Taxes on Income

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Taxes on Income

NOTE 17 - TAXES ON INCOME

The provision for taxes on income consists of the following:

	Year ended December 31
	2016			2015			2014
Federal:
Current	$	(857,279	)	$	(761,435	)	$	591,434
Deferred		148,808			180,235			(150,200	)
Total tax expense (benefit)	$	(708,471	)	$	(581,200	)	$	441,234
State:
Current	$	8,774		$	8,960		$	8,910
Deferred		(10,264	)		20,152			—
Total tax expense (benefit)	$	(1,490	)	$	29,112		$	8,910
Total:
Current	$	(848,505	)	$	(752,475	)	$	600,344
Deferred		138,544			200,387			(150,200	)
Total tax expense (benefit)	$	(709,961	)	$	(552,088	)	$	450,144

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
	2016			2015			2014
Computed income tax expense (benefit) at 34%	$	(718,841	)	$	(589,886	)	$	440,812
Tax effect of:
State tax expense (benefit), net of federal tax benefit		(990	)		18,900			6,018
Other		9,870			18,898			3,314
Income tax expense (benefit)	$	(709,961	)	$	(552,088	)	$	450,144

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
	2016		2015
Deferred tax assets:
Discount on loss reserves	$	546,195	$	660,930
Unearned premium		1,340,027		1,248,509
Unearned commission income		469,730		438,337
Unearned policy fee income		347,792		359,775
State net operating loss carryforwards		1,463,188		1,384,171
Bad debt reserve		507,448		507,778
Other		301,416		307,406
Total gross deferred tax assets		4,975,796		4,906,906
Less valuation allowance		1,264,627		1,159,090
Total deferred tax assets	$	3,711,169	$	3,747,816
Deferred tax liabilities:
Policy acquisition costs	$	1,859,491	$	1,774,284
Unrealized gains (losses) on investments		4,108		(14,088	)
State tax on undistributed insurance company earnings		337,622		357,975
Federal tax liability on state deferred tax assets		167,585		174,514
Depreciation and amortization		165,017		121,044
Total deferred tax liabilities	$	2,533,823	$	2,413,729
Net deferred tax assets	$	1,177,346	$	1,334,087

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, 2016, the Company has deferred tax assets of $1,463,188 generated from state net operating loss carryforwards. The increase in the current year in the deferred tax assets from net operating loss carry forwards of $79,017 is the result of current year net operating losses of $149,919, reduced by the expiration of 2006 tax year net operating loss carry forward of $70,902. The expiring net operating loss carry forward was applied to the valuation allowance. Of $1,463,188 state tax carryforwards current balance, $274,066 expire between 2017 and 2018 and the remaining $1,189,122 expire between 2028 and 2036. The current state tax rate is 8.84%. As of December 31, 2016, the Company has a deferred tax asset valuation allowance related to state net operating losses in the amount of $1,264,627.

The current valuation allowance is related to expected utilization of state tax net operating loss carryforwards to be realized prior to their expiration dates. The net increase to the valuation allowance during the year ended December 31, 2016, was $105,537 and included an increase of $176,440 to the reserve allowance offset by a decrease in the allowance of $70,902 due to expiration of the 2006 net operating loss carryforward that was applied to the valuation allowance. This compares to an increase in the valuation allowance of $305,756 during the year ended December 31, 2015.

The Company and its 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 2013 and California state income tax authorities for tax returns filed starting at taxable year 2012. 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, 2016, the Company had no unrecognized tax benefits, no unrecognized additional liabilities or reduction in deferred tax asset, and no uncertain tax positions. 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.