Note 10. Income Taxes

The components of the income tax provision (benefit) for the years ended December 31, 2013, 2012 and 2011 are as follows:


	2013			2012		2011
Current
Federal	$	—		$	—	$	—
State		(21,080	)		—		—

Total		(21,080	)		—		—

Deferred
Federal		(317,704	)		—		—
State		—			—		—

Total		(317,704	)		—		—

Benefit for income taxes	$	(338,784	)	$	—	$	—

A reconciliation of the anticipated income tax benefit (computed by applying the statutory Federal income tax rate of 34% to loss before income taxes) to the income tax provision (benefit) as reported in the statements of operations for the years ended December 31, 2013, 2012 and 2011 is as follows:


	2013			2012			2011
Benefit for income taxes at statutory Federal rate	$	(2,593,428	)	$	(182,296	)	$	(5,256,200	)
State taxes, net of Federal benefit		(21,080	)		—			—
Dividends received deduction		—			—			(50,100	)
Nondeductible expenses		6,006			4,570			5,900
Write-off of DTA due to 382 Limitation		—			—			10,382,276
Change in cash surrender value of life insurance		(177,843	)		(175,814	)		(216,300	)
Increase (decrease) in valuation allowance		2,447,561			329,113			(4,853,660	)
Other		0			24,427			(11,916	)

Total benefit for income taxes	$	(338,784	)	$	—		$	—

At December 31, 2013 and 2012, the tax effects of temporary differences that give rise to the Company’s deferred tax assets and deferred tax liabilities are as follows:


	2013			2012			2011
Deferred tax assets:
Allowance for loan losses	$	2,212,628		$	2,343,090		$	3,655,330
Nonaccrual interest		1,474,105			1,324,824			774,233
Premises and equipment		1,276,365			1,073,884			1,090,095
Accrued expenses		375,881			224,523			405,108
Share-based Compensation		—			72,456			—
Capital loss carryover		572,301			572,301			572,301
State NOL carryforward benefit		3,612,623			3,237,434			3,081,579
Federal NOL carryforward benefit		18,427,179			15,850,218			14,755,699
NOL write-off for § 382 Limitation		(10,382,276	)		(10,382,276	)		(10,382,276	)
Federal AMT benefit estimate		—			317,704			317,704
Unrealized loss AFS		462,192			250,819			—
Other		36,791			153,959			144,809

Gross deferred tax assets		18,067,789			15,038,936			14,414,582
Valuation allowance		(18,067,789	)		(15,038,936	)		(14,414,582	)

Deferred tax assets, net of valuation allowance		—			—			—
Deferred tax liabilities
Investment securities		—			—			(82,337	)
Other		—			—			—

Gross deferred tax liabilities		—			—			(82,337	)

Deferred tax liability, net	$	—		$	—		$	(82,337	)

The net deferred tax liability at December 31, 2013 and 2012 is included in accrued expenses and other liabilities in the consolidated balance sheets.

The allocation of the deferred tax (benefit) provision items charged to operations and items charged directly to equity for the years ended December 31, 2013, 2012 and 2011 are as follows:


	2013		2012		2011
Deferred tax benefit allocated to equity	$	—	$	—	$	(712,832	)
Deferred tax provision allocated to operations		—		—		—

Total deferred tax benefit	$	—	$	—	$	(712,832	)

The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. Management has reviewed the deferred tax position of the Company at December 31, 2013. The deferred tax position has been affected by several significant transactions in prior years. These transactions include increased provision for loan losses, the levels of non-accrual loans and other-than-temporary impairment write-offs of certain investments, as well as a loss on the bulk sale of loans in 2011. As a result, the Company is in a cumulative net loss position at December 31, 2013, and under the applicable accounting guidance, has concluded that it is not more-likely-than-not that the Company will be able to realize its deferred tax assets and, accordingly, has established a full valuation allowance totaling $18.1 million against its deferred tax asset at December 31, 2013. The valuation allowance is analyzed quarterly for changes affecting the deferred tax asset. If, in the future, the Company generates taxable income on a sustained basis, management’s conclusion regarding the need for a deferred tax asset valuation allowance could change, resulting in the reversal of all or a portion of the deferred tax asset valuation allowance.

As measured under the rules of the Tax Reform Act of 1986, the Company has undergone a greater than 50% change of ownership in 2010. Consequently, use of the Company’s net operating loss carryforward and certain built in deductions available against future taxable income in any one year are limited. The maximum amount of carry forwards available in a given year is limited to the product of the Company’s fair market value on the date of ownership change and the federal long-term tax-exempt rate, plus any limited carry forward not utilized in prior years.

The Company has analyzed the impact of its recent ownership change and has calculated the annual limitation under IRC 382 to be $284,000. Based on the analysis, the Company has determined that the pre-change net operating losses and net unrealized built-in deductions were approximately $36.2 million. Based on a 20 year carry forward period, the Company could utilize approximately $5.6 million of the pre-change net operating losses and built-in deductions. Therefore, the Company wrote-off approximately $10.4 million of deferred tax assets in 2011. Accordingly, the write-off of the deferred tax asset did not affect the consolidated financial statements as there was a full valuation allowance against the deferred tax asset. At December 31, 2013, the Company had $19.1 million of U.S. federal pre-tax net operating loss carryforwards, which are not subject to the above mentioned IRC Section 382 limitation and do not begin to expire until 2020.