Note 8. Income Taxes

Cornerstone files consolidated income tax returns with its subsidiary. Under the terms of a tax-sharing agreement, the subsidiary’s allocated portion of the consolidated tax liability is computed as if they were reporting income and expenses to the Internal Revenue Service as a separate entity.

Income tax expense in the consolidated statements of income for the years ended December 31, 2014, 2013 and 2012, consists of the following:

	2014		2013		2012

Current tax expense	$	473,257	$	937,460	$	960,750
Deferred tax (benefit) expense related to:
Allowance for loan losses		(110,983)		244,565		(255,287)
Foreclosed assets		669,694		(219,483)		(58,692)
Other		(17,963)		80,258		(69,171)

Income tax expense	$	1,014,005	$	1,042,800	$	577,600

Income tax expense is different from expected tax expense computed by multiplying income before income tax expense by the statutory federal income tax rates. These differences are reconciled as follows:

	2014		2013		2012

Expected tax at statutory rates	$	901,778	$	926,027	$	673,085
Increase (decrease) resulting from tax effect of:
State income taxes, net of federal tax benefit		113,783		116,843		84,928
New market tax credits		-		-		(180,000)
Other		(1,556)		(70)		(413)

Income tax expense	$	1,014,005	$	1,042,800	$	577,600

The components of the net deferred tax asset, included in other assets, are as follows:

	2014		2013

Deferred tax assets:
Deferred compensation	$	71,791	$	87,383
Deferred loan fees		41,861		43,838
Allowance for loan losses		1,337,472		1,226,489
Foreclosed assets		776,278		1,445,972
Other		40,890		-

		2,268,292		2,803,682

Deferred tax liabilities:
Depreciation		74,353		76,884
Life insurance		201,503		205,443
Net unrealized gain on securities available for sale		191,004		167,349
Other		-		11,826

		466,860		461,502

Net deferred tax asset	$	1,801,432	$	2,342,180

ASC Topic 740, “Income Taxes,” clarifies the accounting for uncertainty in tax positions. ASC Topic 740 requires that Cornerstone recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Cornerstone recognized no interest and penalties assessed by taxing authorities on any underpayment of income tax for 2014, 2013, or 2012.