Entity information:
INCOME TAXES
Southern Company files a consolidated federal income tax return and various state income tax returns, some of which are combined or unitary. Under a joint consolidated income tax allocation agreement, each Southern Company subsidiary's current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more current expense than would be paid if it filed a separate income tax return. PowerSecure and Southern Company Gas became participants in the income tax allocation agreement as of May 9, 2016 and July 1, 2016, respectively. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability.
Federal Tax Reform Legislation
Following the enactment of the Tax Reform Legislation, the SEC staff issued Staff Accounting Bulletin 118 – "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" (SAB 118), which provides for a measurement period of up to one year from the enactment date to complete accounting under GAAP for the tax effects of the legislation. Due to the complex and comprehensive nature of the enacted tax law changes, and their application under GAAP, Southern Company considers all amounts recorded in the financial statements as a result of the Tax Reform Legislation to be "provisional" as discussed in SAB 118 and subject to revision. Southern Company is awaiting additional guidance from industry and income tax authorities in order to finalize its accounting. The ultimate impact of the Tax Reform Legislation on deferred income tax assets and liabilities and the related regulatory assets and liabilities cannot be determined at this time. See Note 3 under "Regulatory Matters" for additional information.
Current and Deferred Income Taxes
Details of income tax provisions are as follows:
 
2017
 
2016
 
2015
 
(in millions)
Federal —
 
 
 
 
 
Current
$
(62
)
 
$
1,184

 
$
(177
)
Deferred
(6
)
 
(342
)
 
1,266

 
(68
)
 
842

 
1,089

State —
 
 
 
 
 
Current
37

 
(108
)
 
(33
)
Deferred
173

 
217

 
138

 
210

 
109

 
105

Total
$
142

 
$
951

 
$
1,194


Net cash payments (refunds) for income taxes in 2017, 2016, and 2015 were $(410) million, $(148) million, and $(9) million, respectively.
The tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases, which give rise to deferred tax assets and liabilities, are as follows:
 
2017
 
2016
 
(in millions)
Deferred tax liabilities —
 
 
 
Accelerated depreciation
$
10,267

 
$
15,392

Property basis differences
955

 
2,708

Leveraged lease basis differences
251

 
314

Employee benefit obligations
516

 
737

Premium on reacquired debt
54

 
89

Regulatory assets associated with employee benefit obligations
1,046

 
1,584

Regulatory assets associated with AROs
1,225

 
1,781

Other
697

 
907

Total
15,011

 
23,512

Deferred tax assets —
 
 
 
Federal effect of state deferred taxes
326

 
597

Employee benefit obligations
1,307

 
1,868

Over recovered fuel clause
—

 
66

Other property basis differences
446

 
401

Deferred costs
69

 
100

ITC carryforward
2,420

 
1,974

Federal NOL carryforward
518

 
1,084

Unbilled revenue
57

 
92

Other comprehensive losses
84

 
152

AROs
1,197

 
1,732

Estimated Loss on Kemper IGCC
722

 
484

Deferred state tax assets
328

 
266

Regulatory liability associated with the Tax Reform Legislation (not subject to normalization)
465

 
—

Other
485

 
679

Total
8,424

 
9,495

Valuation allowance
(149
)
 
(23
)
Total deferred income taxes
6,736

 
14,040

Portion included in accumulated deferred tax assets
(106
)
 
