NOTE 3

INCOME TAXES

Deferred income taxes reflect temporary differences between the valuation of assets and liabilities for financial and tax reporting.

As of December 31, 2013, Artesian Resources has fully utilized all of its federal net operating loss carry-forwards. As of December 31, 2013, Artesian Resources has separate company state net operating loss carry-forwards aggregating approximately $9.7 million. These net operating loss carry-forwards will expire if unused between 2024 and 2034. Artesian Resources has recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized due to the expiration of the state net operating loss carry-forwards. Management believes that it is more likely than not that the Company will realize the benefits of these net deferred tax assets. The valuation allowance increased from approximately $57,000 in 2012 to approximately $61,000 in 2013.

At December 31, 2013, for federal income tax purposes, there were alternative minimum tax credit carry-forwards aggregating $4.6 million resulting from the payment of alternative minimum tax in current and prior years. These alternative minimum tax credit carry-forwards may be carried forward indefinitely to offset future regular federal income taxes.

Under FASB ASC Topic 740, an uncertain tax position represents our expected treatment of a tax position taken, or planned to be taken in the future, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of our review of our tax positions, we determined that we had no material uncertain tax positions. The Company would recognize, if applicable, interest accrued and penalties related to unrecognized tax benefits in interest expense and in accordance with the regulations of the jurisdictions involved. There were no such interest and penalty charges for the years ended December 31, 2013 or December 31, 2012. The Company remains subject to examination by federal and state authorities for tax years 2010 through 2013.

Components of Income Tax Expense
In thousands	For the Year Ended December 31,
State income taxes	2013			2012		2011
Current		$	526	$	145	$	106
Deferred			706		1,312		994
Total state income tax expense		$	1,232	$	1,457	$	1,100

	For the Year Ended December 31,
Federal income taxes			2013		2012		2011
Current		$	1,199	$	1,795	$	-
Deferred			3,157		3,364		3,554
Total federal income tax expense		$	4,356	$	5,159	$	3,554

Reconciliation of effective tax rate:
	For the Year Ended December 31,
In thousands	2013			2013		2012			2012		2011			2011
	Amount			Percent		Amount			Percent		Amount			Percent
Reconciliation of effective tax Rate
Income before federal and state income taxes		$	13,890		100.0		$	16,460		100.0		$	11,401		100.0

Amount computed at statutory rate			4,722		34.0			5,596		34.0			3,876		34.0
Reconciling items
State income tax-net of federal tax benefit			804		5.8			952		5.8			711		6.2
Other			62		0.4			68		0.4			67		0.6
Total income tax expense and effective rate		$	5,588		40.2		$	6,616		40.2		$	4,654		40.8

Deferred income taxes at December 31, 2013, 2012, and 2011 were comprised of the following:

	For the Year Ended December 31,
In thousands	2013			2012			2011

Deferred tax assets related to:
Federal alternative minimum tax credit carry-forwards	$	4,643		$	5,031		$	3,688
Federal and state operating loss carry-forwards		544			481			3,077
Bad debt allowance		88			96			127
Valuation allowance		(61	)		(57	)		(53	)
Stock options		343			294			251,000
Other		264			326			344
Total deferred tax assets	$	5,821		$	6,171		$	7,434

Deferred tax liabilities related to:
Property plant and equipment basis differences	$	(55,066	)	$	(51,687	)	$	(48,681	)
Expenses of rate proceedings		(86	)		(53	)		(144	)
Property taxes		(592	)		(496	)		(494	)
Other		(657	)		(651	)		(619	)
Total deferred tax liabilities	$	(56,401	)	$	(52,887	)	$	(49,938	)


Net deferred tax liability	$	(50,580	)	$	(46,716	)	$	(42,504	)

Deferred taxes, which are classified into a net current and non-current balance, are presented in the balance sheet as follows:
Current deferred tax liability	$	(838	)	$	(837	)	$	(772	)
Non-current deferred tax liability		(49,742	)		(45,879	)		(41,732	)
Net deferred tax liability	$	(50,580	)	$	(46,716	)	$	(42,504	)

Schedule of Valuation Allowance
	Balance at Beginning of Period			Additions Charged to Costs and Expenses			Deductions		Balance at End of Period
In thousands

Classification
For the Year Ended December 31, 2013 Valuation allowance for deferred tax assets		$	57		$	4		—		$	61
For the Year Ended December 31, 2012 Valuation allowance for deferred tax assets		$	53		$	4		—		$	57
For the Year Ended December 31, 2011 Valuation allowance for deferred tax assets		$	45		$	8		—		$	53