Income Taxes

Provision for income taxes consisted of the following:



	Years ended December 31,
	2019			2018			2017
Current
Federal	$	9,034,736		$	21,058,703		$	19,219,251
State	5,924,933			9,646,172			5,336,885

	14,959,669			30,704,875			24,556,136

Deferred
Federal	(3,508,348		)	(5,954,666		)	(18,718,113		)
State	(3,284,689		)	(2,390,569		)	(1,951,238		)

	(6,793,037		)	(8,345,235		)	(20,669,351		)

Total provision for income taxes	$	8,166,632		$	22,359,640		$	3,886,785

The Company uses the liability method of accounting for income taxes as set forth in ASC 740. Under the liability method, deferred taxes are determined based on differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. As of December 31, 2019, the Company had Federal and California net operating loss carryforwards of approximately $45.6 million and $61.3 million, respectively. The Federal and California net operating loss carryforwards will expire at various dates from 2026 through 2039; however, $23.1 million of the Federal operating loss does not expire and will be carried forward indefinitely. Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company's net operating loss and credit carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within any three years' period since the last ownership change. The Company had a change in control under these Sections with the completion of the Merger. The Company has performed an analysis of the limitation on the NOLs acquired with the Merger and has determined it will be able to utilize all of the net operating losses (“NOLs”) before they expire.

Significant components of the Company's deferred tax assets (liabilities) as of December 31, 2019 and December 31, 2018 are shown below. During the year ended December 31, 2019, the Company recorded a non-cash reclassification $0.9 million of deferred tax liabilities to income tax payable related to utilization of NOLs. A valuation allowance of $8.2 million and $3.4 million as of December 31, 2019 and December 31, 2018, respectively, has been established against the Company's deferred tax assets related to loss entities the Company cannot consolidate under the Federal consolidation rules, as realization of these assets is uncertain.



	2019			2018
Deferred tax assets (liabilities)
State taxes	$	1,110,659		$	1,886,010
Stock options	1,293,164			1,660,664
Accrued payroll and related cost	277,682			238,633
Accrued hospital pool deficit	188,075			168,413
Allowance for bad debts	544,028			1,124,917
Investment in other entities	2,977,431			884,922
Net operating loss carryforward	13,849,685			6,414,256
Lease liability	3,567,302			—
Property and equipment	(927,011		)	(1,286,087		)
Acquired intangible assets	(29,195,045		)	(24,084,892		)
Right-of-use assets	(3,544,315		)	—
Risk Pool Receivable	(1,623,049		)	(2,434,573		)
Other	1,403,446			(792,781		)

Net deferred tax liabilities before valuation allowance	(10,077,948		)	(16,220,518		)

Valuation allowance	(8,191,500		)	(3,395,417		)
Net deferred tax liabilities	$	(18,269,448	)	$	(19,615,935	)



	2019		2018
Tax valuation allowance
Beginning balance	$	3,395,417	$	3,224,517
Charged (credited) to tax expense	1,085,842		170,900
Charged to goodwill	3,710,241		—
Ending balance	8,191,500		3,395,417

On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the Tax Cuts and Jobs Act (the "TCJA"). The TCJA establishes new tax laws that will take effect in 2018, including, but not limited to (1) reduction of the U.S. federal corporate tax rate from a maximum of 35% to 21%; (2) elimination of the corporate alternative minimum tax; (3) a new limitation on deductible interest expense; (4) the Transition Tax; (5) limitations on the deductibility of certain executive compensation; (6) changes to the bonus depreciation rules for fixed asset additions: and (7) limitations on NOLs generated after December 31, 2018, to 80% of taxable income.

ASC 740, Income Taxes, requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the TCJA’s provisions, the SEC staff issued Staff Accounting Bulletin (“SAB 118”), which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740.

During the first nine months of 2018, the Company recorded provisional amounts for certain enactment-date effects of the TCJA, for which the accounting had not been finalized, by applying the guidance in SAB 118. The Company recorded a decrease in its deferred tax assets and deferred tax liabilities of $6.6 million and $16.3 million, respectively, with a corresponding net adjustment to deferred income tax benefit of $9.7 million for the year ended December 31, 2017. Accordingly, the Company completed its accounting for the tax effects of the TCJA in 2018 and did not recognize any material adjustments to the 2018 provisional income tax expense.

The provision for income taxes differs from the amount computed by applying the federal income tax rate as follows for the years ended December 31:



	Years ended December 31,
	2019		2018		2017

Tax provision at U.S. Federal statutory rates	21.0	%	21.0	%	35.0	%
State income taxes net of federal benefit	8.1		6.7		4.4
Non-deductible permanent items	3.3		1.3		(9.7	)
Non-taxable entities	(2.7	)	(0.7	)	(1.9	)
Stock-based compensation	(1.5	)	(1.8	)	0.9
Change in valuation allowance	13.7		—		(2.9	)
Entity Conversion	(10.5	)	0.5		—
Change in rate	—		—		(19.4	)
Other	0.2		0.1		1.4

Effective income tax rate	31.6	%	27.1	%	7.8	%

The Company's effective tax rate is different from the federal statutory rate of 21% due primarily to state taxes, share-based compensation and permanent adjustments. As of December 31, 2019 and 2018, the Company does not have any unrecognized tax benefits related to various federal and state income tax matters. The Company will recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.

The Company is subject to U.S. federal income tax as well as income tax in California. The Company and its subsidiaries' state and Federal income tax returns are open to audit under the statute of limitations for the years ended December 31, 2015 through December 31, 2018 and for the years ended December 31, 2016 through December 31, 2018, respectively. The Company does not anticipate material unrecognized tax benefits within the next 12 months.