INCOME TAXES

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

INCOME TAXES

10. Income Taxes

On December 22, 2017, the President of the United States signed into law the 2017 Tax Act. The 2017 Tax Act includes a number of changes to the existing U.S. tax laws that impact the Company, most notably a reduction in the U.S. corporate income tax rate from 34 percent to 21 percent for tax years beginning after December 31, 2017.

The Company recognized the income tax effects of the 2017 Tax Act in its 2017 consolidated financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. The Company did not identify items for which the income tax effects of the 2017 Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017.

Total income taxes for the years ended December 31, 2018, 2017 and 2016 are presented in the table below.

	For the year ended December 31,
	2018		2017			2016
Income tax expense	$	1,108,982	$	2,814,634		$	1,688,433
Unrealized gains (losses) on securities available for sale presented in accumulated other comprehensive income (loss)		(192,280)		(116,007	)		(939,482	)
Total	$	916,702	$	2,698,627		$	748,951

Income tax expense was as follows:

	For the year ended December 31,
	2018			2017		2016
Current income taxes
Federal	$	1,326,619		$	2,538,272	$	2,438,687
State		—			—		—
Total current tax expense		1,326,619			2,538,272		2,438,687
Deferred income tax (benefit) expense		(217,637	)		276,362		(750,254	)
Total income tax expense	$	1,108,982		$	2,814,634	$	1,688,433

The differences between actual income tax expense and the amounts computed by applying the U.S. federal income tax rate of 21% to pretax income from continuing operations for the periods indicated are reconciled in the table below.

	For the year ended December 31,
	2018			2017			2016
Computed “expected” tax expense	$	1,686,702		$	2,623,595		$	2,358,069
Increase (reduction) in income taxes resulting from:
Tax rate change impact		—			666,674			—
Amortization of credit and gain		196,477			163,411			163,411
Stock based compensation		15,205			24,378			26,012
Valuation Allowance		7,538			16,952			4,314
Other		38,938			(4,768	)		(203,854	)
State income tax, net of federal benefit		(226,578	)		(329,412	)		(319,525	)
Federal Credits		(454,985	)		—			—
Tax exempt interest income		(154,315	)		(346,196	)		(339,994	)
	$	1,108,982		$	2,814,634		$	1,688,433

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2018 and 2017 are presented below.

	December 31, 2018			December 31, 2017
Deferred tax assets:
Allowance for loan losses	$	850,964		$	782,714
State credit carryforward		647,190			488,052
Unrealized gain (loss) on securities available for sale		472,421			284,877
Passthrough income		68,438			70,603
State net operating loss carryforward		74,791			67,253
Nonaccrual interest		27,956			19,209
Other real estate owned		—			18,157
Other		6,155			5,214
Total gross deferred tax assets		2,147,915			1,736,079
Valuation allowance		(74,791	)		(67,253	)
Total gross deferred tax assets, net of valuation allowance		2,073,124			1,668,826
Deferred tax liabilities:
Fixed assets, principally due to differences in depreciation		(39,294	)		(36,424	)
Deferred loan fees		(32,825	)		(31,930	)
Other		(56,481	)		(53,591	)
Prepaid expenses		(210	)		(210	)
		(128,810	)		(122,155	)
Net deferred tax assets	$	1,944,314		$	1,546,671

In 2018, the Company invested in a Federal Rehabilitation Credit. The tax credit was used during the year ended December 31, 2018. Amortization expense recognized for the year ended December 31, 2018 was $354,888. In 2016, the Company invested in a South Carolina Rehabilitation Credit. The tax credit is included in deferred tax assets and is being amortized. Amortization expense recognized for the years ended December 31, 2018 and 2017 was $306,105, and is included in other operating expense on the statement of operations.

There was a $74,791 valuation allowance for deferred tax assets at December 31, 2018 associated with the Company’s state net operating loss. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and prior to their expiration governed by the income tax code. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred income tax assets are expected to be deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 2018. The amount of the deferred income tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 34 percent to 21 percent, resulting in a $666,674 increase in income tax expense for the year ended December 31, 2017 and a corresponding $666,674 decrease in net deferred tax assets as of December 31, 2017.

The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions in accordance with applicable regulations.

Tax returns for 2015 and subsequent years are subject to examination by taxing authorities.