INCOME TAXES

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

As of December 31, 2014, Artesian Resources had fully utilized all of its federal net operating loss carrybacks and carry-forwards. During 2014, Artesian Resources incurred a federal net operating loss of $6.0 million, of which Artesian Resources will elect to carryback to 2012 and 2013 tax years. The carryback results in estimated refunds of $1.2 million and an additional alternative minimum tax (AMT) credit of $0.8 million. The remaining federal net operating loss available to carryforward is approximately $0.2 million.

As of December 31, 2014, Artesian Resources has separate company state net operating loss carry-forwards aggregating approximately $17.5 million. These net operating loss carry-forwards will expire if unused between 2024 and 2035. 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 $61,000 in 2013 to approximately $65,000 in 2014.

At December 31, 2014, for federal income tax purposes, there were alternative minimum tax credit carry-forwards aggregating $5.5 million resulting from the payment of alternative minimum tax in prior years. These alternative minimum tax credit carry-forwards may be carried forward indefinitely to offset future regular federal income taxes. The Company remains subject to examination by Federal and State authorities for tax years 2011 through 2014.

Components of Income Tax Expense
In thousands	For the Year Ended December 31,
State income taxes	2014				2013		2012
Current		$	173		$	526	$	145
Deferred			1,231			706		1,312
Total state income tax expense		$	1,404		$	1,232	$	1,457

	For the Year Ended December 31,
Federal income taxes			2014			2013		2012
Current		$	(1,073	)	$	1,199	$	1,795
Deferred			6,044			3,157		3,364
Total federal income tax expense		$	4,971		$	4,356	$	5,159

Reconciliation of effective tax rate:
	For the Year Ended December 31,
In thousands	2014			2014		2013			2013		2012			2012
	Amount			Percent		Amount			Percent		Amount			Percent
Reconciliation of effective tax Rate
Income before federal and state income taxes		$	15,881		100.0		$	13,890		100.0		$	16,460		100.0

Amount computed at statutory rate			5,400		34.0			4,722		34.0			5,596		34.0
Reconciling items
State income tax-net of federal tax benefit			918		5.8			804		5.8			952		5.8
Other			57		0.3			62		0.4			68		0.4
Total income tax expense and effective rate		$	6,375		40.1		$	5,588		40.2		$	6,616		40.2

Deferred income taxes at December 31, 2014, 2013, and 2012 were comprised of the following:

	For the Year Ended December 31,
In thousands	2014			2013			2012

Deferred tax assets related to:
Federal alternative minimum tax credit carry-forwards	$	5,459		$	4,643		$	5,031
Federal and state operating loss carry-forwards		1,045			544			481
Bad debt allowance		99			88			96
Valuation allowance		(65	)		(61	)		(57	)
Stock options		397			343			294
Other		269			264			326
Total deferred tax assets	$	7,204		$	5,821		$	6,171

Deferred tax liabilities related to:
Property plant and equipment basis differences	$	(63,427	)	$	(55,066	)	$	(51,687	)
Uncertain tax position		(179	)		-			-
Expenses of rate proceedings		(214	)		(86	)		(53	)
Property taxes		(505	)		(592	)		(496	)
Other		(734	)		(657	)		(651	)
Total deferred tax liabilities	$	(65,059	)	$	(56,401	)	$	(52,887	)


Net deferred tax liability	$	(57,855	)	$	(50,580	)	$	(46,716	)

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	$	(812	)	$	(838	)	$	(837	)
Non-current deferred tax liability		(57,043	)		(49,742	)		(45,879	)
Net deferred tax liability	$	(57,855	)	$	(50,580	)	$	(46,716	)

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, 2014 Valuation allowance for deferred tax assets		$	61		$	4		—		$	65
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

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. In 2014, the Company changed its tax method of accounting for qualifying utility system repairs effective with the tax year ended December 31, 2014 and for prior tax years. The tax accounting method was changed to permit the expensing of qualifying utility asset improvement costs that were previously being capitalized and depreciated for book and tax purposes. The Company will recognize a tax deduction on its 2014 Federal tax return when filed of $8.5 million for qualifying capital expenditures made prior to 2014 and an additional income tax deduction of $3.3 million for 2014 activity.

The Company establishes reserves for uncertain tax positions based upon management's judgment as to the sustainability of these positions. These accounting estimates related to the uncertain tax position reserve require judgments to be made as to the sustainability of each uncertain tax position based on its technical merits. The Company believes its tax positions comply with applicable law and that it has adequately recorded reserves as required. However, to the extent the final tax outcome of these matters is different than the estimates recorded, the Company would then adjust its tax reserves or unrecognized tax benefits in the period that this information becomes known. The Company has elected to recognize accued interest (net of related tax benefits) and penalties related to uncertain tax positions as a component of its income tax expense. Currently there are no interest and penalties accrued on the Company's uncertain tax positions as of December 31, 2014.

The following table provides the changes in the Company's unrecognized tax benefits:
	For the year ended December 31, 2014
In thousands	Tax		Interest		Penalty
Balance at beginning of year
Additions based on tax positions related to the current year	$	179		-		-
Additions based on tax positions related to prior years		-		-		-
Reductions for tax positions of prior years		-		-		-
Settlements		-		-		-
Lapses in Statutes of Limitations		-		-		-
Balance at end of year	$	179	$	0	$	0