NOTE 11 — INCOME TAXES
The components of income tax expense were as follows:
| Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Current income tax expense (benefit) | $ | — | $ | 5,080 | ||||
| Deferred income tax expense (benefit) | (944,814 | ) | (2,404,737 | ) | ||||
| (944,814 | ) | (2,409,817 | ) | |||||
| Change in valuation allowance | 944,814 | 2,404,737 | ||||||
| Income tax expense | $ | — | $ | 5,080 | ||||
The following is a summary of the items that caused recorded income taxes to differ from taxes computed using the Company’s statutory federal income tax rate of 34%:
| Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Income tax benefit at federal statutory rate | $ | (879,926 | ) | $ | (1,629,769 | ) | ||
| Change in valuation allowance | 944,814 | (2,404,737 | ) | |||||
| IRC Section 382 limitation to net operating loss carry-forward | — | 4,020,027 | ||||||
| Other | (64,888 | ) | 19,559 | |||||
| Income tax expense | $ | — | $ | 5,080 | ||||
The components of the net deferred tax asset are as follows:
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Deferred tax assets (liabilities): | ||||||||
| Allowance for loan losses | $ | 278,511 | $ | 140,131 | ||||
| Lost interest on nonaccrual loans | 19,047 | 44,348 | ||||||
| Real estate acquired in settlement of loans | 187,707 | 250,453 | ||||||
| Net operating loss carry-forward | 2,757,843 | 1,987,292 | ||||||
| Deferred operational and start-up costs | 43,471 | 56,513 | ||||||
| Other-than-temporary impairment on non-marketable equity securities. | — | — | ||||||
| Unrealized loss (gain) on investment securities available for sale | (2,978 | ) | (58,648 | ) | ||||
| Internally developed software | 3,864,656 | 3,771,558 | ||||||
| Other | 229,187 | 185,313 | ||||||
| 7,377,444 | 6,376,960 | |||||||
| Valuation allowance | (7,377,444 | ) | (6,376,960 | ) | ||||
| Net deferred tax asset | $ | — | $ | — | ||||
The valuation allowance for deferred tax assets as of December 31, 2016 and 2015 was $7.4 million and $6.4 million, respectively. Accounting literature states that a deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not that the Company will not recognize the entire deferred tax asset. The determination of whether a deferred tax asset is realizable is based on the weighting all available evidence, including both positive and negative evidence. In making such judgments, significant weight is given to evidence that can be objectively verified. As of December 31, 2016 and 2015, the Company determined that it is not more likely than not that deferred tax assets will be recognized in future years.
The Company will continue to analyze deferred tax assets and the related valuation allowance on a quarterly basis, taking into account performance compared to forecasted earnings as well as current economic and internal information.
At December 31, 2016, the Company has federal operating loss carry-forwards of approximately $8.0 million that may be used to offset future taxable income and expire beginning in 2026. At December 31, 2016, the Company has state operating loss carry-forwards of approximately $1.2 million that may be used to offset future taxable income and expire beginning in 2035.
The Company has analyzed the tax positions taken or expected to be taken on its tax returns and concluded it has no liability related to uncertain tax positions in accordance with FIN 48. With limited exceptions, income tax returns for 2013 and subsequent years are subject to examination by the taxing authorities.
We have generated significant net operating losses, or NOLs, as a result of our operating results. We are generally able to carry NOLs forward to reduce taxable income in future years. However, the ability to utilize the NOLs is subject to the rules of Section 382 of the Internal Revenue Code. Section 382 generally restricts the use of NOLs after an “ownership change.” An ownership change occurs if, among other things, the shareholders (or specified groups of shareholders) who own or have owned, directly or indirectly, 5% or more of a corporation’s common stock or are otherwise treated as 5% shareholders under Section 382 and U.S. Treasury regulations promulgated thereunder because of an increase of their aggregate percentage ownership of that corporation’s stock by more than 50 percentage points over the lowest percentage of the stock owned by these shareholders over a rolling three-year period. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of taxable income a corporation may offset with NOL carryforwards. This annual limitation is generally equal to the product of the value of the corporation’s stock on the date of the ownership change, multiplied by the long-term tax-exempt rate published monthly by the Internal Revenue Service. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOL carryforwards.