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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Taxes  
15. Income Taxes

Note 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 ended December 31,

 

2021

 

 

2020

 

 

 

 

 

 

 

 

Current federal income tax expense (benefit)

 

$167,622

 

 

$(5,366,759)

Current state income tax expense (benefit)

 

 

1,675

 

 

 

(2,736)

Deferred federal and state income tax (benefit) expense

 

 

(2,200,433)

 

 

3,109,295

 

Income tax benefit

 

$(2,031,136)

 

$(2,260,200)

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

 

Years ended December 31,

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Computed expected tax benefit

 

$(1,975,982)

 

 

21.0%

 

$(270,440)

 

 

21.0%

State taxes, net of Federal benefit

 

 

(221,879)

 

 

2.4

 

 

 

(233,752)

 

 

18.2

 

State valuation allowance

 

 

224,117

 

 

 

(2.4)

 

 

292,087

 

 

 

(22.7)

Benefit of higher tax brackets in NOL carryback - current year

 

 

-

 

 

 

-

 

 

 

(754,829)

 

 

58.6

 

Benefit of higher tax brackets in NOL carryback - prior year

 

 

-

 

 

 

-

 

 

 

(1,274,465)

 

 

99.0

 

Permanent differences

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends received deduction

 

 

(152,147)

 

 

1.6

 

 

 

(118,113)

 

 

9.2

 

Non-taxable investment income

 

 

(75,045)

 

 

0.8

 

 

 

(55,752)

 

 

4.3

 

Stock-based compensation

 

 

55,486

 

 

 

(0.6)

 

 

125,923

 

 

 

(9.8)

Other permanent differences

 

 

56,798

 

 

 

(0.6)

 

 

46,108

 

 

 

(3.6)

Prior year tax matters

 

 

107,173

 

 

 

(1.1)

 

 

(77,625)

 

 

6.0

 

Other

 

 

(49,657)

 

 

0.5

 

 

 

60,658

 

 

 

(4.7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit, as reported

 

$(2,031,136)

 

 

21.6%

 

$(2,260,200)

 

 

175.5%

  

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,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

Deferred tax asset:

 

 

 

 

 

 

Net operating loss carryovers (1)

 

$1,112,318

 

 

$-

 

Claims reserve discount

 

 

1,186,789

 

 

 

838,030

 

Unearned premium

 

 

3,246,364

 

 

 

3,880,275

 

Deferred ceding commission revenue

 

 

2,047,187

 

 

 

19,639

 

Other

 

 

1,220,898

 

 

 

648,691

 

Total deferred tax assets

 

 

8,813,556

 

 

 

5,386,635

 

 

 

 

 

 

 

 

 

 

Deferred tax liability:

 

 

 

 

 

 

 

 

Investment in KICO (2)

 

 

759,543

 

 

 

759,543

 

Deferred acquisition costs

 

 

4,670,187

 

 

 

4,229,928

 

Intangibles

 

 

105,000

 

 

 

105,000

 

Depreciation and amortization

 

 

1,046,817

 

 

 

954,446

 

Net unrealized gains of securities

 

 

2,039,756

 

 

 

3,494,631

 

Total deferred tax liabilities

 

 

8,621,303

 

 

 

9,543,548

 

 

 

 

 

 

 

 

 

 

Net deferred income tax asset (liability)

 

$192,253

 

 

$(4,156,913)

 

(1)

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

 

 

 

 December 31,

 

 

 December 31,

 

 

 

 Type of NOL

 

 2021

 

 

 2020

 

 

Expiration

 

 

 

 

 

 

 

 

 

 

 

Federal only, current year (A)

 

 

1,112,318

 

 

 

1,200,056

 

 

 

 

NOL carried back

 

 

-

 

 

 

(1,200,056)

 

 

 

Federal only, current year

 

$1,112,318

 

 

$-

 

 

None

 

 

 

 

 

 

 

 

 

 

 

 

 

State only (B)

 

 

2,099,239

 

 

 

1,815,546

 

 

December 31, 2041

 

Valuation allowance

 

 

(2,099,239)

 

 

(1,815,546)

 

 

 

State only, net of valuation allowance

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deferred tax asset from net operating loss carryovers

 

$1,112,318

 

 

$-

 

 

 

 

 

(A) On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, allowing for a five year carryback of 2020 and 2019 NOLs. The Company elected on its 2019 federal income tax return to carry back the 2019 NOL to tax years 2014 and 2015. The Company elected on its 2020 federal income tax return to carry back the 2020 NOL to tax year 2015. The corporate tax rate in 2014 and 2015 was 34%, compared to the corporate tax rate of 21% in 2020 and 2019.

 

(B) Kingstone generates operating losses for state purposes and has prior year NOLs available. The state NOL as of December 31, 2021 and 2020 was approximately $32,296,000 and $27,931,000, 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 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 2041. 

 

 

(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, 2021:

 

Decrease in net deferred income tax assets

 

$(4,349,166)

Deferred tax benefit allocated to other comprehensive income

 

 

(2,148,733)

Deferred income tax benefit

 

$(2,200,433)

 

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