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Income Taxes
 3 Months Ended
Mar. 31, 2022
Income Taxes  
Income Taxes

Note 9 – 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.

 

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:

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Deferred tax asset:

 

 

 

 

 

 

Net operating loss carryovers (1)

 

$3,301,658

 

 

$1,112,318

 

Claims reserve discount

 

 

1,169,042

 

 

 

1,186,789

 

Unearned premium

 

 

3,279,286

 

 

 

3,246,364

 

Deferred ceding commission revenue

 

 

1,990,698

 

 

 

2,047,187

 

Net unrealized losses on securities

 

 

509,869

 

 

 

-

 

Other

 

 

1,066,609

 

 

 

1,220,898

 

Total deferred tax assets

 

 

11,317,162

 

 

 

8,813,556

 

 

 

 

 

 

 

 

 

 

Deferred tax liability:

 

 

 

 

 

 

 

 

Investment in KICO (2)

 

 

759,543

 

 

 

759,543

 

Deferred acquisition costs

 

 

4,547,882

 

 

 

4,670,187

 

Intangibles

 

 

105,000

 

 

 

105,000

 

Depreciation and amortization

 

 

1,537,104

 

 

 

1,046,817

 

Net unrealized gains on securities

 

 

-

 

 

 

2,039,756

 

Total deferred tax liabilities

 

 

6,949,529

 

 

 

8,621,303

 

 

 

 

 

 

 

 

 

 

Net deferred income tax asset

 

$4,367,633

 

 

$192,253

 

   

 

(1)

The deferred tax assets from net operating loss carryovers (“NOL”) are as follows:

 

March 31,

December 31,

Type of NOL

2022

2021

Expiration

Federal only, NOL from 2022 and 2021

$3,301,658$1,112,318

NOL carried back

--

Federal only, NOL from 2022 and 2021

3,301,6581,112,318

None

State only (A)

2,127,8592,099,239

December 2027 - December 2042

Valuation allowance

(2,127,859)(2,099,239)

State only, net of valuation allowance

--

Total deferred tax asset from net operating loss carryovers

$3,301,658$1,112,318

 

(A) Kingstone generates operating losses for state purposes and has prior year NOLs available. The state NOL as of March 31, 2022 and December 31, 2021 was approximately $32,736,000 and $32,296,000, 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 condensed consolidated statements of operations and comprehensive 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 2042.

 

(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 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 (together “Untaxed Interest”). As of the date of acquisition, the deferred tax liability on the Untaxed Interest was $1,169,000. A temporary difference with an indefinite life exists when the parent 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.

 

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 three months ended March 31, 2022 and 2021. 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, 2018 through December 31, 2020 remain subject to examination.