XML 91 R21.htm IDEA: XBRL DOCUMENT

15. Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

15. 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 return 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 consolidated financial statements taken as a whole for the respective periods.

The provision for income taxes is comprised of the following:

Years ended December 31,		2019				2018

Current federal income tax expense (benefit)		$	174,779			$	(74,001	)
Current state income tax expense (benefit)			238				(6,784	)
Deferred federal and state income tax benefit			(1,991,208	)			(5,398	)
Income tax benefit		$	(1,816,191	)		$	(86,183	)

A reconciliation of the federal statutory rate to the Company’s effective tax rate is as follows:

Years ended December 31,		2019								2018
Computed expected tax (benefit) expense		$	(1,634,334	)			21.0	%		$	631,483				21.0	%
State taxes, net of federal benefit			(247,909	)			3.2				(377,884	)			(12.6	)
State valuation allowance			261,573				(3.4	)			390,976				13.0
Permanent differences
Dividends received deduction			(97,631	)			1.3				(85,703	)			(2.9	)
Non-taxable investment income			(39,901	)			0.5				(40,861	)			(1.4	)
Excess benefit from stock-based compensation			184				-				(569,459	)			(18.9	)
Stock-based compensation			80,453				(1.0	)			(16,960	)			(0.5	)
Other permanent differences			(15,961	)			0.2				42,496				1.4
Prior year tax matters			(91,748	)			1.2				(61,415	)			(2.0	)
Other			(30,917	)			0.3				1,144				-
Income tax benefit, as reported		$	(1,816,191	)			23.3	%		$	(86,183	)			(2.9	)%

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 sheets reflect temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and income tax purposes, tax effected at 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:

		December 31,				December 31,
		2019				2018

Deferred tax asset:
Net operating loss carryovers (1)		$	1,586,247			$	90,438
Claims reserve discount			839,959				343,905
Unearned premium			3,105,344				3,145,682
Deferred ceding commission revenue			1,624,434				564,202
Other			462,019				383,733
Total deferred tax assets			7,618,003				4,527,960

Deferred tax liability:
Investment in KICO (2)			759,543				759,543
Deferred acquisition costs			4,333,219				3,760,625
Intangibles			105,000				140,700
Depreciation and amortization			312,298				664,194
Net unrealized gains (losses) of securities - available-for-sale			1,796,891				(1,151,335	)
Total deferred tax liabilities			7,306,951				4,173,727

Net deferred income tax asset		$	311,052			$	354,233

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

		December 31,				December 31,
Type of NOL		2019				2018			Expiration

Federal only, current year		$	1,517,866			$	-		None
Amount subject to Annual Limitation, federal only			-				2,100		December 31, 2019
Total federal only			1,517,866				2,100

State only (A)			1,616,568				1,305,365		December 31, 2039
Valuation allowance			(1,548,187	)			(1,217,027	)
State only, net of valuation allowance			68,381				88,338

Total deferred tax asset from net operating loss carryovers		$	1,586,247			$	90,438

(A) Kingstone generates operating losses for state purposes and has prior year NOLs available. The state NOL as of December 31, 2019 and 2018 was approximately $24,901,000 and $20,083,000, 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 consolidated statements of operations and comprehensive income (loss) within other underwriting expenses. Kingstone has recorded a valuation allowance 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 2039.

(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 insurance company 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 (collectively the “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 company has a lower carrying value of its subsidiary for income tax purposes. The deferred tax liability was reduced to $759,543 upon the reduction of federal income tax rates as of December 31, 2017. The Company is required to maintain its deferred tax liability of $759,543 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.

The table below reconciles the changes in net deferred income tax assets (liabilities) to the deferred income tax provision for the year ended December 31, 2019:

Change in net deferred income tax assets		$	43,181
Deferred tax expense allocated to other comprehensive (loss) income			(2,034,389	)
Deferred income tax benefit		$	(1,991,208	)

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 years ended December 31, 2019 and 2018. If any had been recognized these would have been reported in income tax expense.

Generally, taxing authorities may examine the Company’s tax returns for the three years from the date of filing. The Company’s tax returns for the years ended December 31, 2016 through December 31, 2018 remain subject to examination. The Company’s federal income tax return for the year ended December 31, 2016 has been examined by the Internal Revenue Service and was accepted as filed.