Taxes on Income
Taxes on income comprise the following for the years ended December 31, 2017 and 2016:
|
| | | | | | | | | | | |
| 2017 |
| Federal | | State | | Total |
Current | $ | (24,341 | ) | | $ | 6,200 |
| | $ | (18,141 | ) |
Deferred | 230,134 |
| | 6,000 |
| | 236,134 |
|
| $ | 205,793 |
| | $ | 12,200 |
| | $ | 217,993 |
|
| 2016 |
| Federal | | State | | Total |
Current | $ | 51,357 |
| | $ | 5,368 |
| | $ | 56,725 |
|
Deferred | (86,093 | ) | | 11,000 |
| | (75,093 | ) |
| $ | (34,736 | ) | | $ | 16,368 |
| | $ | (18,368 | ) |
Taxes on income differ from the amounts computed by applying the federal income tax rate of 34% to earnings before taxes on income for the following reasons, expressed in dollars at December 31, 2017 and 2016:
|
| | | | | | | |
| 2017 | | 2016 |
Federal tax at statutory rate | $ | 34,642 |
| | $ | 30,955 |
|
Items affecting federal income tax rate: | | | |
State taxes on income, net of federal benefit | 8,052 |
| | 10,803 |
|
Tax-exempt income | (84,963 | ) | | (120,043 | ) |
Valuation allowance | (10,000 | ) | | 35,000 |
|
Effect of change in federal tax rate (1) | 302,000 |
| | — |
|
Other | (31,738 | ) | | 24,917 |
|
| $ | 217,993 |
| | $ | (18,368 | ) |
|
| | | | |
(1) Represents the adjustment from the Tax Cut and Jobs Act adopted December 22, 2017 |
Federal income tax expense for the years ending December 31, 2017 and 2016 was computed using the consolidated effective federal tax rate. The Company also recognized income tax expense pertaining to state franchise taxes payable individually by the Bank.
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below:
|
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Deferred directors’ fees | $ | 195,000 |
| | $ | 338,000 |
|
Allowance for loan losses | 134,000 |
| | 182,000 |
|
Net operating loss carryforward | 165,000 |
| | 138,000 |
|
AMT credit carryforward | 34,720 |
| | 35,000 |
|
Charitable contribution carryforward | 59,000 |
| | 86,000 |
|
Professional fees | 49,000 |
| | 77,000 |
|
Securities available for sale | 121,082 |
| | 246,159 |
|
Other | 23,278 |
| | 28,420 |
|
Gross deferred tax assets | 781,080 |
| | 1,130,579 |
|
Valuation allowance | (96,000 | ) | | (106,000 | ) |
Net deferred tax assets | 685,080 |
| | 1,024,579 |
|
Deferred tax liabilities: | | | |
Securities | — |
| | — |
|
Prepaid expenses | (14,000 | ) | | (21,000 | ) |
FHLB stock dividends | (25,000 | ) | | (38,000 | ) |
Fixed assets | — |
| | (6,000 | ) |
Intangible assets | (15,000 | ) | | (25,000 | ) |
Other | — |
| | — |
|
Gross deferred tax liabilities | (54,000 | ) | | (90,000 | ) |
Net deferred tax assets | $ | 631,080 |
| | $ | 934,579 |
|
Based upon the Company’s level of historical taxable income and anticipated future taxable income over the periods that the deferred tax assets are deductible, management has reviewed whether it is more likely than not the Company will realize the benefits of these deductible differences. Management has determined that a valuation allowance was required for deferred tax assets at December 31, 2017 and 2016, related to the charitable contribution carryforward. The charitable contribution expires if not used by 2020. In addition, as of December 31, 2017, a $34,000 valuation allowance was recorded related to the deferred Iowa income tax items of WCF Bancorp, Inc. As of December 31, 2017 the Company had a federal net operating loss carryforward of $693,000 and a state net operating loss carryforward of $382,000 which expire from 2035 to 2037.
As of December 31, 2017, the Company had no material unrecognized tax benefits. The evaluation was performed for those tax years that remain open to audit. The Company files a consolidated tax return for federal purposes and separate tax returns for the State of Iowa purposes.
Under previous law, the provisions of the IRS and similar sections of Iowa law permitted the Bank to deduct from taxable income an allowance for bad debts based on 8% of taxable income before such deduction or actual loss experience. Legislation passed in 1996 eliminated the percentage of taxable income method as an option for computing bad debt deductions for 1996 and in future years.
Deferred taxes have been provided for the difference between tax bad debt reserves and the loan loss allowances recorded in the financial statements subsequent to December 31, 1987. However, at December 31, 2017 and 2016, retained earnings contain certain historical additions to bad debt reserves for income tax purposes of $2,134,000 as of December 31, 1987, for which no deferred taxes have been provided because the Bank does not intend to use these reserves for purposes other than to absorb losses. If these amounts which qualified as bad debt deductions are used for purposes other than to absorb bad debt losses or adjustments arising from the carryback of net operating losses, income taxes may be imposed at the then-existing rates. The approximate amount of unrecognized tax liability associated with these historical additions is $523,000.