Income taxes. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the 2017 Act), which revised the U.S. corporate income tax regime by, among other things, lowering the corporate tax rate from 35% to 21% effective on January 1, 2018 and imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. In accordance with ASC 740, Income Taxes, changes in tax rates and tax laws are accounted for in the period of enactment, and the resulting effects are recorded as discrete components of the income tax provision related to continuing operations in the same period. Also on December 22, 2017, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 118 (SAB 118), which provided guidance on accounting for the tax effects of the 2017 Act. SAB 118 provided a measurement period that should not extend beyond one year from the enactment date of the 2017 Act for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the 2017 Act for which the accounting under ASC 740 is complete. To the extent that accounting for certain income tax effects of the 2017 Act is incomplete but a reasonable estimate is determinable, a provisional estimate must be recorded in the financial statements.

Based on the Company's best estimates and available information related to the effects of the 2017 Act, the Company recorded provisional amounts in 2017 that included (i) net income tax benefits of $7.8 million, consisting of a $7.2 million federal benefit and a $0.6 million state benefit, related to the remeasurement of deferred tax assets and liabilities and (ii) an income tax expense of $1.2 million related to the transition tax on deemed repatriation of deferred foreign income.

During 2018, the Company completed its determination of the tax effects of the 2017 Act and recorded an additional $0.8 million of federal and state income tax benefits related to the remeasurement of deferred tax assets and liabilities and $0.6 million of reduced income tax expense related to the one-time deemed repatriation.

The 2017 Act also changed the manner in which statutory premium reserves are discounted for tax purposes for post-2017 tax years. During the fourth quarter 2018, the Internal Revenue Service (IRS) and the U.S. Treasury Department issued proposed guidance, which the Company is currently evaluating. The Company expects to finalize its evaluation and calculations in 2019, which are anticipated to result in temporary book-tax differences and not impact total tax expense or the annual effective tax rate.

Income tax expense consists of the following:



	2018		2017		2016
	($000 omitted)
Current income tax expense:
Federal	5,540		1,154		4,718
State	1,089		814		1,447
Foreign	6,622		4,625		5,983
	13,251		6,593		12,148
Deferred income tax expense (benefit):
Federal	43		4,088		6,262
State	(864	)	(254	)	(1,347	)
Foreign	1,077		4,494		2,542
	256		8,328		7,457
Total income tax expense	13,507		14,921		19,605

The following reconciles income tax expense computed at the federal statutory rate with income tax expense as reported:



	2018		2017		2016
	($000 omitted)
Expected income tax expense at 21% in 2018 and 35% in 2017 and 2016 ⁽¹⁾	12,816		22,253		26,279
Nondeductible expenses	1,872		2,610		2,772
Valuation allowance	1,741		—		—
2017 Act impact from the U.S. corporate tax rate change	(745	)	(7,196	)	—
Research and development credits	(732	)	(2,158	)	(3,434	)
2017 Act impact from deemed repatriation of deferred foreign income	(624	)	1,213		—
Return-to-provision and true-up adjustments	(370	)	923		(4,127	)
Net expense (benefit) for the Canadian branch ⁽²⁾	128		(1,480	)	(639	)
Other – net ⁽³⁾	(579	)	(1,244	)	(1,246	)
Income tax expense	13,507		14,921		19,605
Effective income tax rate ⁽¹⁾	22.1	%	23.5	%	26.1	%

⁽¹⁾Calculated using income before taxes and after noncontrolling interests.

⁽²⁾For U.S. income tax purposes, the Company’s Canadian operation is a branch of Guaranty. As a result, the Canadian net deferred tax liability is offset in the U.S. as a deferred tax asset but not in an equal amount given differing tax rates in Canada and the U.S.

⁽³⁾Included within this line are $0.1 million and $0.6 million, respectively, of 2018 and 2017 net income tax benefits from the remeasurement of the state deferred tax assets and liabilities relating to the 2017 Act.

Deferred tax assets and liabilities resulting from the same tax jurisdiction are netted and presented as either an asset or liability on the consolidated balance sheets. Deferred tax assets and liabilities resulting from different tax jurisdictions are not netted. Deferred tax assets and liabilities as of December 31 are detailed below.



	2018		2017
	($000 omitted)
Deferred tax assets:
Accrued expenses	16,013		14,435
Net operating loss (NOL) carryforwards	6,936		6,483
Federal offset to Canadian deferred tax liability	6,618		6,300
Foreign currency translation adjustments	3,194		925
Capitalized expenses	2,356		384
Tax credit carryforwards	1,477		1
Net unrealized losses on investments	1,205		—
Allowance for uncollectible amounts	1,023		1,133
Investments	857		894
Other	1,235		327
Deferred tax assets – gross	40,914		30,882
Valuation allowance	(3,824	)	(2,231	)
Deferred tax assets – net	37,090		28,651
Deferred tax liabilities:
Title loss provisions	(21,936	)	(17,889	)
Amortization – goodwill and other intangibles	(19,891	)	(18,155	)
Deferred compensation on life insurance policies	(2,029	)	(2,278	)
Fixed assets	(1,917	)	(1,968	)
Net unrealized gains on investments	—		(1,826	)
Other	(956	)	(1,383	)
Deferred tax liabilities – gross	(46,729	)	(43,499	)
Net deferred income tax liability	(9,639	)	(14,848	)

At December 31, 2018 and 2017, net deferred tax liabilities for U.S. federal tax paying components totaled approximately $2.0 million and $7.7 million, respectively, and net deferred tax liabilities for foreign tax paying components totaled approximately $7.6 million and $7.1 million, respectively. The net increase (decrease) to the valuation allowance during 2018 and 2017 was $1.6 million and $(0.2) million, respectively.

At December 31, 2018, the Company had $1.5 million of foreign tax credit carryforwards that will expire in 2028, if not utilized. The future utilization of these credit carryforwards is subject to various limitations. The Company's $6.9 million of deferred tax assets relating to NOL carryforwards include certain state amounts which will expire in varying amounts from 2019 through 2038, and foreign amounts which will expire in varying amounts from 2019 through 2023 or have unlimited carryforward periods. The future utilization of all NOL carryforwards is subject to various limitations.

The Company's $3.8 million valuation allowance at December 31, 2018 relates principally to all foreign tax credit carryforwards and certain state and foreign NOL carryforwards that the Company believes is more-likely-than-not will not be utilized prior to expiration.

The Company’s income tax returns are routinely subject to examinations by U.S. federal, foreign, and state and local tax authorities. During 2018, the Company was notified by the IRS that its 2015 U.S. federal tax return was selected for examination. At December 31, 2018, the Company’s 2016 and 2017 U.S. federal income tax returns and 2014 through 2017 Canadian income tax returns remain subject to examination by the IRS and the Canada Revenue Agency, respectively. The Company plans to file its 2018 U.S. federal income tax return during September and its 2018 Canadian income tax return during June. The Company is involved in routine examinations by state and local tax jurisdictions for calendar years 2010 through 2013. The Company expects no material adjustments from any ongoing tax return examinations.