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, 2012, Artesian Resources has fully utilized all of its federal net operating loss carry-forwards aggregating approximately $7.3 million. As of December 31, 2012, Artesian Resources has separate company state net operating loss carry-forwards aggregating approximately $8.5 million. These net operating loss carry-forwards will expire if unused between 2024 and 2031. 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 $53,000 in 2011 to approximately $57,000 in 2012.

At December 31, 2012, for federal income tax purposes, there were alternative minimum tax credit carry-forwards aggregating $5.0 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, 2012 or December 31, 2011. The Company remains subject to examination by state authorities for tax years 2009 through 2011 and by federal authorities for the tax years 2009 through 2012.

Components of Income Tax Expense
In thousands	For the Year Ended December 31,
State income taxes		2012		2011		2010
Current		$	145	$	106	$	127
Deferred			1,312		994		984
Total state income tax expense		$	1,457	$	1,100	$	1,111

	For the Year Ended December 31,
Federal income taxes			2012		2011		2010
Current		$	1,795	$	---	$	823
Deferred			3,364		3,554		3,148
Total federal income tax expense		$	5,159	$	3,554	$	3,971

Reconciliation of effective tax rate:
	For the Year Ended December 31,
In thousands		2012		2012		2011		2011		2010		2010
		Amount		Percent		Amount		Percent		Amount		Percent
Reconciliation of effective tax Rate
Income before federal and state income taxes	$	16,460	%	100.0	$	11,401	%	100.0	$	12,702	%	100.0

Amount computed at statutory rate		5,596		34.0		3,876		34.0		4,319		34.0
Reconciling items
State income tax-net of federal tax benefit		952		5.8		711		6.2		726		5.7
Other		68		0.4		67		0.6		37		0.3
Total income tax expense and effective rate	$	6,616	%	40.2	$	4,654	%	40.8	$	5,082	%	40.0

Deferred income taxes at December 31, 2012, 2011, and 2010 were comprised of the following:

	For the Year Ended December 31,
In thousands	2012			2011			2010

Deferred tax assets related to:
Federal alternative minimum tax credit carry-forwards	$	5,031		$	3,688		$	3,775
Federal and state operating loss carry-forwards		481			3,077			2,521
Bad debt allowance		96			127			132
Valuation allowance		(57	)		(53	)		(45	)
Stock options		294			251			---
Other		326			344			196
Total deferred tax assets	$	6,171		$	7,434		$	6,579

Deferred tax liabilities related to:
Property plant and equipment basis differences	$	(51,687	)	$	(48,681	)	$	(43,767	)
Expenses of rate proceedings		(53	)		(144	)		(18	)
Property taxes		(496	)		(494	)		(470	)
Other		(651	)		(619	)		(341	)
Total deferred tax liabilities	$	(52,887	)	$	(49,938	)	$	(44,596	)


Net deferred tax liability	$	(46,716	)	$	(42,504	)	$	(38,017	)

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	$	(837	)	$	(772	)	$	(459	)
Non-current deferred tax liability		(45,879	)		(41,732	)		(37,558	)
Net deferred tax liability	$	(46,716	)	$	(42,504	)	$	(38,017	)

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

Classification
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
For the Year Ended December 31, 2010 Valuation allowance for deferred tax assets	$37	$8	---	$45