13.INCOME TAXES



The components of the provision for income taxes were as follows:









The Company’s provision for income taxes differs from the amounts computed by applying the federal income tax statutory rates to income before income taxes.  A reconciliation of the differences is as follows:







In 2017, the Company recognized the impact of its investments in partnerships that incurred expenses related to the rehabilitation of certified historic structures located in New York State after the historic structures were placed in service.  At the time a historic structure is placed in service, the Bank is eligible for a federal and New York State tax credit.  As noted in Note 1, for New York State, any new credit earned from rehabilitated historic properties placed in service on or after January 1, 2015 not used in the current tax year will be treated as a refund or overpayment of tax to be credited to the next year’s tax.  Since the realization of the tax credit does not depend on the Bank’s generation of future taxable income or the Bank’s ongoing tax status or tax position, the refund is not considered an element of income tax accounting (ASC 740).  In such cases, the Bank would not record the credit as a reduction of income tax expense; rather, the Bank includes the refundable New York State tax credit in non-interest income with a corresponding receivable recorded in other assets. 



The following table presents the impact to the results of operations from the Bank’s historic tax credit activity for the years ended December 31, 2017 and 2016.  There was no impact to the 2015 results of operations from historic rehabilitation tax credits.





At December 31, 2017 and 2016 the components of the net deferred tax asset were as follows:







The net deferred tax asset at December 31, 2017 and 2016 is included in “other assets” in the Company’s consolidated balance sheets.



In assessing the ability of the Company to realize the benefit of the deferred tax assets, management 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.  Management considers the scheduled reversal of deferred tax liabilities, availability of operating loss carrybacks, projected future taxable income, and tax planning strategies in making this assessment.  Based upon the level of historical taxable income, the opportunity for net operating loss carrybacks, and projections for future taxable income over the periods which deferred tax assets are deductible, management believes it is more likely than not the Company will generate sufficient taxable income to realize the benefits of these deductible differences at December 31, 2017, except for a valuation allowance of $171 thousand on the net deferred tax asset for the investment in a historic tax credits of $454 thousand and an allowance of $114 thousand on the net deferred tax asset for pension and SERP plans of $1.2 million.  In assessing the need for a valuation allowance for the deferred tax assets for the investments in historic tax credits and for the SERP, the Company considered all positive and negative evidence in assessing whether the weight of available evidence supports the recognition of some or all of the deferred tax assets.



In regard to historic tax credit investments, because of the tax nature of the loss to be recognized when the investment is ultimately sold (which for tax purposes will give rise to a capital loss), the Company does not have any known capital gains in the future to be able to utilize the capital losses from these investments.  Therefore, the Company’s assessment of the deferred tax asset warrants the need for a valuation allowance to be recognized on the deferred tax asset that it determined is more-likely-than-not to not be realized.  The amount of remaining capital loss includes the projected capital basis after taking the tax credit, expected losses, and cash distributions.



In regard to the deferred tax asset related to the SERP, given the lump sum distribution election made by one of the Company’s executives, the Company expects it will pay that executive a SERP benefit of more than $1 million in a single fiscal year.  Per Section 162(m) of the Internal Revenue Code, the amount exceeding $1 million is not deductible for income tax purposes.  The Company therefore determined it is more-likely-than-not that the projected benefit obligation for the executive’s SERP benefit exceeding $1 million will not be deductible.



The state historic tax credit carryforward has an indefinite life with no expiration date in which to utilize the credit.



The Company did not have any unrecognized tax benefits for the years ended December 31, 2017, 2016, and 2015.



There were no accrued penalties and interest at December 31, 2017 and 2016.



The Company is subject to routine audits of its tax returns by the Internal Revenue Service (“IRS”) and various state taxing authorities.  During 2017, the Company concluded a NYS audit covering the years 2011-2014. The most recent IRS audit was completed in 2010 and covered the years 2006-2008.  These audits concluded with no material adverse findings.  The tax years 2015-2016 for NYS and 2014-2016 for the IRS remain subject to examination.



The most significant impact of the TCJA is on the Company’s marginal federal tax rate in 2018 and beyond, which will decrease from 35% to 21%.  The change in the corporate tax rate resulted in a $2.0 million expense related to the remeasurement of the Company’s deferred tax asset as of December 31, 2017.  The impact from the TCJA may differ from this estimate, due to, among other things, further refinement of the Company’s calculations, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of tax reform.  Approximately $0.6 million of the $2.0 million expense is associated with deferred taxes related to unrealized gains on available-for-sale investment securities and the unamortized actuarial losses on the Pension Plan and the SERPs which were originally created through other comprehensive income.  The Company reclassified the $0.6 million charge related to deferred tax expense for items originally recorded through OCI from OCI to retained earnings per ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” released in February 2018 and early adopted by the Company for the period ended December 31, 2017. 



Other significant aspects of the TCJA that have a direct impact on the Company include: