The Company prepares its federal income tax return on a consolidated basis. Federal income taxes are allocated to members of the consolidated group based on taxable income. As a result of the Tax Cuts and Jobs Act signed into law on December 22, 2017, the federal corporate income tax rate decreased from 35% to 21% effective January 1, 2018. Deferred tax expense and total income tax expense were impacted by a one-time charge of $410,304 for the revaluation of the Company’s net deferred tax asset to reflect the 21% enacted tax rate in future periods.
Federal income tax expense for the years ended December 31 was as follows:
| 2017 | 2016 | |||||||
| Currently paid or payable | $ | 2,124,999 | $ | 2,096,474 | ||||
| Deferred expense (benefit) | 784,331 | (172,562 | ) | |||||
| Total income tax expense | $ | 2,909,330 | $ | 1,923,912 | ||||
Total income tax expense differed from the amounts computed at the statutory federal income tax rate of 34 percent primarily due to the following for the years ended December 31:
| 2017 | 2016 | |||||||
| Computed expense at statutory rates | $ | 3,107,813 | $ | 2,518,785 | ||||
| Tax exempt interest and BOLI | (484,454 | ) | (471,900 | ) | ||||
| Disallowed interest | 13,867 | 13,053 | ||||||
| Partnership rehabilitation and tax credits | (549,897 | ) | (857,359 | ) | ||||
| Low income housing investment amortization expense | 278,296 | 482,755 | ||||||
| NMTC amortization expense | 129,078 | 117,439 | ||||||
| Deferred tax asset revaluation to enacted tax rates | 410,304 | 0 | ||||||
| Other | 4,323 | 121,139 | ||||||
| $ | 2,909,330 | $ | 1,923,912 | |||||
The deferred income tax expense (benefit) consisted of the following items for the years ended December 31:
| 2017 | 2016 | |||||||
| Depreciation | $ | 12,377 | $ | 64,758 | ||||
| Mortgage servicing rights | (184,146 | ) | (28,011 | ) | ||||
| Deferred compensation | 281,886 | (58,194 | ) | |||||
| Bad debts | 652,671 | (90,633 | ) | |||||
| Limited partnership amortization | (15,573 | ) | 7,865 | |||||
| Investment in CFSG Partners | (39,644 | ) | 13,187 | |||||
| Core deposit intangible | (92,715 | ) | (92,716 | ) | ||||
| Loan fair value | (13,531 | ) | (7,514 | ) | ||||
| OREO write down | 80 | 6,460 | ||||||
| Prepaid expenses | 80,325 | 0 | ||||||
| Revaluation effect of unrealized loss on securities AFS | 45,106 | 0 | ||||||
| Other | 57,495 | 12,236 | ||||||
| Deferred tax expense (benefit) | $ | 784,331 | $ | (172,562 | ) | |||
Listed below are the significant components of the net deferred tax asset at December 31:
| 2017 | 2016 | |||||||
| Components of the deferred tax asset: | ||||||||
| Bad debts | $ | 1,142,001 | $ | 1,794,672 | ||||
| Deferred compensation | 20,280 | 302,166 | ||||||
| Contingent liability - MPF program | 17,793 | 45,042 | ||||||
| OREO write down | 13,860 | 13,940 | ||||||
| Capital lease | 32,609 | 63,228 | ||||||
Unrealized loss on securities AFS |
72,859 | 46,765 | ||||||
| Other | 23,210 | 22,837 | ||||||
| Total deferred tax asset | $ | 1,322,612 | $ | 2,288,650 | ||||
| Components of the deferred tax liability: | ||||||||
| Depreciation | 231,681 | 219,304 | ||||||
| Limited partnerships | 36,536 | 52,109 | ||||||
| Mortgage servicing rights | 227,490 | 411,636 | ||||||
| Investment in CFSG Partners | 75,391 | 115,035 | ||||||
| Core deposit intangible | 0 | 92,715 | ||||||
| Prepaid expenses | 80,325 | 0 | ||||||
| Fair value adjustment on acquired loans | 8,399 | 21,930 | ||||||
| Total deferred tax liability | 659,822 | 912,729 | ||||||
| Net deferred tax asset | $ | 662,790 | $ | 1,375,921 | ||||
US GAAP provides for the recognition and measurement of deductible temporary differences (including general valuation allowances) to the extent that it is more likely than not that the deferred tax asset will be realized.
The net deferred tax asset is included in other assets in the consolidated balance sheets.
ASC Topic 740, Income Taxes, defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the consolidated financial statements. The Company has adopted these provisions and there was no material effect on the consolidated financial statements. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2014 through 2017.