Note 20 – Income Taxes

Significant components of the deferred tax assets and liabilities are as follows:

	December 31,
	2014				2013
	Current		Long-term		Current		Long-term
Deferred tax assets:
Allowance for doubtful accounts	$	141,701	$	-	$	724,534	$	-
Contributions in aid of construction		-		2,480,637		-		1,652,760
Other nondeductible accruals		46,102		-		47,484		-
Recoverable purchase gas costs		217,349		-		60,903		-
Net operating loss carryforwards		-		13,255,842		-		7,733,763
Property tax		157,683		-		154,146		-
Other		451,213		-		754,235		-

Total deferrred tax assets		1,014,048		15,736,479		1,741,302		9,386,523

Deferred tax liabilities:
Recoverable purchase gas costs		378,853		-		454,795		-
Property, plant and equipment		-		17,375,812		-		11,402,464
Unrealized gain on securities available for sale		-		549,046		61,475		-
Amortization of intangibles		-		738,608		-		539,498
Other		-		1,114,692		-		800,698

Total deferrred tax liabilities		378,853		19,778,158		516,270		12,742,660

Net deferred tax asset (liability) before valuation allowance		635,195		(4,041,679)		1,225,032		(3,356,137)
Less: valuation allowance		-		(6,496,715)		-		(5,699,029)

Total deferred tax asset (liability)		635,195		(10,538,394)		1,225,032		(9,055,166)
Discontinued operations		-		-		-		-

Net deferred tax asset (liability), continuing operations	$	635,195	$	(10,538,394)	$	1,225,032	$	(9,055,166)

Income tax expense from continuing operations consists of the following:

	Year Ended December 31,
	2014		2013		2012
Current income tax expense (benefit):
Federal	$	49,270	$	(344,342)	$	(150,224)
State		10,961		120,753		245,483

Total current income tax expense (benefit)		60,231		(223,589)		95,259

Deferred income tax expense:
Federal		1,987,409		3,692,413		2,030,525
State		138,414		(200,217)		252,403

Total deferred income tax expense		2,125,823		3,492,196		2,282,928

Total income taxes before credits		2,186,054		3,268,607		2,378,187
Investment tax credit, net		(21,062)		(21,062)		(21,062)

Total income tax expense		2,164,992		3,247,545		2,357,125
Income tax expense from discontinued operations		(617,410)		(223,834)		(400,326)

Income tax expense from continuing operations	$	1,547,582	$	3,023,711	$	1,956,799

Income tax position differs from the amount computed by applying the Federal statutory rate to pre-tax income from continuing operations as demonstrated in the table below:

	Year Ended December 31,
	2014		2013		2012

Tax expense at statutory rate of 34%	$	2,015,101	$	3,372,404	$	2,065,991
State income tax, net of federal tax expense		307,099		348,151		228,051
Amortization of deferred investment tax credits		(21,062)		(21,062)		(21,062)
Change in valuation allowance		(397,619)		(237,557)		(262,343)
Permanent differences		24,580		134,583		140,211
State rate change		149,015		(346,149)		-
Other		87,878		(2,825)		206,277

Total income tax expense		2,164,992		3,247,545		2,357,125
Income tax expense from discontinued operations		(617,410)		(223,834)		(400,326)

Income tax expense from continuing operations	$	1,547,582	$	3,023,711	$	1,956,799

In 2013, due to the increasing disparity between the tax rates and rules for state income taxes in the states in which the Company operates, the Company changed from using a blended effective tax rate for all its subsidiaries to calculating an effective tax rate for each subsidiary based on each subsidiary’s taxable income and the applicable state tax. This resulted in a decrease in the state effective rate for most subsidiaries offset by an increased effective rate for subsidiaries with operations in North Carolina and Kentucky, with the resulting tax benefit of $336,007 as noted on the “State rate change” line item above. The Company’s Frontier Utilities subsidiary operates in North Carolina and had gross deferred tax assets and net operating losses from the acquisition of Frontier Utilities in 2007 totaling $98.0 million, offset by a 100% valuation allowance of equal amount. Applying the increased effective rate for North Carolina caused an increase in deferred tax assets of $1,970,586 offset by an increase in the corresponding valuation allowance of the same amount. After including the effect of offsetting decreases from other states, the net increase to expense from applying the separate subsidiary effective rates to the valuation allowance is $1,761,514. Combining the ($237,557) from the “Change in valuation allowance” line item above, results in total expense from the change in valuation allowance of $1,523,957.

The Company has approximately $22.5 million in federal net operating loss carryovers as of December 31, 2014. The net operating losses begin to expire in 2024. Due to acquisitions and changes in ownership, these net operating loss carryovers are subject to Section 382 of the Internal Revenue Code. The Company has placed a valuation allowance of $96,000 on the portion relating to its acquisition of Cut Bank Gas in 2009. The Company has approximately $66.8 million of state net operating loss carryovers as of December 31, 2014. The Company has recorded a state deferred tax asset valuation allowance of $4.7 million against the state net operating loss carryover. In addition, the Company has approximately $20.0 million of carryover tax basis as of December 31, 2014. The Company has recorded a state deferred tax asset valuation allowance of $1.7 million related to the carryover tax basis of the subsidiaries, since the carryover tax basis is subject to Section 382 of the Internal Revenue Code. Management has concluded that the realization of these state deferred tax assets do not meet the “more-likely-than-not” requirements of ASC 740.

In assessing the ability to realize the 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 tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future results of operations, and tax planning strategies in making this assessment.

The Company adopted the applicable provisions of ASC 740 to recognize, measure, and disclose uncertain tax positions in the financial statements. Under ASC 740, tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption and in subsequent periods. During the years ended December 31, 2014, 2013 and 2012, no adjustments were recognized for uncertain tax benefits.

The tax years after 2010 remain open to examination by the major taxing jurisdictions in which the Company operates, although no material changes to unrecognized tax positions are expected within the next twelve months.

During 2012, the Company filed Form 3115 with the Internal Revenue Service for an application for change in accounting method for customer recoveries in Ohio due to rate changes. This application has subsequently been approved by the IRS. Under the Company’s prior method of accounting for customer recoveries in Ohio, income was recognized before the “all events test” for income had been satisfied. At the point at which we were recognizing such income, we did not have a fixed right to such income. In our application, we proposed to apply the “all events test” for income to customer recoveries, such that income will now be recognized in connection with such item only when it has a fixed right to receive such income, and the amount can be determined with reasonable accuracy.