Income Taxes

The taxable results of the Company’s U.S. operations are included in the consolidated income tax returns of Cowen Inc. as well as stand-alone state and local tax returns. The Company has subsidiaries that are resident in foreign countries where tax filings have to be submitted on a stand-alone or combined basis. These subsidiaries are subject to tax in their respective countries and the Company is responsible for and, thus, reports all taxes incurred by these subsidiaries. The countries where the Company owns subsidiaries with tax filing obligations are the United Kingdom, Luxembourg, Canada and Hong Kong.

The Company has reflected the impact of the 2017 Tax Cuts and Jobs Act ("TCJA") in the financial statements, including a policy election to account for taxes on Global Intangible Low Tax Income ("GILTI") as incurred on a current year basis and not included in deferred taxes. The Company continues to monitor the impact of the TCJA as additional regulations and formal guidance are provided.

The components of the Company's income tax expense for the years ended December 31, 2018, 2017 and 2016 are as follows:



	Year ended December 31,
	2018			2017			2016
	(dollars in thousands)
Current tax expense/(benefit)
Federal	$	(1,883	)	$	421		$	1,268
State and local	(2,148		)	2,034			1,972
Foreign	785			428			262
Total	$	(3,246	)	$	2,883		$	3,502
Deferred tax expense/(benefit)
Federal	$	12,018		$	44,071		$	(22,834	)
State and local	6,956			(2,938		)	(1,900		)
Foreign	(9		)	37			2,140
Total	18,965			41,170			(22,594		)
Total Tax expense/(benefit)	$	15,719		$	44,053		$	(19,092	)

Consolidated U.S. income/(loss) before income taxes was $93.0 million in 2018, $3.9 million in 2017, and $(29.5) million in 2016. The corresponding amounts for non-U.S.-based income/(loss) were $6.0 million in 2018, $3.1 million in 2017, and $(2.0) million in 2016.

The reconciliations of the Company's federal statutory rate to the effective income tax rate for the years ended December 31, 2018, 2017, and 2016 are as follows:



	Year ended December 31,
	2018		2017		2016
Pre-tax loss at U.S. statutory rate	21.0	%	35.0	%	35.0	%
Dividend received deduction	—		(25.9	)	—
Bargain purchase gain	—		(34.8	)	—
Basis adjustment on investments	3.5		65.2		—
Nondeductible expenses	1.2		14.2		—
Unrecognized gains on foreign subsidiaries	—		—		38.7
Change in valuation allowance	7.1		—		(6.7	)
Impact of tax law change	—		669.8		—
State and foreign tax	(10.0	)	25.3		1.3
Reversal of income attributable to redeemable non-controlling interests	(8.6	)	(119.6	)	1.3
Other, net	1.7		3.7		(9.0	)
Total	15.9	%	632.9	%	60.6	%

As of December 31, 2018, the Company has net income taxes receivable of approximately $6.2 million representing federal, state and foreign tax overpayments, which is included in other assets on the accompanying consolidated statements of financial condition.

The components of the Company's deferred tax assets and liabilities as of December 31, 2018 and 2017 are as follows:



	As of December 31,
	2018			2017
	(dollars in thousands)
Deferred tax assets, net of valuation allowance
Net operating loss	$	48,294		$	78,650
Deferred compensation	59,697			39,992
Goodwill	—			1,042
Option liability	—			5,776
Tax credits	9,036			4,419
Acquired lease liability	2,098			3,473
Other	2,444			2,696
Total deferred tax assets	121,569			136,048
Valuation allowance	(9,135		)	(2,103		)
Deferred tax assets, net of valuation allowance	112,434			133,945
Deferred tax liabilities
Unrealized gains on investments	(13,092		)	(7,523		)
Amortization of bond discount	(4,643		)	(6,402		)
Other	(1,642		)	(3,697		)
Total deferred tax liabilities	(19,377		)	(17,622		)
Deferred tax assets/(liabilities), net	$	93,057		$	116,323

Deferred tax assets, net of valuation allowance, are reported in the accompanying consolidated statements of financial condition. In addition to the deferred tax balances in the table above, the Company records balances related to its operating losses in Luxembourg, which are discussed below.

