Taxes on Income

12 Months Ended

Dec. 31, 2015

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
	2015			2014			2013
Federal:
Current	$	(761,435	)	$	591,434		$	41,922
Deferred		180,235			(150,200	)		286,546
Total tax expense (benefit)	$	(581,200	)	$	441,234		$	328,468
State:
Current	$	8,960		$	8,910		$	8,953
Deferred		20,152			—			299,686
Total tax expense	$	29,112		$	8,910		$	308,639
Total:
Current	$	(752,475	)	$	600,344		$	50,875
Deferred		200,387			(150,200	)		586,232
Total tax expense (benefit)	$	(552,088	)	$	450,144		$	637,107

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
	2015			2014		2013
Computed income tax expense (benefit) at 34%	$	(589,886	)	$	440,812	$	421,863
Tax effect of:
State tax, net of federal tax benefit		18,900			6,018		204,221
Other		18,898			3,314		11,023
Income tax expense (benefit)	$	(552,088	)	$	450,144	$	637,107

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
	2015			2014
Deferred tax assets:
Discount on loss reserves	$	660,930		$	807,148
Unearned premium		1,248,509			1,158,568
Unearned commission income		438,337			402,566
Unearned policy fee income		359,775			355,000
State net operating loss carryforwards		1,384,171			1,133,946
Bad debt reserve		507,778			508,206
Other		307,406			310,774
Total gross deferred tax assets		4,906,906			4,676,208
Less valuation allowance		1,159,090			853,334
Total deferred tax assets	$	3,747,816		$	3,822,874
Deferred tax liabilities:
Policy acquisition costs	$	1,774,284		$	1,627,280
Unrealized gains (losses) on investments		(14,088	)		1,851
State tax on undistributed insurance company earnings		357,975			374,258
Federal tax liability on state deferred tax assets		174,514			189,771
Depreciation and amortization		121,044			111,180
Total deferred tax liabilities	$	2,413,729		$	2,304,340
Net deferred tax assets	$	1,334,087		$	1,518,534

The Company recognizes tax benefits related to positions taken, or expected to be taken, on a tax return only if it is more-likely-than-not that the positions are sustainable. Once this threshold has been met, the Company's measurement of its expected tax benefits is recognized in its consolidated 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, 2015, the Company has deferred tax assets of $1,384,171 generated from state net loss carryforwards. Of these state tax carryforwards, $177,847 expires between 2016 and 2017 and the remaining $1,206,324 expires between 2028 and 2035. The current state tax rate is 8.84%. As of December 31, 2015, the Company has a deferred tax asset valuation allowance related to state net operating losses in the amount of $1,159,090.

The valuation allowance is related to expected utilization of state tax net operating loss carryforwards to be realized prior to their expiration dates. The allowance increased $305,756 during the year ended December 31, 2015, compared to an increase of $204,042 during the year ended December 31, 2014.

The Company and its wholly owned subsidiaries file consolidated federal and state income tax returns. Pursuant to the tax allocation agreement, Crusader and AAC 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 2012 and California state income tax authorities for tax returns filed starting at taxable year 2011. 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 direct written premium in all states where Crusader is admitted. Premium taxes are deferred and amortized as the related premium is 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, 2015, 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.