deferred state income tax assets; and

• $0.4 million and zero of deferred state income tax liabilities.

The Tax Cuts and Jobs Act (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 KFSI Tax Group's consolidated U.S. net operating loss carryforwards, totaling $824.4 million, are as follows:

		Net operating loss
Year of net operating loss	Expiration date	(in thousands)
2007	2027	$	35,890
2008	2028		53,895
2009	2029		496,889
2010	2030		92,058
2011	2031		39,865
2012	2032		30,884
2013	2033		30,779
2014	2034		7,245
2016	2036		16,006
2017	2037		20,848

In addition, not reflected in the table above, are net operating loss carryforwards of (i) $10.1 million relating to losses generated in separate U.S. tax return years, which losses will expire over various years through 2037 and (ii) $0.5 million relating to operations in Barbados, which losses will expire over various years through 2028.

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

(in thousands)	December 31,
	2021			2020
Unrecognized tax benefits - beginning of year	$	1,381		$	1,381
Gross additions		—			—
Gross reductions		—			—
Impact due to expiration of statute of limitations		(1,316	)		—
Unrecognized tax benefits - end of year	$	65		$	1,381

The amount of unrecognized tax benefits that, if recognized as of December 31, 2021 and December 31, 2020 would affect the Company's effective tax rate, was a benefit of $2.8 million and an expense of $0.2 million, respectively.

During the year ended December 31, 2021, the Company recorded an income tax benefit of $2.8 million for the release of a liability for unrecognized tax benefits (including interest and penalties) that had been included in income taxes payable in the consolidated balance sheets.  The Company carried a liability for unrecognized tax benefits of $0.1 million and $1.4 million as of December 31, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, the Company recognized a benefit of $1.5 million and an expense of $0.2 million, respectively, for interest and penalties. At December 31, 2021 and December 31, 2020, the Company carried an accrual for the payment of interest and penalties of $0.1 million and $1.6 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 2017 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 2016 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.