NOTE 8 – INCOME TAXES
The components of income tax expense are as follows for the years ended December 31:
| Years Ended December 31, |
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| 2017 | 2016 | |||||||
| (In Thousands) | ||||||||
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Current: |
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Federal |
$ | 857 | $ | 543 | ||||
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State |
251 | 182 | ||||||
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| 1,108 | 725 | |||||||
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Deferred: |
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Federal |
(12 | ) | 80 | |||||
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Change in federal tax rate |
181 | — | ||||||
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State |
(11 | ) | (9 | ) | ||||
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Change in valuation allowance |
(24 | ) | — | |||||
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| 134 | 71 | |||||||
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Total income tax expense |
$ | 1,242 | $ | 796 | ||||
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The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows for the years ended December 31:
| Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| % of Income | % of Income | |||||||
|
Federal income tax at statutory rate |
34.0 | % | 34.0 | % | ||||
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State tax, net of federal tax benefit |
5.2 | 5.2 | ||||||
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Change in valuation allowance |
(0.8 | ) | 0.0 | |||||
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Change in tax rate |
5.9 | 0.0 | ||||||
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Dividends received deduction |
(0.5 | ) | (1.3 | ) | ||||
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Bank-owned life insurance |
(1.8 | ) | (2.2 | ) | ||||
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Solar credits |
(2.3 | ) | (0.0 | ) | ||||
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Stock compensation |
1.1 | 1.1 | ||||||
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Tax exempt income |
(1.0 | ) | (1.3 | ) | ||||
|
ESOP |
0.7 | 0.6 | ||||||
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Other |
0.3 | (0.3 | ) | |||||
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Effective tax rates |
40.8 | % | 35.9 | % | ||||
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The Company had gross deferred tax assets and gross deferred tax liabilities as follows as of December 31:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| (In Thousands) | ||||||||
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Deferred tax assets: |
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Allowance for loan losses |
$ | 319 | $ | 356 | ||||
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Deferred compensation |
83 | 83 | ||||||
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Security writedowns |
5 | 27 | ||||||
|
ESOP |
16 | 12 | ||||||
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Stock based compensation |
47 | 47 | ||||||
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Accrued expenses |
31 | 13 | ||||||
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Contribution to Melrose Cooperative Bank Foundation |
204 | 406 | ||||||
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Gross deferred tax assets |
705 | 944 | ||||||
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Valuation allowance |
(66 | ) | (90 | ) | ||||
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Gross deferred tax assets, net of valuation allowance |
639 | 854 | ||||||
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Deferred tax liabilities: |
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Accelerated depreciation |
(181 | ) | (220 | ) | ||||
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Net unrealized holding gain on available-for-sale securities |
(94 | ) | (514 | ) | ||||
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Gross deferred tax liabilities |
(275 | ) | (734 | ) | ||||
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Net deferred tax asset |
$ | 364 | $ | 120 | ||||
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In connection with its initial public offering, the Company donated common stock and cash in the amount of $1,362,000 to the Melrose Cooperative Bank Foundation. As of December 31, 2017, the Company had a remaining gross deferred tax asset of $204,000. A valuation allowance of $66,000 has been established against the deferred tax assets related to the uncertain utilization of the charitable contribution carryforward created primarily by the donation to the Foundation.
The judgment applied by management considers the likelihood that sufficient taxable income will be realized within the carryforward period in light of its tax planning strategies and changes in market conditions. The charitable contribution carryforward of $769,000 at December 31, 2017 expires in 2019 and the related tax benefit, net of the valuation allowance, included in net deferred tax assets is $138,000.
It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. As of December 31, 2017 and 2016, there were no material uncertain tax positions related to federal and state income tax matters. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2014 through December 31, 2017. Interest and penalties, if any, are recorded as income tax expense.
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (TCJA), a comprehensive tax legislation which, among other things, reduced the federal income tax rate for C corporations to 21% effective January 1, 2018. The TCJA makes broad and complex changes to the Internal Revenue Code which will impact the Company, including reduction of the corporate income tax rate as well as introduction of business-related exclusions, deductions and credits. The effects of the TCJA have been recorded in the fourth quarter 2017. As a result of the reduction of the Company’s corporate income tax rate from 34% to 21% under the TCJA, the Company revalued its net deferred tax asset at December 31, 2017 and recognized an $181,000 tax expense.