Note 5 - Income Tax Provision

3 Months Ended

Mar. 31, 2025

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note 5. Income Tax Provision

The Company uses the estimated effective tax rate ("ETR") method in computing the interim tax provision. Certain items, including those deemed unusual, infrequent, or that cannot be reliably estimated, are treated as discrete items and excluded from the estimated annual ETR ("AETR"). In these cases, the actual tax expense or benefit is reported in the same period as the related item. Certain tax effects are also not reflected in the AETR, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions and are recorded in the period in which the change occurs. The AETR is revised, as necessary, at the end of successive interim reporting periods.  

The Company's effective income tax rate was 14.0% for the three months ended March 31, 2025, compared with 18.1% for the same period in 2024. The ETR differs from the statutory rate of 21% primarily due to tax favored investments (i.e., tax-exempt interest and the dividends received deduction) offset by an increase the valuation allowance associated with capital loss carryforwards. The change in the ETR for the three months ended March 31, 2025 compared to the three months ended March 31, 2024 was due to the relationship of taxable income to consolidated pre-tax income (loss). The ETR differs for the three months ended March 31, 2025 from the full year-ended December 31, 2024 ETR of 11.5% due to the prior year release in valuation allowance associated with net operating losses and favorable prior period adjustments. 

The Company is required to evaluate the recoverability of its deferred tax assets and establish a valuation allowance, if necessary, to reduce its deferred tax asset to an amount that is more likely than not to be realizable. Considerable judgment and the use of estimates are required when determining whether a valuation allowance is necessary and, if so, the amount of such valuation allowance. When evaluating the need for a valuation allowance, the Company considers many factors, including: the nature and character of the deferred tax assets and liabilities; taxable income in prior carryback years; future reversals of temporary differences; the length of time carryovers can be utilized; and any tax planning strategies the Company would employ to avoid a tax benefit from expiring unused.

As of March 31, 2025, based on all available evidence, we concluded that a valuation allowance should remain on a portion of the deferred tax asset related to capital loss carryforwards that are not more-likely-than-not to be realized. For the three months ended March 31, 2025, the Company recorded an increase of $79K to the valuation allowance associated with capital loss carryforwards. The expense was recorded in the income tax expense. At March 31, 2025, and December 31, 2024, the Company has recorded a total valuation allowance of approximately $390,000 and $309,000, respectively, associated with the life insurance net operating losses subject to limitations under IRC section 382 and capital loss carryforwards.