Note 18: Income Tax

The provision for income taxes includes these components:


	2019		2018		2017
Income tax expense
Currently payable (receivable)
Federal	$	2,636	$	(505)	$	3,231
State		-		-		-
Deferred
Federal		53		3,465		1,342
Effect of "Tax Cuts and Jobs Act"		-		-		2,000
State		(330)		-		220
Total income tax expense	$	2,359	$	2,960	$	6,793

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


	2019			2018			2017
Federal statutory income tax at 21%, 21% & 34%, respectively	$	5,483		$	4,583		$	6,496
Non tax captive insurance income		(275)			(245)			(310)
State taxes		(261)			-			145
Tax credits		(134)			(134)			(96)
Tax-exempt income		(1,520)			(1,355)			(1,453)
Effect of "Tax Cuts and Jobs Act"		-			-			2,000
Equity compensation		(715)			-			-
Other		(219)			111			11
Actual tax expense	$	2,359		$	2,960		$	6,793
Effective tax rate		9.03	%		13.56	%		35.55	%

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 The Tax Act repealed the corporate Alternative Minimum Tax (“AMT”) and as a result a portion of the Company’s AMT credit carryover from prior years is refundable beginning in 2018.

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


	December 31,
	2019		2018
Assets
Allowance for loan losses	$	3,201	$	3,054
Deferred compensation		2,360		1,855
Business tax and AMT credit carryovers		408		821
Net operating loss carryover		2,861		3,256
Goodwill impairment		391		630
Purchase accounting adjustments		1,070		1,322
Unrealized loss on securities available for sale		-		640
Other real estate owned		999		1,001
Other		1,316		902
Total assets		12,606		13,481

Liabilities
Unrealized gain on securities available for sale	$	(2,289)	$	-
Depreciation and amortization		(860)		(580)
FHLB stock		(298)		(298)
State income tax		(391)		(425)
Loan fees		(239)		(257)
Investments in limited partnerships		(1,218)		(1,424)
Mortgage servicing rights		(782)		(717)
Core deposit intangible		(884)		(1,042)
Other		(199)		(629)
Total liabilities		(7,160)		(5,372)

Valuation Allowance
Beginning balance		(365)		(407)
Decrease during period		65		42
Ending balance		(300)		(365)
Net deferred tax asset	$	5,146	$	7,744

The Company has a federal net operating loss carryforward acquired in the Universal acquisition of $7.1 million. The use of this carryforward is limited to $1.3 million annually. The Company also has a state net operating loss carryforward of $27.4 million that will begin to expire in 2025. In addition, the Company has an AMT credit carryover of $408,000. 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, 2019.

The Company’s federal and state income tax returns have been closed without audit by the IRS through the year ended December 31, 2015.