Income taxes

12 Months Ended

Dec. 31, 2019

Income taxes. In 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. As a result, 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. In 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.

Effective January 1, 2018, the Company adopted ASU 2018-02, Income Statement - Reporting Comprehensive Income, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provided a one-time option to reclassify the stranded tax effects of the 2017 Act from AOCI directly to retained earnings. The stranded tax effects resulted from the remeasurement of deferred tax assets and liabilities which were originally recorded in comprehensive income but whose remeasurement is reflected in the income statement. The Company reclassified $1.0 million of net tax expense from AOCI to retained earnings in the 2018 consolidated statement of equity as a result of the adoption.

Income tax expense consists of the following:



	2019	2018		2017
	($000 omitted)
Current income tax expense:
Federal	12,329	5,540		1,154
State	846	1,089		814
Foreign	4,851	6,622		4,625
	18,026	13,251		6,593
Deferred income tax expense (benefit):
Federal	6,631	43		4,088
State	150	(864	)	(254	)
Foreign	1,888	1,077		4,494
	8,669	256		8,328
Total income tax expense	26,695	13,507		14,921

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



	2019		2018		2017
	($000 omitted)
Expected income tax expense at 21% in 2019 and 2018 and 35% in 2017 ⁽¹⁾	22,116		12,816		22,253
Nondeductible expenses	3,249		1,872		2,610
Valuation allowance	1,326		1,741		—
Net expense (benefit) for the Canadian branch ⁽²⁾	613		128		(1,480	)
Return-to-provision and true-up adjustments	(776	)	(370	)	923
Research and development credits	(278	)	(732	)	(2,158	)
2017 Act impact from the U.S. corporate tax rate change	—		(745	)	(7,196	)
2017 Act impact from deemed repatriation of deferred foreign income	—		(624	)	1,213
Other – net ⁽³⁾	445		(579	)	(1,244	)
Income tax expense	26,695		13,507		14,921
Effective income tax rate ⁽¹⁾	25.3	%	22.1	%	23.5	%

⁽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.



	2019		2018
	($000 omitted)
Deferred tax assets:
Accrued expenses	18,290		16,013
Federal offset to Canadian deferred tax liability	7,961		6,618
Net operating loss (NOL) carryforwards	7,017		6,936
Tax credit carryforwards	2,230		1,477
Foreign currency translation adjustments	1,765		3,194
Allowance for uncollectible amounts	983		1,023
Net unrealized losses on investments in securities	621		1,205
Investments	424		857
Capitalized expenses	—		2,356
Other	1,370		1,235
Deferred tax assets – gross	40,661		40,914
Valuation allowance	(4,056	)	(3,824	)
Deferred tax assets – net	36,605		37,090
Deferred tax liabilities:
Title loss provisions	(29,704	)	(21,936	)
Amortization – goodwill and other intangibles	(22,379	)	(19,891	)
Net unrealized gains on investments in securities	(4,218	)	—
Deferred compensation on life insurance policies	(2,202	)	(2,029	)
Fixed assets	(1,997	)	(1,917	)
Other	(417	)	(956	)
Deferred tax liabilities – gross	(60,917	)	(46,729	)
Net deferred income tax liability	(24,312	)	(9,639	)

At December 31, 2019, the Company had $2.2 million of foreign tax credit carryforwards that will begin to expire in 2028. The future utilization of these credit carryforwards is subject to various limitations. The Company's $7.0 million of deferred tax assets relating to NOL carryforwards include losses from various states and will expire in varying amounts from 2020 through 2039, and foreign losses which will expire in varying amounts from 2020 through 2023 or have unlimited carryforward periods. The future utilization of all NOL carryforwards is subject to various limitations.

The Company's valuation allowance at December 31, 2019 relates primarily to all foreign tax credit carryforwards and certain state and foreign NOL carryforwards which the Company believes are not more-likely-than-not to 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. In 2019, the IRS closed the 2015 U.S. federal tax return examination with no changes. At December 31, 2019, the Company’s 2016 through 2018 U.S. federal income tax returns and 2015 through 2018 Canadian income tax returns remain subject to examination. The Company is involved in routine examinations by state tax jurisdictions for calendar years 2010 through 2013 and remains subject to examination for 2015 through 2018 tax returns. The Company expects no material adjustments from any ongoing tax return examinations.