9. INCOME TAXES
The components of income taxes are summarized as follows:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Current tax expense (benefit): | ||||||||
| Federal | $ | - | $ | - | ||||
| State | 18,000 | 19,395 | ||||||
| 18,000 | 19,395 | |||||||
| Deferred tax expense (benefit): | ||||||||
| Federal | 436,980 | (40,111 | ) | |||||
| State | (76,638 | ) | (14,032 | ) | ||||
| 360,342 | (54,143 | ) | ||||||
| State valuation allowance, net | 33,422 | 113,236 | ||||||
| $ | 411,764 | $ | 78,488 | |||||
The following is a reconciliation of expected income taxes (benefit), computed at the applicable federal statutory rate of 34% to the actual income tax expense (benefit):
| Year Ended | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Federal income tax expense (benefit) | $ | 28,803 | $ | (13,237 | ) | |||
| Impact of Tax Reform | 422,910 | - | ||||||
| State income tax expense (benefit) | (15,974 | ) | 3,540 | |||||
| Income from life insurance | (20,732 | ) | (19,615 | ) | ||||
| Tax-exempt interest | (4,737 | ) | (6,107 | ) | ||||
| Other | (31,928 | ) | 671 | |||||
| State valuation allowance, net | 33,422 | 113,236 | ||||||
| Actual income tax (benefit) | $ | 411,764 | $ | 78,488 | ||||
The components of deferred tax assets and liabilities are as follows:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| Depreciation | $ | 102,918 | $ | 120,917 | ||||
| Benefit plan liabilities | 88,510 | 184,596 | ||||||
| Allowance for loan losses | 126,770 | 165,192 | ||||||
| Charitable contribution carryover | 3,362 | 4,113 | ||||||
| Net operating loss carryover | 595,124 | 722,316 | ||||||
| Unfunded pension liability | 303,719 | 533,578 | ||||||
| Unrealized loss on securities available for sale | 87,361 | 262,710 | ||||||
| 1,307,764 | 1,993,422 | |||||||
| Valuation allowance | (222,208 | ) | (171,569 | ) | ||||
| Total deferred tax assets | 1,085,556 | 1,821,853 | ||||||
| Deferred tax liabilities: | ||||||||
| Discounts on investments | 299 | 1,069 | ||||||
| Prepaid benefit plans | 393,200 | 533,584 | ||||||
| Net deferred loan costs/fees | 9,476 | 15,533 | ||||||
| Other | 143 | 1,092 | ||||||
| Total deferred tax liabilities | 403,118 | 551,278 | ||||||
| Net deferred tax assets | $ | 682,438 | $ | 1,270,575 | ||||
At December 31, 2017, the Company had a federal net operating loss carryover of $1,672,000 and a New York state net operating loss carryover of $2,828,000 available to offset future taxable income.
In assessing the realizability of 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. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As a result of New York State tax law changes, a valuation allowance of $222,000 has been established on the entire New York State portion of the net deferred tax asset. Based upon projections of future taxable income, management believes it is more likely than not the Company will realize the remaining deferred tax asset.
On December 22, 2017, the President signed into law the Tax Act. The new law reduces the federal corporate income tax rate from 34% to 21% for tax years beginning after December 31, 2017. Under ASC 740, “Income Taxes”, companies are required to recognize the effect of tax law changes in the period of enactment; therefore, the Company re-measured its deferred tax assets and liabilities at the enacted tax rate expected to apply when its temporary differences are expected to be realized or settled. As of the date of enactment, the resulting impact of the re-measurement of the Company’s deferred tax balances was $422,910.
The Association qualifies as a savings and loan association under the provisions of the Internal Revenue Code and, therefore, was permitted, prior to January 1, 1996, to deduct from federal taxable income an allowance for bad debts based on eight percent of taxable income before such deduction less certain adjustments, subject to certain limitations. Beginning January 1, 1996, the Association, for federal income tax purposes, must calculate its bad debt deduction using either the experience or the specific charge off method. Retained earnings at December 31, 2017 included approximately $1,700,000 of such bad deductions for which income taxes have not been provided.