(9) Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

(9) Income Taxes

(9) Income Taxes

Income taxes consist of the following: 

	Year Ended December 31,
	2021		2020			2019
	(In thousands)
Current federal tax expense	$	8,992	$	(23,576	)	$	(574	)
Current state tax expense		2,845		472			105
Deferred federal tax expense		3,012		18,937			2,759
Deferred state tax expense		3,373		2,610			1,466
Income tax expense	$	18,222	$	(1,557	)	$	3,756

Income tax expense for the years ended December 31, 2021, 2020 and 2019 differs from the amount determined by applying the statutory federal rate to income before income taxes as follows: 

	Year Ended December 31,
	2021			2020			2019
	(In thousands)
Expense at federal tax rate	$	13,807		$	4,225		$	1,924
State taxes, net of federal income tax effect		3,974			1,505			1,027
Stock-based compensation		(947	)		35			169
Non-deductible expenses		1,129			974			856
Net operating loss carryback		(1,694	)		(9,435	)		–
Effect of change in tax rate		–			–			–
Accounting method change		–			–			–
Other		1,953			1,139			(220	)
	$	18,222		$	(1,557	)	$	3,756

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was adopted, providing wide ranging economic relief for individuals and businesses. One component of the CARES Act provides the Company with an opportunity to carry back net operating losses (“NOLs”) arising from 2018, 2019 and 2020 to the prior five tax years. The Company has such NOLs reflected on its balance sheet as a portion of deferred tax assets. The Company has previously valued its NOLs at the federal corporate income tax rate of 21%. However, the provisions of the CARES Act provide for NOL carryback claims to be calculated based on a rate of 35%, which was the federal corporate tax rate in effect for the carryback years. Consequently, the Company has revalued the benefit from its NOLs to reflect a 35% tax rate. The result of the revaluation of NOLs and other tax adjustments is a net tax benefit reflected in income taxes of $680,000 and $8.8 million respectively, for the years ended December 31, 2021 and 2020.

The tax effected cumulative temporary differences that give rise to deferred tax assets and liabilities as of December 31, 2021 and 2020 are as follows: 

	December 31,
	2021			2020
		(In thousands)
Deferred Tax Assets:
Finance receivables	$	10,644		$	10,930
Accrued liabilities		1,694			541
NOL carryforwards		2,070			7,470
Built in losses		2,679			3,312
Pension accrual		–			1,745
Stock compensation		3,584			4,463
Lease liability		2,737			3,843
Other		–			46
Total deferred tax assets		23,408			32,350
Deferred Tax Liabilities:
Finance receivables	$	–		$	–
Deferred loan costs		–			(205	)
Pension accrual		(1,026	)		–
Lease right-of-use assets		(2,487	)		(3,517	)
Furniture and equipment and other		(320	)		(116	)
Total deferred tax liabilities		(3,833	)		(3,838	)
Net deferred tax asset	$	19,575		$	28,512

We acquired certain net operating losses and built-in loss assets as part of our acquisitions of MFN Financial Corp. (“MFN”) in 2002 and TFC Enterprises, Inc. (“TFC”) in 2003. Moreover, both MFN and TFC have undergone an ownership change for purposes of Internal Revenue Code (“IRC”) Section 382. In general, IRC Section 382 imposes an annual limitation on the ability of a loss corporation (that is, a corporation with a net operating loss (“NOL”) carryforward, credit carryforward, or certain built-in losses (“BILs”)) to utilize its pre-change NOL carryforwards or BILs to offset taxable income arising after an ownership change.

In determining the possible future realization of deferred tax assets, we have considered future taxable income from the following sources: (a) reversal of taxable temporary differences; and (b) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into years in which net operating losses might otherwise expire.

Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not. A valuation allowance is recognized for a deferred tax asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. In making such judgements, significant weight is given to evidence that can be objectively verified. Although realization is not assured, we believe that the realization of the recognized net deferred tax asset of $19.6 million as of December 31, 2021 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of $19.6 million consists of approximately $12.2 million of net U.S. federal deferred tax assets and $7.4 million of net state deferred tax assets.

As of December 31, 2021, we had net operating loss carryforwards for state income tax purposes of $42.4 million. These state net operating losses begin to expire in 2024.

We recognize a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. We recognize potential interest and penalties related to unrecognized tax benefits as income tax expense. At December 31, 2021, we had no unrecognized tax benefits for uncertain tax positions.

We are subject to taxation in the US and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2018.