8. Income Taxes



Components of income tax expense were as follows for the years ended December 31:









For the years ended December 31, reconciliations between statutory and effective tax rates are as follows:







Deferred tax assets and liabilities are recorded for the expected future tax consequences of events that are reported in different periods for financial reporting and income tax purposes.  The majority of our deferred tax assets relate to deductions that already have been claimed for financial reporting purposes but not for tax purposes.  The majority of our deferred tax liabilities relate to differences between the tax bases and financial reporting amounts of our land and depreciable property, due to accelerated tax depreciation (including bonus depreciation), revaluation of assets in purchase accounting transactions, and differences in capitalization methods.



The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act made significant changes to federal tax law, including a reduction in the federal income tax rate from 35% to 21% effective January 1, 2018, 100% bonus depreciation for certain capital expenditures, stricter limits on deductions for interest and certain executive compensation, and a one-time transition tax on previously deferred earnings of certain foreign subsidiaries. As a result of our initial analysis of the Tax Act and existing implementation guidance, we remeasured our deferred tax assets and liabilities and computed our transition tax liability net of offsetting foreign tax credits. This resulted in a $5.9 billion reduction in our income tax expense in 2017. We also recorded a $212 million reduction to our operating expense related to income tax adjustments at equity-method affiliates.



The SEC provided guidance in SAB 118 on accounting for the tax effects of the Tax Act (See Note 3). In accordance with that guidance, some of the income tax effects recorded in 2017 are provisional, including those related to our analysis of 100% bonus depreciation for certain capital expenditures, stricter limits on deductions for certain executive compensation, the one-time transition tax, and the reduction to our operating expense related to income tax adjustments at equity-method affiliates. The accounting for these income tax effects may be adjusted during 2018 as a result of continuing analysis of the Tax Act; additional implementation guidance from the IRS, state tax authorities, the SEC, the FASB, or the Joint Committee on Taxation; and new information from domestic or foreign equity affiliates.



On July 6, 2017, the State of Illinois increased its corporate income tax rate effective July 1, 2017.  In the third quarter of 2017, we increased our deferred tax expense by $33 million to reflect the increased tax rate.



Deferred income tax (liabilities)/assets were comprised of the following at December 31:









When appropriate, we record a valuation allowance against deferred tax assets to reflect that these tax assets may not be realized. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized based on management’s judgments using available evidence for purposes of estimating whether future taxable income will be sufficient to realize a deferred tax asset. In 2017 and 2016, there were no valuation allowances.



Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.



A reconciliation of changes in unrecognized tax benefits liabilities/(assets) from the beginning to the end of the reporting period is as follows:







We recognize interest and penalties as part of income tax expense. Total accrued liabilities for interest and penalties were $8 million at both December 31, 2017, and 2016. Total interest and penalties recognized as part of income tax expense (benefit) were $(3) million for 2017, $5 million for 2016, and $(3) million for 2015.



The statute of limitations has run for all years prior to 2014 and UPC is not currently under examination by the Internal Revenue Service (IRS) for any of its open years.  In 2017, UPC amended its 2013 income tax returns, primarily to claim deductions resulting from the resolution of prior year IRS examinations.  We have not received any communication from the IRS related to these amended returns.



In 2016, UPC amended its 2011 and 2012 income tax returns to claim deductions resulting from the resolution of IRS examinations for years prior to 2011. The IRS and Joint Committee on Taxation reviewed these amended returns.  In the third quarter of 2017, we received a refund of $62 million, consisting of $60 million of tax and $2 million of interest.



In the third quarter of 2015, UPC and the IRS signed a closing agreement resolving all tax matters for tax years 2009-2010. The settlement had an immaterial effect on our income tax expense. In connection with the settlement, UPC paid $10 million in the fourth quarter of 2015.



Several state tax authorities are examining our state income tax returns for years 2010 through 2015.



We do not expect our unrecognized tax benefits to change significantly in the next 12 months.



The portion of our unrecognized tax benefits that relates to permanent changes in tax and interest would reduce our effective tax rate, if recognized. The remaining unrecognized tax benefits relate to tax positions for which only the timing of the benefit is uncertain. Recognition of the tax benefits with uncertain timing would reduce our effective tax rate only through a reduction of accrued interest and penalties.  The unrecognized tax benefits that would reduce our effective tax rate are as follows: