Taxes on Income

Taxes on income comprise the following:



	June 30, 2018
	Federal			State		Total
Current	$	27,099		$	12,900	$	39,999
Deferred	50,000			3,000		53,000
	$	77,099		$	15,900	$	92,999

	June 30, 2017
	Federal			State		Total
Current	$	5,182		$	2,050	$	7,232
Deferred	(50,632		)	1,000		(49,632		)
	$	(45,450	)	$	3,050	$	(42,400	)

Taxes on income for the six months ending June 30, 2018, and 2017, differ from the amounts computed by applying the federal income tax rate of 21% and 34% respectively to earnings before taxes on income for the following reasons, expressed in dollars:



	June 30, 2018			June 30, 2017
Federal tax at statutory rate	$	84,836		$	21,761
Items affecting federal income tax rate:
State taxes on income, net of federal benefit	12,561			2,013
Tax-exempt income	(22,263		)	(43,749		)
Bank-owned life insurance	231			(22,809		)
Valuation allowance	4,000			13,000
Other	13,634			(12,616		)
	$	92,999		$	(42,400	)

Federal income tax expense for the periods ended June 30, 2018 and December 31, 2017 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 June 30, 2018 and December 31, 2017 are presented below:



	June 30, 2018			December 31, 2017
Deferred tax assets:
Deferred directors’ fees	$	197,000		$	195,000
Allowance for loan losses	133,000			134,000
Net operating loss carryforward	135,000			165,000
AMT credit	34,720			34,720
Charitable contribution	59,000			59,000
Professional fees	48,000			49,000
Securities available-for-sale	351,523			121,082
Fixed assets	(8,000		)	—
Other	12,280			23,278
Gross deferred tax assets	962,523			781,080
Valuation allowance	(100,000		)	(96,000		)
Net deferred tax assets	862,523			685,080
Deferred tax liabilities:
Prepaid expenses	(14,000		)	(14,000		)
FHLB stock dividends	(25,000		)	(25,000		)
Intangible assets	(15,000		)	(15,000		)
Gross deferred tax liabilities	(54,000		)	(54,000		)
Net deferred tax assets	$	808,523		$	631,080

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 June 30, 2018 and December 31, 2017, related to the charitable contribution carryforward and Iowa corporate net operating loss carryovers. The charitable contribution expires if not used by 2020.

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 June 30, 2018 and December 31, 2017, retained earnings contain certain historical additions to bad debt reserves for income tax purposes of approximately $0 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 $0.