Note 17: Income Tax

The provision for income taxes includes these components:


	2018		2017		2016
Income tax expense
Currently payable (receivable)
Federal	$	(505)	$	3,231	$	2,849
State		-		-		-
Deferred
Federal		3,465		1,342		1,317
Effect of "Tax Cuts and Jobs Act"		-		2,000		-
State		-		220		220
Total income tax expense	$	2,960	$	6,793	$	4,386

A reconciliation of income tax expense at the federal statutory rate to actual tax expense is shown below:


	2018			2017			2016
Federal statutory income tax at 21%, 34% & 34%, respectively	$	4,583		$	6,496		$	5,993
Non tax captive insurance income		(245)			(310)			(319)
State taxes		-			145			145
Tax credits		(134)			(96)			(96)
Tax-exempt income		(1,355)			(1,453)			(1,404)
Effect of "Tax Cuts and Jobs Act"		-			2,000			-
Other		111			11			67
Actual tax expense	$	2,960		$	6,793		$	4,386
Effective tax rate		13.56	%		35.55	%		24.88	%

The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017 reducing the Company’s federal corporate tax rate from 34% to 21%, effective January 1, 2018. For deferred tax assets and liabilities, amounts were remeasured based on the rates expected to reverse in the future, which was 21%. Based on this new law, we recorded an additional tax expense of $2.0 million due to the revaluation of the company’s deferred tax asset in 2017. The Tax Act repealed the corporate Alternative Minimum Tax (“AMT”) and as a result a portion of the Company’s AMT credit carryover from prior years will be refundable beginning in 2018. The amount shown above as a current receivable of $505,000 is the anticipated refund of the AMT credits for 2018.

The components of the net deferred tax asset included on the consolidated balance sheets at December 31, were as follows:


	December 31,
	2018		2017
Assets
Allowance for loan losses	$	3,054	$	3,278
Deferred compensation		1,855		2,142
Business tax and AMT credit carryovers		821		3,434
Net operating loss carryover		3,256		1,161
Goodwill impairment		630		903
Purchase accounting adjustments		1,322		624
Unrealized loss on securities available for sale		640		-
Other real estate owned		1,001		43
Other		902		414
Total assets		13,481		11,999

Liabilities
Unrealized gain on securities available for sale	$	-	$	(153)
Depreciation and amortization		(580)		(382)
FHLB stock		(298)		(253)
State income tax		(425)		(331)
Loan fees		(257)		(257)
Investments in limited partnerships		(1,424)		(1,402)
Mortgage servicing rights		(717)		(402)
Core deposit intangible		(1,042)		(114)
Other		(629)		(768)
Total liabilities		(5,372)		(4,062)

Valuation Allowance
Beginning balance		(407)		(789)
Decrease during period		42		382
Ending balance		(365)		(407)
Net deferred tax asset	$	7,744	$	7,530

The Company has a federal net operating loss carryforward acquired in the Universal acquisition of $7.2 million. The use of this carryforward is limited to $1.3 million annually. The Company also has a state net operating loss carryforward of $35.0 million that will begin to expire in 2024 and Low Income Housing tax credit carryover of $316,000 that will begin to expire in 2032. In addition, the Company has an AMT credit carryover of $505,000. Management believes that the Company will be able to utilize the benefits recorded for the state loss carryforwards and federal credits within the allotted time periods, except for the amount represented by the valuation allowance. The valuation allowance has been recorded for the possible inability to use a portion of the state net operating loss carryover.

Retained earnings include approximately $14.7 million for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amounts was approximately $3.1 million at December 31, 2018.

The Company’s federal and state income tax returns have been closed without audit by the IRS through the year ended December 31, 2014.