8. Income Taxes

3 Months Ended

Mar. 31, 2016

Notes to Financial Statements

8. 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.

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:

	March 31,			December 31,
	2016			2015
Deferred tax asset:
Net operating loss carryovers (1)	$	131,626		$	150,492
Claims reserve discount		459,217			405,709
Unearned premium		2,600,074			2,555,012
Deferred ceding commission revenue		2,181,511			2,187,923
Other		92,904			151,250
Total deferred tax assets		5,465,332			5,450,386
Deferred tax liability:
Investment in KICO (2)		1,169,000			1,169,000
Deferred acquisition costs		3,732,274			3,684,004
Intangibles		557,222			597,657
Depreciation and amortization		367,642			415,938
Net unrealized appreciation of securities - available for sale		745,504			255,977
Total deferred tax liabilities		6,571,642			6,122,576
Net deferred income tax liability	$	(1,106,310	)	$	(672,190	)

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

	March 31,			December 31,
Type of NOL	2016			2015			Expiration
State only (A)	$	563,108		$	540,865			December 31, 2036
Valuation allowance		(441,682	)		(403,973	)
State only, net of valuation allowance		121,426			136,892
Amount subject to Annual Limitation, federal only (B)		10,200			13,600			December 31, 2019
Total deferred tax asset from net operating loss carryovers	$	131,626		$	150,492

(A) Kingstone generates operating losses for state purposes and has prior year NOLs available. The state NOL as of March 31, 2016 and December 31, 2015 was approximately $8,663,000 and $8,321,000, respectively. 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 income and 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 NOLs over their remaining lives, which expire between 2027 and 2036.

(B) The Company has an NOL of $30,000 that is subject to Internal Revenue Code Section 382, which places a limitation on the utilization of the federal NOL 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.

(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. 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 the stock of KICO is sold, or the assets of KICO are sold or KICO and the parent are merged.

In assessing the valuation of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. No valuation allowance against deferred tax assets has been established, except for NOL limitations, as the Company believes it is more likely than not the deferred tax assets will be realized based on the historical taxable income of KICO, or by offset to deferred tax liabilities.

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 the three months ended March 31, 2016 and 2015. If any had been recognized these would have been reported in income tax expense.

The tax returns for years ended December 31, 2012 through 2015 are subject to examination, generally for three years after filing.