(52
)
Accumulated deferred income taxes
$
6,842

 
$
14,092


The implementation of the Tax Reform Legislation significantly reduced accumulated deferred income taxes, partially offset by bonus depreciation provisions in the Protecting Americans from Tax Hikes Act. The Tax Reform Legislation also significantly reduced tax-related regulatory assets and increased tax-related regulatory liabilities.
At December 31, 2017, the tax-related regulatory assets to be recovered from customers were $825 million. These assets are primarily attributable to tax benefits flowed through to customers in prior years, deferred taxes previously recognized at rates lower than the current enacted tax law, and taxes applicable to capitalized interest.
At December 31, 2017, the tax-related regulatory liabilities to be credited to customers were $7.3 billion. These liabilities are primarily attributable to deferred taxes previously recognized at rates higher than the current enacted tax law and to unamortized ITCs.
In accordance with regulatory requirements, deferred federal ITCs for the traditional electric operating companies and the natural gas distribution utilities are amortized over the life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits amortized in this manner amounted to $22 million in 2017, $22 million in 2016, and $21 million in 2015. Southern Power's deferred federal ITCs are amortized to income tax expense over the life of the asset. Credits amortized in this manner amounted to $57 million in 2017, $37 million in 2016, and $19 million in 2015. Also, Southern Power received cash related to federal ITCs under the renewable energy incentives of $162 million for the year ended December 31, 2015. No cash was received related to these incentives in 2017 and 2016. Furthermore, the tax basis of the asset is reduced by 50% of the ITCs received, resulting in a net deferred tax asset. Southern Power has elected to recognize the tax benefit of this basis difference as a reduction to income tax expense in the year in which the plant reaches commercial operation. The tax benefit of the related basis differences reduced income tax expense by $18 million in 2017, $173 million in 2016, and $54 million in 2015. See "Unrecognized Tax Benefits" below for further information.
Tax Credit Carryforwards
At December 31, 2017, Southern Company had federal ITC and PTC carryforwards (primarily related to Southern Power) which are expected to result in $2.1 billion of federal income tax benefits. The federal ITC carryforwards begin expiring in 2034 but are expected to be fully utilized by 2027. The PTC carryforwards begin expiring in 2032 but are expected to be fully utilized by 2027. The acquisition of additional renewable projects could further delay existing tax credit carryforwards. The ultimate outcome of these matters cannot be determined at this time.
Additionally, Southern Company had state ITC carryforwards for the state of Georgia totaling approximately $318 million, which will expire between 2020 and 2027 but are expected to be fully utilized.
Net Operating Loss
After carrying back portions of the federal NOL generated in 2016, Southern Company had a consolidated federal NOL carryforward of approximately $2.3 billion at December 31, 2017. The federal NOL will begin expiring in 2037 but is expected to be fully utilized by 2019. The ultimate outcome of this matter cannot be determined at this time.
At December 31, 2017, the state NOL carryforwards for Southern Company's subsidiaries were as follows:
Jurisdiction
Approximate NOL Carryforwards
Approximate Net State Income Tax Benefit
Tax Year NOL
Begins Expiring
 
(in millions)
 
Mississippi
$
2,890

$
114

2032
Oklahoma
986

47

2036
Georgia
524

23

2019
New York
229

13

2036
New York City
209

15

2036
Florida
304

13

2034
Other states
465

24

Various
Total
$
5,607

$
249



Effective Tax Rate
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
 
2017
 
2016
 
2015
Federal statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
State income tax, net of federal deduction
12.5

 
2.1

 
1.9

Employee stock plans dividend deduction
(4.1
)
 
(1.2
)
 
(1.2
)
Non-deductible book depreciation
3.1

 
0.9

 
1.2

AFUDC-Equity
(2.6
)
 
(2.0
)
 
(2.2
)
Non-deductible equity portion on Kemper IGCC write-off
15.7

 
—

 
—

ITC basis difference
(1.7
)
 
(5.0
)
 
(1.5
)
Federal PTCs
(12.1
)
 
(1.2
)
 
—

Amortization of ITC
(4.2
)
 
(0.9
)
 
(0.5
)
Tax Reform Legislation
(25.6
)
 
—

 
—

Other
(2.7
)
 
(0.4
)
 
