NOTE 12 – INCOME TAXES

Significant components of the income tax provision are as follows for the periods presented (in thousands):

	For the years ended December 31,
	2015			2014			2013
Current:
Federal	$	61,830		$	47,245		$	28,508
State and local		7,402			7,877			5,708
Total current expense (benefit)		69,232			55,122			34,216
Deferred:
Federal		(775	)		(152	)		7,917
State and local		82			(354	)		(554	)
Total deferred expense (benefit)		(693	)		(506	)		7,363
Income tax expense	$	68,539		$	54,616		$	41,579

The following table reconciles the statutory federal income tax rate to the Company’s effective tax rate for the periods presented (in thousands):

	For the years ended December 31,
	2015			2014			2013
Expected provision at federal statutory tax rate		35.0	%		35.0	%		35.0	%
Increases (decreases) resulting from:
Disallowed meals & entertainment		0.2	%		0.4	%		0.4	%
Disallowed compensation		1.1	%		4.2	%		2.3	%
State income tax, net of federal tax benefit		3.4	%		3.6	%		3.6	%
Effect of change in rate		0.1	%		—			—
Other, net		(0.6	%)		(0.4	%)		—
Total income tax expense (benefit)		39.2	%		42.8	%		41.3	%

Deferred income taxes represent the temporary differences between the U.S. GAAP and tax basis of the Company’s assets and liabilities. The tax effects of temporary differences are as follows as of the dates presented (in thousands):

	As of December 31,
	2015			2014
Deferred income tax assets:
Unearned premiums	$	25,082		$	15,835
Advanced premiums		1,859			1,332
Unpaid losses and LAE		1,105			1,654
Regulatory assessments		31			111
Share-based compensation		5,535			520
Accrued wages		164			539
Allowance for uncollectible receivables		214			138
Additional tax basis of securities		51			53
Capital loss carryforwards		850			918
Other comprehensive income		2,521			1,152
Total deferred income tax assets		37,412			22,252
Deferred income tax liabilities:
Deferred policy acquisition costs, net		(22,969	)		(9,898	)
Prepaid expenses		(456	)		(504	)
Other		(75	)		—
Total deferred income tax liabilities		(23,500	)		(10,402	)
Net deferred income tax asset	$	13,912		$	11,850

At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. A valuation allowance would be based on all available information including the Company’s assessment of uncertain tax positions and projections of future taxable income from each tax-paying component in each jurisdiction, principally derived from business plans and available tax planning strategies. There are no valuation allowances as of December 31, 2015.

The deferred tax asset balance is analyzed regularly by management. Based on these analyses, the Company has determined that its deferred tax asset is recoverable. Projections of future taxable income or gains incorporate several assumptions of future business and operations that are apt to differ from actual experience. If, in the future, the Company’s assumptions and estimates that resulted in the forecast of future taxable income or gains for each tax-paying component prove to be incorrect, a valuation allowance may be required.

The Company has adopted ASC 740-10-05, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740 provides a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company’s policy is to classify interest and penalties related to unrecognized tax positions in its provision for income taxes. As of December 31, 2015, 2014 and 2013, we have determined that no uncertain tax liabilities are required.

The Company filed a consolidated federal income tax return for the fiscal years ended December 31, 2014, 2013 and 2012 and intends to file the same for the year ended December 31, 2015. The tax allocation agreement between the Company and the Insurance Entities provide that they will incur income taxes based on a computation of taxes as if they were stand-alone taxpayers. The computations are made utilizing the financial statements of the Insurance Entities prepared on a statutory basis of accounting and prior to consolidating entries which include the conversion of certain balances and transactions of the statutory financial statements to a U.S. GAAP basis.

During 2015, the Company amended its 2010 federal tax return which resulted in a decrease to the 2013 Capital Loss carryforward of approximately $5.6 million. The Company had subsequently amended its 2009 federal tax return to carryback its 2012 Capital Loss carryforward resulting in a refund of approximately $5.7 million.

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company’s 2012 through 2014 tax years are still subject to examination in the U.S. Various state jurisdiction tax years remain open to examination. The Company received notice from the IRS Joint Committee on Taxation that it has completed its consideration of the audit relating to the loss carryback of realized losses from securities sold during 2012 and applied to 2009. The IRS Joint Committee on Taxation has taken no exception to the conclusion reached by the Internal Revenue Service, the result of which yielded no material change.