Note 8.

Income Taxes

Cornerstone files consolidated income tax returns with its subsidiary. Under the terms of a tax-sharing agreement, the subsidiary’s allocated portion of the consolidated tax liability is computed as if they were reporting income and expenses to the Internal Revenue Service as a separate entity.

Income tax expense in the consolidated statements of income for the years ended December 31, 2013, 2012 and 2011, consists of the following:

	2013		2012		2011

Current tax expense	$	937,460	$	960,750	$	77,279
Deferred tax expense (benefit) related to:
Allowance for loan losses		244,565		(255,287)		509,358
Other		(139,225)		(127,863)		(398,437)

Income tax expense	$	1,042,800	$	577,600	$	188,200

The income tax expense is different from the expected tax expense computed by multiplying income before income tax expense by the statutory federal income tax rates. These differences are reconciled as follows:

	2013		2012		2011

Expected tax at statutory rates	$	926,027	$	673,085	$	414,206
Increase (decrease) resulting from tax effect of:
State income taxes, net of federal tax benefit		116,843		84,928		52,263
New market tax credits		-		(180,000)		(277,500)
Other		(70)		(413)		(769)

Income tax expense	$	1,042,800	$	577,600	$	188,200

The components of the net deferred tax asset, included in other assets, are as follows:

	2013		2012
Deferred tax assets:
Deferred compensation	$	87,383	$	104,709
Deferred loan fees		43,838		107,143
Allowance for loan losses		1,226,489		1,471,054
Foreclosed assets		1,445,972		1,226,489

		2,803,682		2,909,395

Deferred tax liabilities:
Depreciation		76,884		83,150
Life insurance		205,443		204,386
Net unrealized gain on securities available for sale		167,349		907,797
Other		11,826		6,990

		461,502		1,202,323

Net deferred tax asset	$	2,342,180	$	1,707,072

ASC Topic 740, “Income Taxes,” clarifies the accounting for uncertainty in tax positions. ASC Topic 740 requires that Cornerstone recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Cornerstone recognized no interest and penalties assessed by taxing authorities on any underpayment of income tax for 2013, 2012, or 2011.