11 - Income Taxes

On December 22, 2017, TCJA was signed into law. The TCJA contains significant changes to corporate taxation, including the reduction of the corporate income tax rate to 21%, the acceleration of expensing for certain business assets, the one-time transition tax related to the transition of U.S. international tax from a worldwide tax system to a territorial tax system, the repeal of the domestic production deduction, additional limitations on the deductibility of interest expense, the repeal of the corporate alternative minimum tax and expanded limitations on the deductibility of executive compensation.

The key impacts of the TCJA on our financial statements for 2017 were the revaluation of our deferred tax balances to the new corporate tax rate that resulted in additional tax expense of $4.8 million and the reclassification of an alternative minimum tax credit carryforward of $8.5 million from net deferred tax assets to federal income taxes recoverable. We will recover the alternative minimum tax credit carryforward over the next three years. While we cannot reasonably estimate the impact of the TCJA on our consolidated financial results for 2018 and subsequent years, we generally expect the reduction of the corporate income tax rate to reduce our effective tax rate and income tax expense beginning in 2018.

Our provision for income tax for 2017, 2016 and 2015 consisted of the following:


	2017			2016		2015
Current	$	(2,139,061	)	$	8,496,405	$	5,621,367
Deferred		7,137,423			2,030,865		980,868

Federal income tax provision	$	4,998,362		$	10,527,270	$	6,602,235

Our effective tax rate is different from the amount computed at the statutory federal rate of 35% for 2017, 2016 and 2015. The reasons for such difference and the related tax effects are as follows:


	2017			2016			2015
Income before income taxes	$	12,114,462		$	41,328,407		$	27,592,268

Computed “expected” taxes		4,240,062			14,464,942			9,657,294
Tax-exempt interest		(3,241,530	)		(3,951,926	)		(4,806,855	)
Proration		518,948			629,697			737,644
Effect of tax reform		4,752,547			—			—
Dividends received deduction		(508,409	)		(691,616	)		(701,658	)
Tax benefit on exercise of options		(873,515	)		—			—
Other, net		110,259			76,173			1,715,810

Federal income tax provision	$	4,998,362		$	10,527,270		$	6,602,235

The tax effects of temporary differences that give rise to significant portions of our deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are as follows:


	2017			2016
Deferred tax assets:
Unearned premium	$	15,511,854		$	23,964,558
Loss reserves		4,164,246			6,460,683
Net operating loss carryforward - Le Mars		683,979			1,271,411
Alternative minimum tax credit carryforward		—			7,357,733
Net state operating loss carryforward - DGI Parent		77,132,006			72,049,234
Net unrealized losses		713,549			1,213,836
Other		2,300,595			3,307,286

Total gross deferred tax assets		100,506,229			115,624,741
Less valuation allowance		(77,396,473	)		(72,490,012	)

Net deferred tax assets		23,109,756			43,134,729

Deferred tax liabilities:
Deferred policy acquisition costs		12,660,871			19,708,220
Other		3,320,042			4,383,096

Total gross deferred tax liabilities		15,980,913			24,091,316

Net deferred tax asset	$	7,128,843		$	19,043,413

We provide a valuation allowance when we believe it is more likely than not that we will not realize some portion of a deferred tax asset. At December 31, 2017 and 2016, we established a valuation allowance of $264,467 and $440,778, respectively, related to a portion of the net operating loss carryforward of Le Mars that we acquired on January 1, 2004 and a valuation allowance of $77.1 million and $72.0 million, respectively, for the net state operating loss carryforward of DGI. We determined that we were not required to establish a valuation allowance for the other net deferred tax assets of $23.1 million and $43.1 million at December 31, 2017 and 2016, respectively, since it is more likely than not that we will realize these deferred tax assets through reversals of existing temporary differences, future taxable income and our implementation of tax-planning strategies.

Tax years 2014 through 2017 remained open for examination by tax authorities at December 31, 2017. The net operating loss carryforward of $3.3 million of Le Mars will begin to expire in 2020 if not utilized and is subject to an annual limitation of approximately $376,000.