Income Taxes

12 Months Ended

Dec. 31, 2021

Income Taxes [Abstract]

Income Taxes

11 - Income Taxes

Our provision for income tax expense for 2021, 2020 and 2019 consisted of the following:

	2021		2020		2019
Current federal income tax	$	3,998,431	$	10,450,803	$	8,454,358
Deferred federal income tax		1,085,903		6,448		649,928
Federal income tax expense	$	5,084,334	$	10,457,251	$	9,104,286
Pennsylvania income tax		—		—		825,000
Income tax expense	$	5,084,334	$	10,457,251	$	9,929,286

Our effective tax rate is different from the amount computed at the statutory federal rate of 21%. The reasons for such difference and the related tax effects are as follows:

	2021			2020			2019
Income before income tax expense	$	30,338,508		$	63,272,503		$	57,081,030
Computed “expected” taxes		6,371,087			13,287,226			11,987,016
Tax-exempt interest		(1,491,154	)		(1,468,806	)		(1,325,197	)
Proration		401,717			395,663			357,044
Dividends received deduction		(115,713	)		(113,845	)		(1,913,238	)
Net operating loss carryback		—			(1,640,084	)		—
Tax benefit on exercise of options		(438,850	)		(302,901	)		(64,765	)
Other, net		357,247			299,998			236,676
Pennsylvania income tax, net of federal benefit		—			—			651,750
Income tax expense	$	5,084,334		$	10,457,251		$	9,929,286

The tax effects of temporary differences that give rise to significant portions of our deferred tax assets and deferred tax liabilities at December 31, 2021 and 2020 are as follows:

	2021			2020
Deferred tax assets:
Unearned premium	$	16,674,502		$	15,481,602
Loss reserves		9,568,677			8,808,342
Net operating loss carryforward		25,174			104,041
Net state operating loss carryforward - DGI Parent		7,865,563			7,850,334
Other		1,859,687			2,342,967
Total gross deferred tax assets		35,993,603			34,587,286
Less valuation allowance		(7,865,563	)		(7,850,334	)
Net deferred tax assets		28,128,040			26,736,952
Deferred tax liabilities:
Deferred policy acquisition costs		14,285,958			12,422,961
Loss reserve transition adjustment		1,148,529			1,440,793
Other		6,007,934			7,190,085
Total gross deferred tax liabilities		21,442,421			21,053,839
Net deferred tax asset	$	6,685,619		$	5,683,113

Our income tax expense for 2020 included a $1.6 million income tax benefit related to the carryback of 2018 net operating losses to past tax years with higher statutory income tax rates than are currently in effect, as allowed under the Coronavirus Aid, Relief and Economic Security Act that was enacted in March 2020.

We provide a valuation allowance when we believe it is more likely than not that we will not realize some portion of a deferred tax asset. At December 31, 2021 and 2020, we established a valuation allowance of $7.9 million for the net state operating loss carryforward of DGI. We determined that we were not required to establish a valuation allowance for the other net deferred tax assets of $28.1 million and $26.7 million at December 31, 2021 and 2020, respectively, since it is more likely than not that we will realize these deferred tax assets through reversals of existing temporary differences, future taxable income and our implementation of tax-planning strategies.

Tax years 2016 through 2021 remained open for examination by tax authorities at December 31, 2021. Federal income taxes recoverable at December 31, 2021 and 2020 included refunds of $2.3 million due to us for tax years prior to 2021.