Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

11 - Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“ the 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 generated sufficient taxable income in 2019 to fully utilize this alternative minimum tax credit carryforward.

Our provision for income tax expense (benefit) for 2019, 2018 and 2017 consisted of the following:

	2019		2018			2017
Current federal income tax	$	8,454,358	$	(11,296,704	)	$	(2,139,061	)
Deferred federal income tax		649,928		(4,179,805	)		7,137,423
Federal income tax expense (benefit)	$	9,104,286	$	(15,476,509	)	$	4,998,362
Pennsylvania income tax		825,000		—			—
Income tax expense (benefit)	$	9,929,286	$	(15,476,509	)	$	4,998,362

Our effective tax rate is different from the amount computed at the statutory federal rate of 21% for 2019 and 2018 and 35% for 2017. The reasons for such difference and the related tax effects are as follows:

	2019			2018			2017
Income (loss) before income taxes	$	57,081,030		$	(48,236,849	)	$	12,114,462
Computed “expected” taxes		11,987,016			(10,129,738	)		4,240,062
Tax-exempt interest		(1,325,197	)		(1,521,090	)		(3,241,530	)
Proration		357,044			405,204			518,948
Effect of tax reform		—			—			4,752,547
Dividends received deduction		(1,913,238	)		(99,726	)		(508,409	)
Net operating loss carryback		—			(4,210,523	)		—
Tax benefit on exercise of options		(64,765	)		(25,938	)		(873,515	)
Other, net		236,676			105,302			110,259
Pennsylvania income tax, net of federal benefit		651,750			—			—
Income tax expense (benefit)	$	9,929,286		$	(15,476,509	)	$	4,998,362

The tax effects of temporary differences that give rise to significant portions of our deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are as follows:

	2019			2018
Deferred tax assets:
Unearned premium	$	15,482,366		$	15,634,433
Loss reserves		7,820,683			7,644,415
Net operating loss carryforward		200,942			3,090,010
Net state operating loss carryforward—DGI Parent		7,519,991			8,070,196
Net unrealized losses		—			3,782,145
Other		2,603,155			2,517,791
Total gross deferred tax assets		33,627,137			40,738,990
Less valuation allowance		(7,538,024	)		(8,334,663	)
Net deferred tax assets		26,089,113			32,404,327
Deferred tax liabilities:
Deferred policy acquisition costs		12,449,820			12,729,176
Loss reserve transition adjustment		1,733,056			2,339,068
Other		3,391,926			4,266,328
Total gross deferred tax liabilities		17,574,802			19,334,572
Net deferred tax asset	$	8,514,311		$	13,069,755

We recorded a net operating loss carryforward for the portion of our taxable loss for 2018 that exceeded our taxable income in 2016 and 2017. We utilized the full net operating loss carryforward in 2019. We also recorded a loss reserve transition adjustment in 2018 related to changes the TCJA required with respect to the calculation of loss reserve discounting. Pursuant to the provisions of the TCJA, we will include the loss reserve transition adjustment in our taxable income over eight years beginning in 2018.

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, 2019 and 2018, we established a valuation allowance of $18,033 and $264,467, 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 $7.5 million and $8.1 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 $26.1 million and $32.4 million at December 31, 2019 and 2018, 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 2016 through 2019 remained open for examination by tax authorities at December 31, 2019. The net operating loss carryforward of $956,865 of Le Mars will begin to expire in 2020 if not utilized and is subject to an annual limitation of approximately $376,000.