Income Taxes
Income tax expense was as follows (in millions):
|
| | | | | | | | | | | | |
| | Year Ended | | Year Ended | | Year Ended |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
Current: | | | | | | |
Federal | | $ | 1,727 |
| | $ | 1,360 |
| | $ | 1,579 |
|
State | | 203 |
| | 172 |
| | 210 |
|
Total current | | 1,930 |
| | 1,532 |
| | 1,789 |
|
Deferred: | | | | | | |
Federal | | (6,594 | ) | | 892 |
| | 1,089 |
|
State | | 128 |
| | 95 |
| | 50 |
|
Total deferred | | (6,466 | ) | | 987 |
| | 1,139 |
|
Total | | $ | (4,536 | ) | | $ | 2,519 |
| | $ | 2,928 |
|
Reconciliation of the U.S. federal statutory income tax rate to the effective tax rate was as follows:
|
| | | | | | | | | |
| | Year Ended | | Year Ended | | Year Ended |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
U.S. Federal statutory income tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal tax benefit | | 2.8 |
| | 2.6 |
| | 2.2 |
|
Tax law change | | (97.2 | ) | | — |
| | — |
|
Other, net | | (0.4 | ) | | (0.4 | ) | | 0.1 |
|
Effective tax rate | | (59.8 | )% | | 37.2 | % | | 37.3 | % |
The components of deferred tax assets and liabilities were as follows (in millions):
|
| | | | | | | | |
| | December 31,
2017 | | December 31,
2016 |
Deferred tax liabilities: | | | | |
Property and equipment | | $ | (13,667 | ) | | $ | (20,660 | ) |
Other | | (391 | ) | | (369 | ) |
Total deferred tax liabilities | | (14,058 | ) | | (21,029 | ) |
Deferred tax assets: | | | | |
Casualty and environmental | | 196 |
| | 237 |
|
Compensation and benefits | | 111 |
| | 332 |
|
Intangible assets and liabilities | | 30 |
| | 72 |
|
Pension and retiree health and welfare benefits | | 16 |
| | 89 |
|
Long-term debt fair value adjustment under acquisition method accounting | | — |
| | 8 |
|
Other | | 163 |
| | 290 |
|
Total deferred tax assets | | 516 |
| | 1,028 |
|
Net deferred tax liability | | $ | (13,542 | ) | | $ | (20,001 | ) |
BNSF Railway and BNSF are included in the consolidated U.S. federal income tax return of Berkshire. In accordance with the income tax allocation agreement between BNSF and BNSF Railway, BNSF Railway makes payments to or receives refunds from BNSF based on its separate consolidated tax liabilities.
All U.S. federal income tax returns of BNSF Railway are closed for audit through the tax period ending February 12, 2010. BNSF Railway is currently under examination for the period February 13 - December 31, 2010 and years 2011, 2012 and 2013.
BNSF Railway and its subsidiaries have various state income tax returns in the process of examination, administrative appeal or litigation. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states.
Tax Reform
As a result of the Tax Act signed into law on December 22, 2017, the provision for income taxes for the fourth quarter of 2017 was adjusted to reflect the revaluation of BNSF Railway's deferred tax liability by $7.4 billion as a result of the reduction of the federal income tax rate from 35 percent to 21 percent effective January 1, 2018. The effective tax rate for 2017 was negative 59.8 percent. Without the decrease to income tax expense arising from the Tax Act, the effective tax rate for 2017 would have been positive 37.4 percent.
Uncertain Tax Positions
The amount of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015, was $57 million, $62 million, and $69 million, respectively. The amount of unrecognized tax benefits at December 31, 2017 that would affect the Company’s effective tax rate if recognized was $34 million, computed at the federal income tax rate expected to be applicable in the taxable period in which the amount may be incurred by the Company. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
|
| | | | | | | | | | | | |
| | Year Ended | | Year Ended | | Year Ended |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
Beginning balance | | $ | 62 |
| | $ | 69 |
| | $ | 78 |
|
Additions for tax positions related to current year | | 7 |
| | 4 |
| | 7 |
|
Additions (reductions) for tax positions taken in prior years | | (1 | ) | | (1 | ) | | (8 | ) |
Additions (reductions) for tax positions as a result of: | | | | | | |
Settlements | | — |
| | 1 |
| | 1 |
|
Lapse of statute of limitations | | (11 | ) | | (11 | ) | | (9 | ) |
Ending balance | | $ | 57 |
| | $ | 62 |
| | $ | 69 |
|
It is expected that the amount of unrecognized tax benefits will change in the next twelve months; however, BNSF Railway does not expect the change to have a significant impact on the results of operations, the financial position or the cash flows of the Company.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in income tax expense in the Consolidated Statements of Income, which is consistent with the recognition of these items in prior reporting periods. The Company had recorded a liability of approximately $6 million and $5 million for interest and penalties for the years ended December 31, 2017 and 2016, respectively. For the years ended December 31, 2017 and 2016, the incremental interest and penalty expense recognized each year was less than $1 million. For the year ended December 31, 2015, the Company recognized a reduction of approximately $4 million in interest and penalty expense.