Ottawa Bancorp Inc

Note

. Income Taxes

The Company and Bank file a consolidated federal income tax return on a calendar year basis.

Income tax expense is summarized as follows:

	Years Ended December 31,
	2017			2016
Federal:
Current	$	588,767		$	87,588
Deferred		819,734			366,026
		1,408,501			453,614
State:
Current		208,047			143,769
Deferred		(112,799	)		2,411
		95,248			146,180
	$	1,503,749		$	599,794

The Company

’s income tax differed from the maximum statutory federal rate of

35%

for the periods ended as follows:

	Years Ended December 31,
	2017			2016

Expected income taxes	$	811,571		$	651,312
Income tax effect of:
State taxes, net of federal tax benefit		61,911			95,017
Tax exempt interest		(157,882	)		(178,803	)
Income taxed at lower rates		(23,188	)		(18,609	)
Revaluation of deferred taxes, Tax Cuts and Jobs Act of 2017		809,403			-
Other		1,934			50,877
	$	1,503,749		$	599,794

During t

fourth

quarter of

2017

the Company revalued its net deferred tax assets which resulted in a charge of approximately

$0.8

million to income tax expense. This income tax adjustment resulted primarily from the

December 22, 2017

enactment of the Tax Cuts and Jobs Act (the “TCJA”), which lowered the corporate tax rate from

percent to

percent. Prior to the enactment of TCJA, the Company’s net deferred tax assets were valued based upon the projection of a

percent federal future tax benefit.

The components of the net deferred tax asset are as follows:

	December 31,
	2017			2016
Deferred tax assets
Employee benefit plans	$	818,437		$	1,033,250
Allowance for loan losses		704,647			885,495
Net operating loss carryforwards		181,212			371,570
MRP and RRP compensation		132,252			182,856
Loans		84,268			191,434
Purchase accounting - acquisition expenses		90,076			133,904
Other		43,844			46,944
		2,054,736			2,845,453
Deferred tax liabilities
Unrealized gain on securities available for sale		(60,834	)		(44,473	)
Prepaid expenses		(23,973	)		(38,349	)
Origination of mortgage servicing rights		(17,916	)		(28,423	)
Core deposit intangible		(81,523	)		(140,422	)
		(184,246	)		(251,667	)
Net deferred tax asset	$	1,870,490		$	2,593,786

Stockholders’ equity at

December 31, 2017

and

2016

includes approximately

$2,268,000

for which

federal income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reductions of amounts so allocated for purposes other than bad debt losses or adjustments arising from carry-back of net operating losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approximately

$646,000

and

$887,000

December 31, 2017

and

2016,

respectively.

December 31, 2017,

the Company had federal net operating loss carry forwards of approximately

$0.9

million. At

December 31, 2016,

the Company had net operating loss carry forwards of approximately

$1.2

million, comprised of approximately

$1.1

million of federal and approximately

$0.1

million of Illinois. Per Internal Revenue Code Section

382

limitations, our use of the acquired federal net operating loss carry forward of approximately

$0.9

million at

December 31, 2017

is limited to approximately

$0.2

million per year until fully realized. The federal net operating loss carry forwards will begin to expire in

2033.

Management believes that it is more likely than

not

that the deferred tax assets included in the accompanying consolidated balance sheets will be fully utilized. We have determined that

further valuation allowance is required as of

December 31, 2017,

although there is

guarantee that those assets will be fully recognizable in future periods.