0.2

Effective income tax rate
13.3
 %
 
27.3
 %
 
32.9
 %

Southern Company's effective tax rate is typically lower than the statutory rate due to employee stock plans' dividend deduction, non-taxable AFUDC equity, and federal income tax benefits from ITCs and PTCs. However, in 2017, the effective tax rate was primarily lower due to the remeasurement of deferred income taxes resulting from the Tax Reform Legislation.
In March 2016, the FASB issued ASU 2016-09, which changed the accounting for income taxes for share-based payment award transactions. Entities are required to recognize all excess tax benefits and deficiencies related to the exercise or vesting of stock compensation as income tax expense or benefit in the income statement. The adoption of ASU 2016-09 did not have a material impact on Southern Company's overall effective tax rate. See Note 1 under "Recently Issued Accounting Standards" for additional information.
Legal Entity Reorganization
In September 2017, Southern Power began a legal entity reorganization of various direct and indirect subsidiaries that own and operate substantially all of its solar facilities, including certain subsidiaries owned in partnership with various third parties. The reorganization included the purchase of all of the redeemable noncontrolling interests, representing 10% of the membership interests, in Southern Turner Renewable Energy, LLC. The reorganization is expected to be substantially completed in the first quarter 2018 and is expected to result in estimated tax benefits totaling between $50 million and $55 million related to certain changes in state apportionment rates and net operating loss carryforward utilization that will be recorded in the first quarter 2018. The ultimate outcome of this matter cannot be determined at this time.
Unrecognized Tax Benefits
Changes during the year in unrecognized tax benefits were as follows:
 
2017
 
2016
 
2015
 
(in millions)
Unrecognized tax benefits at beginning of year
$
484

 
$
433

 
$
170

Tax positions increase from current periods
10

 
45

 
43

Tax positions increase from prior periods
10

 
21

 
240

Tax positions decrease from prior periods
(196
)
 
(15
)
 
(20
)
Reductions due to settlements
(290
)
 
—

 
—

Balance at end of year
$
18

 
$
484

 
$
433


The tax positions increase from current and prior periods for 2017 and 2016 relate primarily to state tax benefits and charitable contribution carryforwards that were impacted as a result of the settlement of R&E expenditures associated with the Kemper County energy facility, as well as deductions for R&E expenditures associated with the Kemper County energy facility. The tax positions decrease from prior periods for 2017 and 2016, and the reductions due to settlements for 2017, relate primarily to the settlement of R&E expenditures associated with the Kemper County energy facility and federal income tax benefits from deferred ITCs. See Note 3 under "Kemper County Energy Facility" and "Section 174 Research and Experimental Deduction" herein for more information.
The impact on Southern Company's effective tax rate, if recognized, is as follows:

2017

2016

2015

(in millions)
Tax positions impacting the effective tax rate
$
18


$
20


$
10

Tax positions not impacting the effective tax rate
—


464


423

Balance of unrecognized tax benefits
$
18


$
484


$
433


The tax positions impacting the effective tax rate primarily relate to state tax benefits and charitable contribution carryforwards that were impacted as a result of the settlement of R&E expenditures associated with the Kemper County energy facility and Southern Company's estimate of the uncertainty related to the amount of those benefits. The tax positions not impacting the effective tax rate for 2016 and 2015 relate to deductions for R&E expenditures associated with the Kemper County energy facility. See "Section 174 Research and Experimental Deduction" herein for more information. These amounts are presented on a gross basis without considering the related federal or state income tax impact.
Accrued interest for all tax positions other than the Section 174 R&E deductions was immaterial for all years presented.
Southern Company classifies interest on tax uncertainties as interest expense. Southern Company did not accrue any penalties on uncertain tax positions.
It is reasonably possible that the amount of the unrecognized tax benefits could change within 12 months. The settlement of federal and state audits could impact the balances significantly. At this time, an estimate of the range of reasonably possible outcomes cannot be determined.
The IRS has finalized its audits of Southern Company's consolidated federal income tax returns through 2016. Southern Company is a participant in the Compliance Assurance Process of the IRS. However, the pre-Merger Southern Company Gas 2014, 2015, and June 30, 2016 federal tax returns are currently under audit. The audits for Southern Company's state income tax returns have either been concluded, or the statute of limitations has expired, for years prior to 2011.
Section 174 Research and Experimental Deduction
Southern Company has reflected deductions for R&E expenditures related to the Kemper County energy facility in its federal income tax calculations since 2013 and filed amended federal income tax returns for 2008 through 2013 to also include such deductions. In December 2016, Southern Company and the IRS reached a proposed settlement, which was approved on September 8, 2017 by the U.S. Congress Joint Committee on Taxation, resolving a methodology for these deductions. As a result of this approval, Southern Company recognized $176 million of previously unrecognized tax benefits and reversed $36 million of associated accrued interest.