Taxes on Income

12 Months Ended

Dec. 31, 2019

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
	2019			2018
Federal expense (benefit):
Current	$	13,809		$	—
Deferred		(51,809	)		(727,333	)
Total tax benefit	$	(38,000	)	$	(727,333	)
State expense (benefit):
Current	$	8,800		$	8,800
Deferred		(104,987	)		(38,700	)
Total tax benefit	$	(96,187	)	$	(29,900	)
Total expense (benefit):
Current	$	22,609		$	8,800
Deferred		(156,796	)		(766,033	)
Total tax benefit	$	(134,187	)	$	(757,233	)

The income tax provision reflected in the Consolidated Statements of Operations is different than the expected federal income tax rate of 21% on income as shown in the following table:

	Year ended December 31
	2019			2018
Computed income tax benefit at 21%	$	(682,477	)	$	(824,626	)
Tax effect of:
State tax expense benefit, net of federal tax benefit		(139,765	)		(615,802	)
Change in valuation allowance – state net operating losses		63,777			592,181
Change in valuation allowance – federal		600,000			—
Deferred tax true up		289			63,481
Other, including nondeductible expenses		23,989			27,533
Income tax benefit	$	(134,187	)	$	(757,233	)

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

	Year ended December 31
	2019		2018
Deferred tax assets:
Discount on loss reserves	$	329,065	$	324,346
Unearned premium		747,217		671,792
Unearned commission income		432,969		388,099
Unearned policy fee income		145,533		166,565
Net operating loss carryforwards		4,145,783		3,515,221
State net operating loss carryforwards		1,931,665		1,850,934
Unrealized losses on investments		—		292,415
Bad debt reserve		336,075		340,688
Other		205,292		195,048
Total gross deferred tax assets		8,273,599		7,745,108
Less valuation allowance		2,531,665		1,850,934
Total deferred tax assets	$	5,741,934	$	5,894,174
Deferred tax liabilities:
Policy acquisition costs	$	892,349	$	867,652
State tax on undistributed insurance company earnings		343,735		392,802
Federal tax liability on state deferred tax assets		90,461		81,723
Depreciation and amortization		175,524		176,513
Unrealized gains on investments		314,433		—
Total deferred tax liabilities	$	1,816,502	$	1,518,690
Net deferred tax assets	$	3,925,432	$	4,375,484

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 federal and 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.

As of December 31, 2019, the Company has $19,741,828 of federal net operating loss carryforwards that will begin to expire in 2035. For the years ended December 31, 2019 and December 31, 2018, a valuation allowance on deferred tax assets generated from federal net operating losses was established in the amount of $600,000 and $0, respectively as the Company does not expect to realize that portion of the tax benefit from its federal net operating losses in the future.

As of December 31, 2019, the Company had deferred tax assets of $1,931,665 generated from state net operating loss carryforwards. The state tax carryforwards expire between 2028 and 2039. For the years ended December 31, 2019 and December 31, 2018, a valuation allowance on deferred tax assets generated from state net operating loss carryforwards was established in the amount of $1,931,665 and $1,850,934, respectively as the Company does not expect to realize a tax benefit from its state net operating losses in the future.

As a result of the Company’s analysis at December 31, 2019, the Company believes it is more likely than not that it will be able to utilize the net operating loss carryforwards, net of the valuation allowance, before they expire. Additionally, $4,106,936 of the net operating losses generated in 2019 and 2018 is subject to an indefinite carryforward period.

The current federal effected state tax rate is 6.98%.

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 2016 and California state income tax authorities for tax returns filed starting at taxable year 2015. 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, 2019, 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.