Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes

Income Taxes

13. Income Taxes

A summary of the income tax expense in the Consolidated Statements of Operations is shown below.

	Years Ended December 31,
	2020		2019		2018
Current Income Taxes:
Federal	$	31,133	$	19,280	$	26,548
State		267		43		108
		31,400		19,323		26,656
Deferred Income Taxes:
Federal		5,159		4,757		(5,600)
State		—		—		—
		5,159		4,757		(5,600)
Total income tax expense	$	36,559	$	24,080	$	21,056

The income tax expense attributable to the consolidated results of operations is different from the amounts determined by multiplying income before federal income taxes by the statutory federal income tax rate. The sources of the difference and the tax effects of each were as follows for the periods indicated.

	Years Ended December 31,
	2020		2019		2018
Federal income tax expense at statutory rate	$	36,702	$	25,973	$	21,893
Investment income, net		(1,394)		(1,626)		(1,862)
State taxes, net		211		34		85
Nondeductible expenses		697		488		494
Tax windfall related to share-based stock compensation		(298)		(1,003)		(79)
Other, net		641		214		525
Total income tax expense	$	36,559	$	24,080	$	21,056

The deferred income tax (liability) asset represents the tax effects of temporary differences attributable to the Company’s consolidated federal tax return group. Its components were as shown in the following table for the periods indicated.

	Years Ended December 31,
	2020		2019
Deferred tax assets:
Discounting of loss reserves	$	5,421	$	5,642
Discounting of unearned premium reserve		17,217		17,710
Bad debt allowance		433		274
Employee benefits		3,609		4,340
Rent incentive		912		1,063
Total deferred tax assets before valuation allowance		27,592		29,029
Valuation allowance for deferred tax assets		—		—
Total deferred tax assets		27,592		29,029
Deferred tax liabilities:
Deferred acquisition costs		(15,742)		(15,600)
Investments		(4,349)		(1,744)
Net unrealized gains on investments		(18,720)		(11,985)
Loss reserve transition adjustment		(1,385)		(1,662)
Software development costs		(3,053)		(2,109)
Premium acquisition expenses		(379)		(509)
Depreciation		(1,575)		(1,137)
Total deferred tax liabilities		(45,203)		(34,746)
Net deferred tax liability	$	(17,611)	$	(5,717)

The Company believes that the positions taken on its income tax returns for open tax years will be sustained upon examination by the Internal Revenue Service (“IRS”).  Therefore, the Company has not recorded any liability for uncertain tax positions under ASC 740, Income Taxes.

During the years ended December 31, 2020 and December 31, 2019 there were no material changes to the amount of the Company’s unrecognized tax benefits or to any assumptions regarding the amount of its ASC 740 liability.

As of December 31, 2020 and December 31, 2019, the Company had no unrecognized tax benefits, and none which if recognized would affect the effective tax rate. The Company does not currently anticipate significant changes in the amount of unrecognized income tax benefits during the next twelve months.

The Company records interest and penalties associated with audits as a component of income before income taxes. Penalties are recorded in underwriting, operating and other expenses, and interest expense is recorded in interest expenses in the Consolidated Statements of Operations. The Company had no interest and penalties related to income taxes accrued as of December 31, 2020 and 2019.

In the Company’s opinion, adequate tax liabilities have been established for all open years. However, the amount of these tax liabilities could be revised in the near term if estimates of the Company’s ultimate liability are revised. All tax years prior to 2017 are closed.