Taxes on Income

12 Months Ended

Dec. 31, 2021

Taxes on Income

Taxes On Income

NOTE 16 – TAXES ON INCOME

The provision for taxes on income consists of the following:

	Year ended December 31
	2021		2020
Federal expense
Deferred		450,117		3,566,840
Total tax expense	$	450,117	$	3,566,840
State expense
Current	$	8,800	$	8,800
Deferred		-		(28,042	)
Total tax expense (benefit)	$	8,800	$	(19,242	)
Total expense
Current	$	8,800	$	8,800
Deferred		450,117		3,538,798
Total tax expense	$	458,917	$	3,547,598

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
	2021			2020
Computed income tax benefit at 21%	$	(1,095,010	)	$	(3,768,138	)
Tax effect of:
State tax expense (benefit), net of federal tax benefit		137,312			(572,511	)
Change in valuation allowance – state net operating losses		(130,360	)		557,310
Change in valuation allowance – federal		1,547,392			7,319,959
Other, including nondeductible expenses		3,620			10,920
Other – prior year true up		(4,037	)		58
Income tax expense	$	458,917		$	3,547,598

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

	Year ended December 31
	2021		2020
Deferred tax assets:
Discount on loss reserves	$	605,164	$	531,845
Unearned premium		599,571		759,659
Unearned commission income		-		438,574
Unearned policy fee income		62,834		127,293
Net operating loss carryforwards		8,584,487		7,769,603
State net operating loss carryforwards		2,509,115		2,402,438
Unrealized losses on investments		-		-
Bad debt reserve		62,673		333,649
Other		474,854		237,803
Total gross deferred tax assets		12,898,698		12,600,864
Less valuation allowance		11,939,459		10,557,080
Total deferred tax assets	$	959,239	$	2,043,784
Deferred tax liabilities:
Policy acquisition costs	$	191,586	$	858,705
State tax on undistributed insurance company earnings		25,357		84,219
Federal tax liability on state deferred tax assets		63,456		91,277
Depreciation and amortization		302,073		266,880
Unrealized gains on investments		376,767		742,703
Total deferred tax liabilities	$	959,239	$	2,043,784
Net deferred tax assets	$	-	$	-

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 will 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, 2021, the Company had deferred tax assets of 8,584,487 generated from 40,878,510 of federal net operating loss carryforwards that will begin to expire in 2035 and deferred tax assets of $2,509,115 generated from state net operating loss carryforwards which begin to expire in 2028.  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 years ended December 31, 2021 and December 31, 2020, the Company has established a full valuation allowance against all deferred tax assets in the amount of $11,939,459 and $10,557,080, 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 2018 and California state income tax authorities for tax returns filed starting at taxable year 2017.  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, 2021, 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.