Taxes on Income

12 Months Ended

Dec. 31, 2017

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
	2017			2016
Federal expense (benefit):
Current	$	—		$	(857,279	)
Deferred		(1,327,602	)		148,808
Total tax expense (benefit)	$	(1,327,602	)	$	(708,471	)
State expense (benefit):
Current	$	8,800		$	8,774
Deferred		163,565			(10,264	)
Total tax expense (benefit)	$	172,365		$	(1,490	)
Total expense (benefit):
Current	$	8,800		$	(848,505	)
Deferred		(1,164,037	)		138,544
Total tax expense (benefit)	$	(1,155,237	)	$	(709,961	)

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
	2017			2016
Computed income tax benefit at 34%	$	(3,359,275	)	$	(718,841	)
Tax effect of:
Impact of change in tax law		2,137,385			—
State tax expense (benefit), net of federal tax benefit		1,061			(990	)
Expired state net operating losses		117,379			—
Other		(51,787	)		9,870
Income tax benefit	$	(1,155,237	)	$	(709,961	)

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
	2017		2016
Deferred tax assets:
Discount on loss reserves	$	264,510	$	546,195
Unearned premium		794,461		1,340,027
Unearned commission income		360,443		469,730
Unearned policy fee income		212,419		347,792
Net operating loss carryforwards		2,746,927		—
State net operating loss carryforwards		1,258,753		1,463,188
Unrealized losses on investments		63,770		—
Bad debt reserve		334,705		507,448
Other		255,414		301,416
Total gross deferred tax assets		6,291,402		4,975,796
Less valuation allowance		1,258,753		1,264,627
Total deferred tax assets	$	5,032,649	$	3,711,169
Deferred tax liabilities:
Policy acquisition costs	$	1,036,477	$	1,859,491
Unrealized gains on investments		—		4,108
State tax on undistributed insurance company earnings		372,146		337,622
Federal tax liability on state deferred tax assets		96,368		167,585
Depreciation and amortization		146,852		165,017
Total deferred tax liabilities	$	1,651,843	$	2,533,823
Net deferred tax assets	$	3,380,806	$	1,177,346

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, 2017, the Company has $13,080,606 of federal net operating loss carryforwards that will begin to expire in 2035. As of December 31, 2017, the Company had deferred tax assets of $1,258,753 generated from state net operating loss carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. For the years ended December 31, 2017 and December 31, 2016, a valuation allowance was established in the amount of $1,258,753 and $1,264,627, respectively, as the Company does not expect to realize a tax benefit from its state net operating losses in future years. For the years ended December 31, 2017 and December 31, 2016 the amount of state net operating losses that expired were $1,209,784 and $802,062, respectively. The remaining $1,258,753 of state tax carryforwards, expire between 2028 and 2037. The current federal effected state tax rate is 6.98%.

TCJA, signed into law on December 22, 2017, reduced the corporate Federal income tax rate from 34% to 21%, effective for years beginning after December 31, 2017. As a result of the TCJA, the Company has recognized a decrease to its net deferred asset as of December 31, 2017 in the amount of $2,176,862. The Company has determined that no other changes are required to the deferred tax asset (liability), and the current income tax expense is unaffected by this change in the law.

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 2014 and California state income tax authorities for tax returns filed starting at taxable year 2013. 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, 2017, 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.