Taxes on Income

12 Months Ended

Dec. 31, 2013

Notes to Financial Statements

Taxes on Income

NOTE 16 - TAXES ON INCOME

The provision for taxes on income consists of the following:

	Year ended December 31
	2013		2012			2011
Federal:
Current	$	41,922	$	959,935		$	1,670,957
Deferred		286,546		60,600			276,145
Total	$	328,468	$	1,020,535		$	1,947,102
State:
Current	$	8,953	$	8,949		$	8,982
Deferred		299,686		(128,176	)		54,208
Total	$	308,639	$	(119,227	)	$	63,190
Total:
Current	$	50,875	$	968,884		$	1,679,939
Deferred		586,232		(67,576	)		330,353
Total	$	637,107	$	901,308		$	2,010,292

The income tax provision reflected in the consolidated statements of operations is different than the expected federal income tax rate of 34% on income as shown in the following table:

	Year ended December 31
	2013		2012			2011
Computed income tax expense at 34%	$	421,863	$	970,711		$	1,955,058
Tax effect of:
State tax, net of federal tax benefit		204,221		(78,259	)		41,233
Other		11,023		8,856			14,001
Income tax expense	$	637,107	$	901,308		$	2,010,292

The Company recognizes deferred income tax assets and liabilities for the expected future tax effects attributable to temporary differences between the financial statement and tax return bases of assets and liabilities, and expected benefits of utilizing net operating loss carryforwards, based on enacted tax rates and other provisions of the tax law. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period in which such change is enacted. Deferred tax assets are reduced by a valuation allowance if it is more-likely-than-not that any portion of the deferred tax assets may not be realized. The ultimate realization of deferred tax assets is dependent upon generating sufficient taxable income of the appropriate character within the carryback and carryforward periods available under the tax law. Management considers the reversal of deferred tax liabilities, projected future taxable income of an appropriate nature, and tax planning strategies in making this assessment. The Company increased its valuation allowance related to deferred tax assets on state net operating losses. Although realization is not assured, management believes that it is more likely-than-not that the Company’s remaining net deferred tax assets will be realized.

Significant components of the Company’s net deferred tax assets and liabilities are as follows:

	Year ended December 31
	2013			2012
Deferred tax assets
Discount on loss reserves	$	871,495		$	1,241,447
Unearned premiums		1,056,093			1,104,384
Unearned commission income		369,882			388,624
Unearned policy fee income		344,176			365,007
State net operating loss carryforwards		953,595			771,172
Bad debt reserve		401,856			430,944
Other		184,333			108,761
Total gross deferred tax assets		4,181,430			4,410,339
Less valuation allowance		649,292			223,423
Net deferred tax assets	$	3,532,138		$	4,186,916
Deferred tax liabilities
Policy acquisition costs	$	1,525,962		$	1,588,442
Unrealized gains (losses) on investments		(2,977	)		62,489
State tax on undistributed insurance company earnings		357,669			337,112
Federal tax liability on state deferred tax assets		181,210			275,514
Depreciation and amortization		97,114			32,430
Total gross deferred tax liabilities	$	2,158,978		$	2,295,987
Net deferred tax assets	$	1,373,160		$	1,893,929

The Company recognizes tax benefits related to positions taken, or expected to be taken, on a tax return only if, “more-likely-than-not” the positions are sustainable. Once this threshold has been met, the Company's measurement of its expected tax benefits is recognized in its financial statements. If the Company determines after a review of its anticipated future taxable income, and all other available evidence, both positive and negative, that it “is more-likely-than-not” that any of its deferred tax assets will not result in future tax benefits, a valuation allowance is established for the portion of these assets that are not expected to be realized.

As of December 31, 2013, the Company has deferred tax assets of $953,595 generated from state net loss carryforwards. Of these state tax carryforwards, $176,470 expires between 2016 and 2017, and the remaining $771,125 expires between 2028 and 2033. The current state tax rate is 8.84%. As of December 31, 2013, the Company has a deferred tax asset valuation allowance related to state net operating losses in the amount of $649,292.

The net increase in the state deferred tax asset valuation allowance in 2013 of $243,446 was related to the revaluation of the expected utilization of state tax net operating loss carryforwards to be realized prior to their expiration dates.

The Company and its wholly owned subsidiaries file consolidated federal and state income tax returns. Pursuant to the tax allocation agreement, Crusader Insurance Company and American Acceptance Corporation are allocated taxes or tax credits in the case of losses, at current corporate rates based on their own taxable income or loss. The Company files income tax returns under U.S. federal and various state jurisdictions. The Company is subject to examination by U.S. federal income tax authorities for tax returns filed starting at taxable year 2010 and California state income tax authorities for tax returns filed starting at taxable year 2009. There are no ongoing examinations of income tax returns by federal or state tax authorities.

As a California insurance company, Crusader is obligated to pay a premium tax on gross premiums written in all states that Crusader is admitted. Premium taxes are deferred and amortized as the related premiums are earned. The premium tax is in lieu of state franchise taxes and is not included in the provision for state taxes.

As of December 31, 2013, the Company had no unrecognized tax benefits and no unrecognized additional liabilities or reduction in deferred tax asset. In addition, the Company had not accrued interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.