NOTE 10 - FEDERAL INCOME TAXES

With the passage of the Tax Cuts and Jobs Act (“Tax Act”), tax law for corporations has several material changes effective beginning in 2018. The most significant change is the reduction in the corporate tax rate from 34% to 21%. Because this reduced rate was signed into law in December 2017, generally accepted accounting principles require recognition of the lower rate on the Company’s deferred tax position as of December 31, 2017. As the Company is in a net deferred tax asset position, the reduction of this benefit resulted in a $1.2 million additional charge to Federal Income Tax expense in the Company’s 2017 Consolidated Statements of Income.

The composition of income tax expense is as follows:

	(Amounts in thousands)
	Years Ended December 31,
	2017			2016			2015
Current	$	1,199		$	1,256		$	916
Deferred		(28	)		(129	)		303
Change in corporate tax rate		1,246			—			—
Total	$	2,417		$	1,127		$	1,219

The ability to realize the benefit of deferred tax assets is dependent upon a number of factors, including the generation of future taxable income, the ability to carry back taxes paid in previous years, the ability to offset capital losses with capital gains, the reversal of deferred tax liabilities, and certain tax planning strategies. A valuation allowance of $94,000 had been established to offset in its entirety the tax benefits associated with securities sold at a loss that management was able to offset in 2016. For years subsequent to 2017, the ability to carry back taxes paid in previous years has been eliminated by the Tax Act.

The following is a summary of net deferred taxes included in other assets:

	(Amounts in thousands)
	December 31,
	2017			2016
Gross deferred tax assets:
Allowance for loan and other real estate losses	$	961		$	1,655
Deferred loan origination cost - net		234			303
Impairment loss on securities		29			48
Deferred compensation		668			1,006
AMT credit carryforward		904			904
Unrealized loss on available-for-sale securities		475			1,499
Other items		333			540
Total gross deferred tax assets		3,604			5,955
Gross deferred tax liabilities:
Premises and equipment		(362	)		(566	)
Other items		(325	)		(524	)
Total net deferred tax liabilities		(687	)		(1,090	)
Net deferred tax asset	$	2,917		$	4,865

The Company had a deferred tax asset of $904,000 for credits related to Alternative Minimum Taxes (AMT) as of December 31, 2017 and December 31, 2016. The AMT credits have an unlimited carry-forward period. No valuation allowance had been established for these deferred tax assets in view of the Corporation’s ability to carry forward taxes paid and credits earned in previous years, to future years, coupled with the anticipated future taxable income as evidenced by the Corporation’s earnings potential. The Tax Act eliminates the AMT for corporations beginning in 2018. The Company expects to offset its regular tax liability in 2018, utilizing the AMT credit in its entirety.

The following is a reconciliation of the valuation allowance for net deferred tax assets:

	December 31,
	2017		2016
Valuation allowance at beginning of year	$	—	$	94,000
Utilization of capital loss carryover		—		(94,000	)
Valuation allowance at end of year	$	—	$	—

The following is a reconciliation between tax expense using the statutory tax rate of 34% and the income tax provision:

	(Amounts in thousands)
	Years Ended December 31,
	2017			2016			2015
Statutory tax expense	$	2,301		$	2,039		$	1,903
Tax effect of non-taxable interest income		(663	)		(628	)		(600	)
Tax effect of earnings on bank-owned life insurance-net		(414	)		(112	)		(115	)
Tax effect of deferred tax valuation reversal		—			(94	)		—
Change in corporate tax rate		1,246			—			—
Tax effect of low income housing credit		(149	)		(142	)		(54	)
Tax effect of non-deductible expenses		96			64			85
Federal income tax expense	$	2,417		$	1,127		$	1,219

The related income tax expense on investment securities gains amounted to $3,000 for 2017, $142,000 for 2016 and $22,000 for 2015 and is included in the federal income tax expense.

The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more-likely-than-not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The provision also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. There were no significant unrecognized tax benefits at December 31, 2017 and the Company does not expect any significant increase in unrecognized tax benefits in the next twelve months. No interest or penalties were incurred for income taxes which would have been recorded as a component of income tax expense.

There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company’s federal and state income tax returns for taxable years through 2013 have been closed for purposes of examination by the Internal Revenue Service and the Ohio Department of Revenue.