Income Taxes
On December 22, 2017, the Tax Act was signed into law. Among other things, the Tax Act reduced the federal corporate income tax rate from 34% to 21%, effective January 1, 2018, which required the Company to revalue its net deferred tax asset to account for the future impact of lower corporate income tax rates and other provisions of the 2017 legislation. As a result of the Company's revaluation, the net deferred tax asset was reduced by $606,000 through an increase to the provision for income taxes of the same amount. Income tax expense was comprised of the following for the dates indicated below:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 1,500,337 |
| | $ | 1,022,082 |
| | $ | 1,056,002 |
|
State | 209,396 |
| | 191,999 |
| | 285,699 |
|
Total Current Tax Expense | 1,709,733 |
| | 1,214,081 |
| | 1,341,701 |
|
Deferred: | | | | | |
Federal | 736,390 |
| | 696,638 |
| | 722,699 |
|
State | (10,663 | ) | | 9,761 |
| | 2,699 |
|
Total Deferred Tax Expense | 725,727 |
| | 706,399 |
| | 725,398 |
|
Total Income Tax Expense | $ | 2,435,460 |
| | $ | 1,920,480 |
| | $ | 2,067,099 |
|
(14) Income Taxes, Continued
The Company's income taxes differ from those computed at the statutory federal income tax rate, as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax at Statutory Income Tax Rate | $ | 2,840,292 |
| | $ | 2,667,347 |
| | $ | 2,782,229 |
|
State Tax and Other | 44,764 |
| | 153,236 |
| | 101,834 |
|
Tax Exempt Interest | (730,477 | ) | | (732,087 | ) | | (684,708 | ) |
Life Insurance | (394,445 | ) | | (179,520 | ) | | (143,820 | ) |
Valuation Allowance | 69,133 |
| | 11,504 |
| | 11,564 |
|
Impact of Federal Rate Change on Deferred Taxes | 606,193 |
| | — |
| | — |
|
Total Income Tax Expense | $ | 2,435,460 |
| | $ | 1,920,480 |
| | $ | 2,067,099 |
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below. Net deferred tax assets were included in other assets at December 31, 2017 and 2016.
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred Tax Assets: | | | |
Deferred Compensation | $ | 434,881 |
| | $ | 620,256 |
|
Provision for Loan Losses | 1,769,574 |
| | 2,873,574 |
|
Other Real Estate Owned | 23,676 |
| | 106,107 |
|
Net Fees Deferred for Financial Reporting | 69,000 |
| | 97,273 |
|
Net Operating Losses | 312,412 |
| | 243,279 |
|
Other | 253,731 |
| | 292,402 |
|
Total Gross Deferred Tax Assets | 2,863,274 |
| | 4,232,891 |
|
Less: Valuation Allowance | (312,412 | ) | | (243,279 | ) |
Net Deferred Tax Assets | 2,550,862 |
| | 3,989,612 |
|
Deferred Tax Liabilities: | | | |
FHLB Stock Basis Over Tax Basis | 71,621 |
| | 114,577 |
|
Depreciation | 345,462 |
| | 386,940 |
|
Prepaid Expenses | 26,605 |
| | 44,103 |
|
Unrealized Gain on Securities Available for Sale | 1,182,967 |
| | 714,584 |
|
Total Gross Deferred Tax Liability | 1,626,655 |
| | 1,260,204 |
|
Net Deferred Tax Asset | $ | 924,207 |
| | $ | 2,729,408 |
|
The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary
differences are expected to be recovered or paid. Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. As of December 31, 2017, management has determined that it is more likely than not that the total deferred tax asset will be realized except for the deferred tax asset associated with state net operating loss carryforwards, and, accordingly, has established a valuation allowance only for this item. The change in the valuation allowance was $69,000. The Company had state net operating losses attributable to the non-bank entities of $7.9 million and $7.4 million for the years ended December 31, 2017 and 2016, respectively.
Retained earnings at December 31, 2017 included tax bad debt reserves of $2.1 million, for which no provision for federal income tax has been made. If, in the future, these amounts are used for any purpose other than to absorb bad debt losses, including dividends, stock redemptions, or distributions in liquidation, or the Company ceases to be qualified as a bank holding company, they may be subject to federal income tax at the prevailing corporate tax rate.
(14) Income Taxes, Continued
At December 31, 2017, the Company had no material unrecognized tax benefits or accrued interest and penalties. It is the Company's policy to account for interest and penalties accrued relative to unrecognized tax benefits as a component of income tax expense. Tax returns for 2014 and subsequent years are subject to examination by taxing authorities.