Taxes on Income

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

Taxes on Income

NOTE 16 – TAXES ON INCOME

The provision for taxes on income consists of the following:

	Year ended December 31
	2020			2019
Federal expense (benefit):
Current	$	—		$	13,809
Deferred		3,566,840			(51,809	)
Total tax expense (benefit)	$	3,566,840		$	(38,000	)
State expense (benefit):
Current	$	8,800		$	8,800
Deferred		(28,042	)		(104,987	)
Total tax benefit	$	(19,242	)	$	(96,187	)
Total expense (benefit):
Current	$	8,800		$	22,609
Deferred		3,538,798			(156,796	)
Total tax expense (benefit)	$	3,547,598		$	(134,187	)

The income tax provision reflected in the Consolidated Statements of Operations is different than the expected federal income tax rate of 21% on income as shown in the following table:

	Year ended December 31
	2020			2019
Computed income tax benefit at 21%	$	(3,768,138	)	$	(682,477	)
Tax effect of:
State tax benefit, net of federal tax benefit		(572,511	)		(139,765	)
Change in valuation allowance – state net operating losses		557,310			63,777
Change in valuation allowance – federal		7,319,959			600,000
Other, including nondeductible expenses		10,920			23,989
Other – prior year true up		58			289
Income tax expense (benefit)	$	3,547,598		$	(134,187	)

Significant components of the Company’s net deferred tax assets and liabilities are as follows:

	Year ended December 31
	2020		2019
Deferred tax assets:
Discount on loss reserves	$	531,845	$	329,065
Unearned premium		759,659		747,217
Unearned commission income		438,574		432,969
Unearned policy fee income		127,293		145,533
Net operating loss carryforwards		7,769,603		4,145,783
State net operating loss carryforwards		2,402,438		1,931,665
Bad debt reserve		333,649		336,075
Other		237,803		205,292
Total gross deferred tax assets		12,600,864		8,273,599
Less valuation allowance		10,557,080		2,531,665
Total deferred tax assets	$	2,043,784	$	5,741,934
Deferred tax liabilities:
Policy acquisition costs	$	858,705	$	892,349
State tax on undistributed insurance company earnings		84,219		343,735
Federal tax liability on state deferred tax assets		91,277		90,461
Depreciation and amortization		266,880		175,524
Unrealized gains on investments		742,703		314,433
Total deferred tax liabilities	$	2,043,784	$	1,816,502
Net deferred tax assets	$	—	$	3,925,432

The Company recognizes deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases, and for tax credits.  The Company evaluates its deferred tax assets for recoverability based on available evidence, including assumptions about future profitability, reversal patterns of recorded deferred tax assets and deferred tax liabilities, and capital gain generation. Some or all of the Company’s deferred tax assets could expire unused if the Company is unable to generate taxable income of a sufficient nature in the future to utilize them.

If the Company determines it is more-likely-than-not that it would not be able to realize all or a portion of its deferred tax assets in the future, the Company would reduce the deferred tax asset through a charge to earnings in the period in which the determination is made. This charge could have a materially adverse effect on the Company’s results of operations and financial condition. In addition, the assumptions used to make this determination are subject to change from period to period based on changes in tax laws or variances between the Company’s projected operating performance and actual results. As a result, management’s judgment is required in assessing the possible need for a deferred tax asset valuation allowance.

As of December 31, 2020, the Company had deferred tax assets of $7,769,603 generated from $36,998,110 of federal net operating loss carryforwards that will begin to expire in 2035 and deferred tax assets of $2,402,438 generated from state net operating loss carryforwards which expire between 2028 and 2040. In connection with preparation of its consolidated financial statements, the Company periodically performs an analysis of future income projections to determine the adequacy of the valuation allowance. In light of the net losses that were generated in recent years, for the twelve months ended December 31, 2020, the Company has established a valuation allowance for the aggregate amount of the federal and state net operating losses and other deferred tax assets in the amount of $10,557,080 that, in management’s judgment, are not more-likely-than-not to be realized. For the year ended December 31, 2019, the Company carried a valuation allowance on deferred tax assets generated from federal and state net operating losses in the amount of $600,000 and $1,931,665, respectively.

The current federal effected state tax rate is 6.98%.

The Company and its subsidiaries file consolidated federal and state income tax returns. Pursuant to the tax allocation agreement, Crusader and AAC are allocated taxes, or tax credits in the case of losses, at current corporate rates based on their own taxable income or loss. The Company files income tax returns under U.S. federal and various state jurisdictions. The Company is subject to examination by U.S. federal income tax authorities for tax returns filed starting at taxable year 2017 and California state income tax authorities for tax returns filed starting at taxable year 2016. There are no ongoing examinations of income tax returns by federal or state tax authorities.

As a California insurance company, Crusader is obligated to pay a premium tax on direct written premium in all states where Crusader is admitted. Premium taxes are deferred and amortized as the related premium is earned. The premium tax is in lieu of state franchise taxes and is not included in the provision for state taxes.

As of December 31, 2020, the Company had no unrecognized tax benefits, no unrecognized additional liabilities or reduction in deferred tax asset, and no uncertain tax positions. In addition, the Company had not accrued interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.