NOTE 14 – Income Taxes

The provision for income taxes included in the accompanying consolidated financial statements consists of the following components:


	June 30, 2019		June 30, 2018
Current tax expense (benefit):
Federal	$	(73,075)	$	(259,421)
State		(12,578)		(104,823)
		(85,653)		(364,244)
Deferred tax expense (benefit):
Federal		30,589		(61,178)
State		—		—
		30,589		(61,178)

Total income tax expense (benefit)	$	(55,064)	$	(425,422)


	June 30, 2019		June 30, 2018
Deferred tax assets
Federal net operating loss	$	6,858,921	$	6,618,021
Other real estate owned		708,259		819,818
State loss and contribution		3,050,448		2,978,855
Unrealized loss on available for sale securities		—		118,031
Bad debt reserve		352,489		360,714
Pension		226,412		—
Other assets		74,554		111,107
Total deferred tax assets		11,271,083		11,006,546
Deferred tax liabilities
Pension		—		(64,891)
Deferred loan fees		(131,008)		(131,132)
Depreciation		(113,769)		(108,766)
FHLB dividends		—		(62,985)
Unrealized gain on available for sale securities		(55,112)		—
Other liabilities		(72,573)		(74,349)
Total deferred tax liabilities		(372,462)		(442,123)
Valuation allowance		(10,868,032)		(10,503,245)
Net deferred tax asset	$	30,589	$	61,178


	June 30, 2019				June 30, 2018
			Percent of				Percent of
			Pretax				Pretax
	Amount		Income		Amount		Income
Reconciliation of statutory to effective rates
Federal income taxes at statutory rate	$	(95,425)	21.00	%	$	(260,849)	25.38	%
Adjustments for
True up of payable(s)		(78,506)	17.28	%		(259,421)	25.24	%
Refundable AMT tax credit		—	0.00	%		(61,178)	5.95	%
State income taxes, net of valuation allowance		(12,578)	2.77	%		(104,823)	10.20	%
Federal valuation allowance		114,767	(25.26)	%		245,698	(23.91)	%
Other - Net		16,678	(3.67)	%		15,151	(1.47)	%

Effective income taxes - operations	$	(55,064)	12.12	%	$	(425,422)	41.39	%

Deferred tax assets primarily relate to the difference in the allowance for loan losses (and other real estate owned) for book and tax purposes and net operating losses. The Company has federal net operating loss carryforwards of approximately $32.7 million and $31.5 million as of June 30, 2019 and June 30, 2018. The Company has state net operating loss carryforwards of approximately $47.5 million and $47.7 million as of June 30, 2019 and June 30, 2018. The federal losses begin to expire as of September 30, 2029 and the state losses begin to expire as of September 30, 2025. Deferred tax liabilities primarily relate to the difference in loan fees, depreciation on premises and equipment, FHLB stock basis, and prepaid pension costs.

Under U.S. GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent on judgment concerning management’s evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of the current and future economic and business conditions. Management considered both positive and negative evidence regarding the ultimate realizability of the Company’s deferred tax assets. Positive evidence includes the existence of taxes paid in available carryback years as well as the probability that taxable income will be generated in future periods while negative evidence includes losses in the current year or cumulative losses in the current and prior two years as well as general business and economic trends. At June 30, 2019 and June 30, 2018, management determined that a valuation allowance relating to the Company’s deferred tax asset was necessary. This determination was based largely on the negative evidence represented by cumulative losses in recent years caused by the significant loan loss provisions recorded during recent years associated with our loan portfolio. In addition, general uncertainty surrounding future economic and business conditions have increased the potential volatility and uncertainty of our projected earnings. Therefore, a valuation allowance of $10.9 million and $10.5 million was recorded as of June 30, 2019 and June 30, 2018.

The Company’s policy is to recognize interest and penalties related to uncertain tax positions as components of interest expense and miscellaneous expense, respectively. The Company recognized $0 of interest and penalties related to uncertain tax positions in its Consolidated Statement of Operations during the year ended June 30, 2019 and the nine months ended June 30, 2018. The Company had $0 accrued for the payment of interest and penalties related to income tax issues as of June 30, 2019 and June 30, 2018.

The Company is no longer subject to U.S. federal income tax examinations by the Internal Revenue Service for years before September 30, 2016. The Company is no longer subject to Wisconsin income tax examinations by the Wisconsin Department of Revenue for the years before September 30, 2015. The Bank is not currently under examination by any taxing jurisdiction.

During the nine months ended June 30, 2018, the Bank early adopted ASU 2018‑02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018‑02”), which was issued by FASB in February 2018. ASU 2018‑02 provides for the reclassification of the effect of re-measuring deferred tax balances related to items within AOCI to retained earnings resulting from the Tax Cuts and Jobs Act of 2017. As a result, the Bank reclassified $454,323 from AOCI to retained earnings as of and for the nine months ended June 30, 2018.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law making significant changes to the Internal Revenue Code. The Act amends the Internal Revenue Code to reduce corporate tax rates and modify various tax policies, credits, and deductions. The Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate, which is effective beginning January 1, 2018. The Company has calculated the impact of the Act in its June 30, 2018 income tax provision and as a result recorded a reduction of $4.0 million to its deferred tax asset at June 30, 2018 before applying a valuation allowance.

Under the Internal Revenue Code and Wisconsin Statutes, the Company is permitted to deduct, for tax years beginning before 1996, an annual addition to a reserve for bad debts. This amount differs from the provision for loan losses recorded for financial accounting purposes. Under prior law, bad debt deductions for income tax purposes were included in taxable income of later years only if the bad debt reserves were used for purposes other than to absorb bad debt losses. Because the Bank did not intend to use the reserve for purposes other than to absorb losses, no deferred income taxes were provided. Retained earnings at June 30, 2019 and June 30, 2018, respectively, includes approximately $7,800,000 for which no deferred Federal or state income taxes were provided.