10. Income Taxes

9 Months Ended

Sep. 30, 2012

Income Tax Disclosure [Abstract]

10. 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 years’ 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, 2012 was 33.0% and 30.6%, respectively. The Company’s effective tax rate from continuing operations for the nine months and three months ended September 30, 2011 was 24.1% and (46.4)%, 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,
	2012					2011					2012					2011
Computed expected tax expense	$	447,491		34.0	%	$	51,003		34.0	%	$	1,136,779		34.0	%	$	501,775		34.0	%
State taxes, net of Federal benefit		9,754		0.7			(10,225	)	(6.8	)		55,553		1.7			(24,976	)	(1.7	)
Permanent differences
Dividends received deduction		(10,386	)	(0.8	)		(18,782	)	(12.5	)		(46,963	)	(1.4	)		(25,911	)	(1.8	)
Non-taxable investment income		(15,781	)	(1.2	)		(16,449	)	(11.0	)		(49,590	)	(1.5	)		(62,992	)	(4.3	)
Stock-based compensation
expense		3,065		0.2			7,284		4.9			13,302		0.4			29,094		2.0
Other permanent differences		6,287		0.5			(42,889	)	(28.6	)		18,568		0.6			(28,344	)	(1.9	)
Prior year tax matters		(32,456	)	(2.5	)		(72,960	)	(48.6	)		(32,456	)	(1.0	)		(50,886	)	(3.5	)
Other		(5,812	)	(0.4	)		33,458		22.3			8,554		0.3			17,926		1.2
Total tax	$	402,162		30.6	%	$	(69,560	)	(46.4	)  %	$	1,103,747		33.0	%	$	355,686		24.1	%

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,
	2012			2011
	(unaudited)
Deferred tax asset:
Net operating loss carryovers (1)	$	264,648		$	276,312
Claims reserve discount		275,543			220,354
Unearned premium		735,723			647,596
Deferred ceding commission revenue		1,585,172			1,354,016
Other		13,721			4,583
Total deferred tax assets		2,874,807			2,502,861
Deferred tax liability:
Investment in KICO (2)		1,169,000			1,169,000
Deferred acquisition costs		1,835,200			1,542,163
Intangibles		1,123,321			1,244,628
Depreciation and amortization		136,117			133,411
Reinsurance recoverable		20,400			20,400
Net unrealized appreciation of securities - available for sale		601,891			172,155
Investment income		-			10,543
Total deferred tax liabilities		4,885,929			4,292,300
Net deferred income tax liability	$	(2,011,122	)	$	(1,789,439	)

(1)   The deferred tax assets from net operating loss carryovers are as follows:

(A) Kingstone generates operating losses for state purposes and has prior year net operating loss carryovers available. KICO, the Company’s insurance underwriting subsidiary, is not subject to state income taxes. KICO’s state tax obligations are paid through a gross premiums tax which is included in the Condensed Consolidated Statements of Comprehensive Income within other underwriting expenses. A valuation allowance has been recorded due to the uncertainty of generating enough state taxable income to utilize 100% of the available state net operating loss carryovers over their remaining lives which expire between 2022 and 2027.

(B) NOL is subject to Internal Revenue Code Section 382, which places a limitation on the utilization of the federal net operating loss to approximately $10,000 per year (“Annual Limitation”) as a result of a greater than 50% ownership change of the Company in 1999. The losses subject to the Annual Limitation will be available for future years, expiring through December 31, 2019.

	September 30,		December 31,
Type of NOL	2012		2011		Expiration
State only (A)	$	364,633	$	284,749	December 31, 2027
Valuation allowance		130,585		42,437
State only, net of valuation allowance		234,048		242,312
Amount subject to Annual Limitation, Federal only (B)		30,600		34,000	December 31, 2019
Total deferred tax asset from net operating loss carryovers	$	264,648	$	276,312

(2)   Deferred tax liability -  investment in KICO

On July 1, 2009, the Company completed the acquisition of 100% of the issued and outstanding common stock of KICO (formerly known as Commercial Mutual Insurance Company (“CMIC”)) pursuant to the conversion of CMIC from an advance premium cooperative to a stock property and casualty insurance company. Pursuant to the plan of conversion, the Company acquired a 100% equity interest in KICO, in consideration for the exchange of $3,750,000 principal amount of surplus notes of CMIC. In addition, the Company forgave all accrued and unpaid interest on the surplus notes as of the date of conversion. As of the date of acquisition, unpaid accrued interest on the surplus notes along with the accretion of the discount on the original purchase of the surplus notes totaled $2,921,319 (together “Untaxed Interest”). As of the date of acquisition the deferred tax liability on the Untaxed Interest was $1,169,000. Under GAAP guidance for business combinations, a temporary difference with an indefinite life exists when the parent has a lower carrying value of its subsidiary for income tax purposes. The Company is required to maintain its deferred tax liability of $1,169,000 related to this temporary difference until either the stock of KICO is sold, the assets of KICO are sold or KICO and the parent are merged.

The Company had no material unrecognized tax benefit and no adjustments to liabilities or operations were required. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for nine months ended September 30, 2012 and 2011. If any had been recognized these would be reported in income tax expense.

IRS Tax Audit

The Company’s Federal income tax return for the year ended December 31, 2009 has been examined by the Internal Revenue Service and was accepted as filed. The tax returns for years ended December 31, 2010 and 2011 are subject to examination, generally for three years after filing.