Income Taxes

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

Income Taxes

The Company files a consolidated U.S. Federal Income Tax return that includes all wholly-owned subsidiaries. State tax returns are filed on a consolidated or separate basis depending on applicable laws. The company records adjustments related to prior year’s taxes during the period when they are identified, generally when the tax returns are filed.   The effect of these adjustments on the current and prior periods (during which the differences originated) is evaluated based upon quantitative and qualitative factors and are considered in relation to the financial statements taken as a whole for the respective periods. The Company has evaluated this year’s amounts in relation to the current and prior reporting periods and determined that a restatement of those prior reporting periods is not appropriate. The Company’s effective tax rate from continuing operations for the nine months and three months ended September 30, 2011 was 24.1% and 41.9%, respectively. A reconciliation of the Federal statutory rate to our effective rate from continuing operations is as follows:

	For the Three Months Ended										For the Nine Months Ended
	September 30,										September 30,
	2011					2010					2011					2010
Computed expected tax expense	$	51,003		34.0	%	$	117,025		34.0	%	$	501,775		34.0	%	$	458,036	34.0	%
State taxes, net of Federal benefit		(10,225	)	(6.8	)		10,164		3.0			(24,976	)	(1.7	)		24,932	1.9
Permanent differences		(70,835	)	(47.2	)		(12,773	)	2.6			(88,153	)	(6.0	)		46,756	4.5
True-up of prior year taxes		(72,960	)	(48.6	)		—		—			(50,886	)	(3.5	)		—	—
Other		33,458		22.3			13,862		(2.3	)		17,926		1.2			34,664	1.6
Total tax	$	(69,559	)	(46.4	)%	$	128,278		37.3	%	$	355,686		24.1	%	$	564,388	41.9	%

Deferred tax assets and liabilities are determined using the enacted tax rates applicable to the period the temporary differences are expected to be recovered. Accordingly, the current period income tax provision can be affected by the enactment of new tax rates. The net deferred income taxes on the balance sheet reflect temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and income tax purposes, tax effected at a various rates depending on whether the temporary differences are subject to Federal taxes, State taxes, or both. Significant components of the Company’s deferred tax assets and liabilities are as follows:

	September 30,	December 31,
	2011	2010
	(unaudited)
Deferred tax asset:
Net operating loss carryovers	$            383,403	$           253,564
Claims reserve discount	247,454	188,074
Unearned premium	664,933	551,966
Loss and loss adjustment expenses	-	39,100
Reinsurance recoverable	-	13,600
Deferred ceding commission revenue	1,311,659	1,094,634
Accrued expenses	-	56,800
Other	47,447	-
Total deferred tax assets	2,654,896	2,197,738
Deferred tax liability:
Investment in KICO	1,169,000	1,169,000
Deferred acquisition costs	1,501,119	1,230,460
Intangibles	1,285,064	1,406,371
Depreciation and amortization	195,443	204,287
Reinsurance recoverable	20,400	-
Net unrealized appreciation of securities - available for sale	108,730	109,497
Investment income	27,864	42,348
Other	-	34,332
Total deferred tax liabilities	4,307,620	4,196,295
Net deferred income tax liability	$        (1,652,724)	$      (1,998,557)

Under GAAP guidance for the “Accounting for Uncertainty in Income Taxes”, the Company had no material unrecognized tax benefit and no adjustments to liabilities or operations were required. Additionally, Accounting for Uncertainty in Income Taxes, provides guidance on the recognition of interest and penalties related to income taxes. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the nine months and three months ended September 30, 2011 and 2010. If any had been recognized these would be reported in income tax expense.

IRS Tax Audit

In July 2011, the Company received a notice that its Federal income tax return for the year ended December 31, 2009 has been selected for examination by the Internal Revenue Service. The audit commenced in September 2011. The final results of this audit are unknown, although management is confident in the tax assertions made in the tax return.