The Company records deferred tax assets and liabilities for the future tax benefit or expense that will result from differences between the carrying value of its assets for income tax purposes and for financial reporting purposes, as well as for operating or capital loss and tax credit carryovers. A valuation allowance is recorded to bring the net deferred tax assets to a level that, in management’s view, is more likely than not to be realized in the foreseeable future. This level will be estimated based on a number of factors, especially the amount of net deferred tax assets of the Company that are actually expected to be realized, for tax purposes, in the foreseeable future. The Company recorded approximately $9.1 million valuation allowance against its deferred tax assets of $121.6 million as of December 31, 2018 and recorded approximately $2.1 million valuation allowance against its deferred tax assets of $136.0 million as of December 31, 2017. Separately, the Company has deferred tax liabilities of $19.4 million as of December 31, 2018, and $17.6 million as of December 31, 2017.

For the year 2018, the Company’s total deferred tax expense of $19.0 million was derived by the basis difference realized from the disposal of assets and the reversal of timing differences in the normal course of business. The deferred tax expense of $41.2 million in 2017 predominantly related to the impact of the TCJA, and the reversal of timing differences in the normal course of business. The deferred tax benefit of $22.6 million in 2016 was derived by the release of deferred tax liabilities related to the previous acquisitions by a local subsidiary, and reversal of temporary items during the course of normal operations.

As of December 31, 2018, the Company has foreign tax credit carryforwards of $7.0 million which expire between 2018 and 2026. A full valuation allowance was established against foreign tax credit carryforward as the Company determined that it is not more likely than not that the credits will be utilized.

The Company has the following net operating loss carryforwards at December 31, 2018:



	Federal		New York State		New York City		Hong Kong
Jurisdiction:
Net operating loss (in millions)		$138.0		$58.0		$98.2		$12.7
Year of expiration	2037		2037		2037		Indefinite

In addition to the net operating loss carryforwards in the table above, the Company also has net operating loss carryforwards in Luxembourg. These loss carryforwards are only accessible to the extent of taxable income generated by the Luxembourg reinsurance companies, including any deferred income that will be generated in the future. Consequently, the Company recorded a deferred tax asset of $189.1 million, net of deferred tax liabilities of $323.1 million in connection with future taxable income, and an offsetting valuation allowance of $189.1 million against its Luxembourg net operating loss carryforwards that are in excess of such taxable income.

The Company underwent a change of control under Section 382 of the Internal Revenue Code on November 2, 2009 (“Section 382”). Accordingly, a portion of the Company’s deferred tax assets, in particular a portion of its net operating loss, have been subject to an annual limitation. As of December 31, 2018, all of these losses were utilized. Further, as a result of an acquisition of a subsidiary with net operating loss carryovers in June 2011, a portion of the Company’s deferred tax assets, are subject to an annual limitation under Section 382. The deduction limitation is approximately $6.7 million annually and applies to approximately $37.1 million of net operating losses. The Company is not expected to lose any deferred tax assets as a result of these limitations.

The components of unrecognized tax benefits are as follows:



	As of December 31,
	2018			2017
	(dollars in thousands)
Beginning balance at January 1	$	3,947		$	—
Increases due to acquisition	—			2,847
Increases/(Decreases) due to current year positions	(3,648		)	1,100
Ending balance at December 31	$	299		$	3,947

The amount of the unrecognized tax benefits that impacted the effective tax rate of the Company is $(1.7) million. The total amount of income tax-related interest and penalties recognized in the consolidated statement of operations for the year ended December 31, 2018 is $0.3 million. No income tax-related interest and penalties are recognized in the consolidated statement of financial condition at December 31, 2018.

The Company is subject to examination by the United States Internal Revenue Service as well as state, local and foreign tax authorities in jurisdictions where the Company has significant business operations, such as New York, United Kingdom, and Luxembourg. The open tax years are 2015-2017 for the United States, and 2016-2017 for United Kingdom and Luxembourg. In October, the Company concluded an IRS audit for tax year 2014 with no financial statement impact. In December, the Company concluded a New York City unincorporated business tax audit for tax years 2011 to 2013, which caused a release of unrecognized tax benefits of $1.2 million.

The Company continues to permanently reinvest the capital and accumulated earnings of its United Kingdom, Canadian and Hong Kong subsidiaries.