NOTE

– INCOME TAXES

The provision (benefit) for income taxes for the years ended

December 31, 2018

and

2017,

includes these components:

	Years Ended December 31,
	2018		2017
Current
Federal	$	284,797	$	(109,214	)
State		79,196		13,194
Deferred expense & change in valuation allowance		51,706		914,130
Net deferred tax asset revaluation adjustment		-		1,150,318
Provision (benefit) for income taxes	$	415,699	$	1,968,428

December 22, 2017,

the President signed into law the Tax Cuts and Jobs Act (the “Act”). The Act includes a number of changes in existing tax law impacting businesses including, among other things, a permanent reduction in the corporate income tax rate to

21%

from

34%

The rate reduction took effect on

January 1, 2018.

As a result of the lower corporate tax rate, the Company has recorded a revaluation adjustment of

$1.2

million to reduce its deferred tax assets effective

December 31, 2017,

with a corresponding charge to income tax expense.

Income tax expense differs from the amounts computed by applying federal income tax rates of

21%

2018

and

34%

2017,

to earnings before federal income tax expense. These differences are primarily caused by the valuation allowance reversal in

2016

and net deferred tax asset revaluation adjustment in

2017,

expenses that are

not

deductible for tax purposes and tax adjustments related to prior federal income tax returns.

A reconciliation of income tax expense at the Federal statutory rate to the Company’s actual income tax expense for all periods presented is shown below:

	Years Ended December 31,
	2018						2017
	Amount			Rate			Amount			Rate
Federal tax at the statutory rate	$	312,735			21	%	$	791,867			34	%
Benefit from permanent differences:
State income taxes, net of Federal tax benefit		58,156			4			73,896			3
Bank-owned life insurance		(59,303	)		(4	)		(74,019	)		(3	)
Meals & entertainment		9,169			1			-			-
Net deferred tax asset revaluation adjustment		-			-			1,150,318			49
Other, net		94,942			6			26,366			1

Provision (benefit) for income taxes	$	415,699			28	%	$	1,968,428			85	%

The tax effects of temporary differences related to deferred taxes were:

	As of December 31,
	2018			2017
Deferred tax assets:
Allowance for loan losses	$	721,765		$	720,047
Unrealized losses on AFS securities		135,038			77,931
Board of Directors retirement plan		239,957			232,748
Other, net		311,762			155,858
Deferred compensation		215,033			183,155
Accrued bonus		216,254			258,069
Purchase accounting		-			4,325
Organizational costs		70,638			93,404
Net operating loss carryforwards		840,001			1,014,199
Total deferred tax assets		2,750,448			2,739,736

Deferred tax liabilities:
FHLB stock dividends		(52,709	)		(32,412	)
Depreciation and amortization		(276,802	)		(336,613	)
Loan origination costs		(195,770	)		(179,185	)
Purchase accounting		(28,239	)		-
Total deferred tax liabilities		(553,520	)		(548,210	)

Net deferred tax asset		2,196,928			2,191,526

A valuation allowance for deferred tax assets is recorded when 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 tax assets is dependent upon the generation of future taxable income and tax planning strategies which will create taxable income during the periods in which those temporary differences become deductible. Management considered the scheduled reversal of deferred tax liabilities, projected future taxable income, NOL carry-back potential, and tax planning strategies in making this assessment. Based upon the Company’s assessment of all available evidence, management determined it was more-likely-than-

not

that the net deferred tax asset would be realized at

December 31, 2018.

December 31, 2018,

the Company had federal operating loss carry-forwards of approximately

$4.0

million.all of which subject to Internal Revenue Code (“IRC”) Section

382

limitations, which limit the annual use of acquired losses to

$250,000

per year, and begin to expire in

2028.

December 31, 2018,

the Company has recorded deferred tax assets of

$840,000

related to the Federal net operating loss carry-forwards.

It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than

not

to be sustained upon examination by tax authorities. As of

December 31, 2018,

2017

and

2016,

there were

material uncertain tax positions related to federal and state income tax matters. The Company does

not

expect the amounts of unrecognized tax benefits to significantly increase or decrease within the next

months.

The Company files consolidated U.S. federal and various state income/franchise tax returns. The Company is

longer subject to examination by U.S. federal taxing authorities for years before

2015

and is

longer subject to examination by state taxing authorities for years before

2014

2015.

Our federal and state tax returns have

not

been audited for the past

five

years.