18. INCOME TAXES
We compute our income tax expense by applying a Texas state franchise tax rate to modified gross margin. Subsequent to the Midcoast sale, we are no longer subject to the Texas Margin Tax since all of our Texas activity was a result of owning these assets.
For the years ended December 31, 2017, 2016 and 2015, our Texas state franchise tax rate was 0.4%. Our income tax expense is summarized below:
|
| | | | | | | | | | | |
| For the year ended December 31, |
| 2017 | | 2016 | | 2015 |
|
| (in millions) |
Current state | $ | (5 | ) | | $ | 3 |
| | $ | 4 |
|
Deferred state | (3 | ) | | (4 | ) | | (1 | ) |
Total income tax (benefit) expense | $ | (8 | ) | | $ | (1 | ) | | $ | 3 |
|
Our effective tax rate is calculated by dividing the income tax expense by the pretax net book income or loss. The income base for calculating our income tax expense is modified gross margin for Texas rather than pretax net book income or loss. As a result, this difference is the only reconciling item between the statutory and effective income tax rate. Our effective tax rate is as follows:
|
| | | | | | | | | | | |
| For the year ended December 31, |
| 2017 | | 2016 | | 2015 |
|
| (in millions) |
Income before income tax | $ | 700 |
| | $ | 115 |
| | $ | 742 |
|
State income tax (benefit) expense | $ | (8 | ) | | $ | (1 | ) | | $ | 3 |
|
Effective income tax rate | (1.1 | )% | | (0.9 | )% | | 0.4 | % |
Accounting for Uncertainty in Income Taxes
The following is a reconciliation of our beginning and ending balance of unrecognized tax benefits in millions:
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
| | | | | |
| (in millions) |
Unrecognized tax benefits at January 1 | $ | 39 |
| | $ | 37 |
| | $ | 33 |
|
Additions for tax positions taken in current period | 1 |
| | 2 |
| | 4 |
|
Lapses of statute of limitations | (6 | ) | | — |
| | — |
|
Unrecognized tax benefits at December 31 | $ | 34 |
| | $ | 39 |
| | $ | 37 |
|
As of December 31, 2017, 2016 and 2015, the entire balance of unrecognized tax benefits would favorably affect our effective tax rate in future periods if recognized. It is reasonably possible that our liability for unrecognized tax benefits will not change during the next twelve months. We also recognized interest accrued related to unrecognized tax benefits and penalties as income tax expense. As of December 31, 2017, we accrued penalties of $1 million and interest of $1 million. As of December 31, 2016, we accrued penalties of $2 million and interest of $1 million. Furthermore, we recognize accrued interest income related to unrecognized tax benefits in interest income when the related unrecognized tax benefits are recognized. As such, at December 31, 2017 and 2016, $1 million and $1 million of accrued interest income, respectively, has not been included in the balance of unrecognized tax benefits.
Our tax years are generally open to examination by the IRS and state revenue authorities for calendar years ended December 31, 2017, 2016 and 2015.
US TAX REFORM
On December 22, 2017, United States legislation referred to as the "Tax Cuts and Jobs Act" (the TCJA) was signed into law. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA includes significant changes to the Internal Revenue Code of 1986 (as amended, the Code), including amendments which significantly change the taxation of individual and business entities. The most significant change included in the TCJA is a reduction in the corporate federal income tax rate from 35% to 21%. Changes in the Code from the TCJA did not have a material impact on our financial statements in 2017.