ONEOK INC /NEW/

INCOME TAXES

The following table sets forth our provision for income taxes for the periods indicated:



	Years Ended December 31,
	2017		2016			2015
	(Thousands of dollars)
Current income tax provision
Federal	$	295	$	6,086		$	13,191
State	1,670		2,449			2,967
Total current income taxes from continuing operations	1,965		8,535			16,158
Deferred income tax provision
Federal	376,728		193,974			116,681
State	68,589		9,897			3,761
Total deferred income taxes from continuing operations	445,317		203,871			120,442
Total provision for income taxes from continuing operations	447,282		212,406			136,600
Discontinued operations	—		(1,250		)	2,031
Total provision for income taxes	$	447,282	$	211,156		$	138,631

The following table is a reconciliation of our income tax provision from continuing operations and excludes discontinued operations for the periods indicated:



	Years Ended December 31,
	2017			2016			2015
	(Thousands of dollars)
Income before income taxes	$	1,040,801		$	957,956		$	521,876
Less: Net income attributable to noncontrolling interests	205,678			391,460			134,218
Net income attributable to ONEOK before income taxes	835,123			566,496			387,658
Federal statutory income tax rate	35.0		%	35.0		%	35.0		%
Provision for federal income taxes	292,293			198,274			135,680
State income taxes, net of federal benefit	16,197			12,303			5,800
Deferred tax rate change, inclusive of valuation allowance	141,283			43			928
Other, net	(2,491		)	1,786			(5,808		)
Income tax provision	$	447,282		$	212,406		$	136,600

The following table sets forth the tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities for the periods indicated:



	December 31, 2017			December 31, 2016
Deferred tax assets	(Thousands of dollars)
Employee benefits and other accrued liabilities	$	85,355		$	118,831
Federal net operating loss	159,162			26,334
State net operating loss and benefits	73,277			39,759
Derivative instruments	30,060			32,082
Other	13,546			2,425
Total deferred tax assets	361,400			219,431
Valuation allowance for state net operating loss and tax credits
Carryforward expected to expire prior to utilization	(66,632		)	(9,430		)
Net deferred tax assets	294,768			210,001
Deferred tax liabilities
Excess of tax over book depreciation	64,508			107,249
Investment in partnerships	77,035			1,726,541
Regulatory assets	15			33
Total deferred tax liabilities	141,558			1,833,823
Net deferred tax assets (liabilities) before discontinued operations	153,210			(1,623,822		)
Discontinued operations	—			10,500
Net deferred tax assets (liabilities)	$	153,210		$	(1,613,322	)

In December 2017, the Tax Cuts and Jobs Act was signed into law. The Tax Cuts and Jobs Act makes extensive changes to the U.S. tax laws and includes provisions that, beginning in 2018, reduce the U.S. corporate tax rate to 21 percent from 35 percent, increase expensing for capital-investment, limit the interest deduction, and limit the use of net operating losses to offset future taxable income. Due to the reduction in the corporate tax rate, we revalued our deferred tax assets and liabilities as required at enactment. Our net deferred tax assets represent expected corporate tax benefits in the future. The reduction in the federal corporate tax rate reduces these benefits, which resulted in a one-time noncash charge to net income through income tax expense of $141.3 million, inclusive of the valuation allowance described below, recorded in the fourth quarter 2017. We will continue to monitor U.S. Treasury Department and IRS implementation of the Tax Cuts and Jobs Act and will apply applicable guidance and rulemaking as it becomes available.

Tax benefits related to certain state net operating loss and tax credit carryforwards will begin expiring in 2030 and 2020, respectively. Due to the new tax legislation and the impact of increased expensing for capital-investment, we believe that it is more likely than not that the tax benefits of certain state net operating loss and tax credit carryforwards will not be utilized prior to their expirations; therefore, we recorded a valuation allowance of $54.1 million related to these state tax benefits in the fourth quarter 2017.

The Tax Cuts and Jobs Act may reduce future tariff rates charged on our regulated pipelines. For regulated companies, the effect on deferred tax assets and liabilities of a change in tax rates is recorded as regulatory assets and regulatory liabilities in the period that includes the enactment date, if, as a result of an action by a regulator, it is probable that the effect of the change in tax rates will be recovered from or returned to customers through future rates. The rates charged on substantially all of our regulated natural gas pipelines have been established through shipper specific negotiation, discounts and negotiated settlements, which do not ascribe any specific cost of service elements. The rates charged on substantially all of our regulated NGL pipelines are established through negotiated transportation service agreements that are not adjusted based on a traditional cost of service. We expect future tariff rate changes, if any, related to the change in U.S. corporate tax rate to be established prospectively over time on a similar negotiated basis. If in the future the FERC or other regulatory bodies were to require a refund of previously collected amounts on our regulated pipelines, then we may record a regulatory liability through a one-time charge to expense.

On June 30, 2017, we completed the Merger Transaction in a taxable exchange to the ONEOK Partners unitholders resulting in a book/tax difference in the basis of the underlying assets acquired. We recorded a deferred tax asset of $2.1 billion, computed as the net of the equity value exchanged of $8.8 billion and noncontrolling interests of $3.0 billion at a tax rate of 37 percent. These deferred tax assets were revalued in December 2017, as described above.

As a result of adopting ASU 2016-09 in first quarter 2017, we recorded an adjustment increasing beginning retained earnings and deferred tax assets of $73.4 million to recognize the cumulative tax benefits included in net operating loss carryforwards on the tax return but not reflected in deferred tax assets as of December 31, 2016. Beginning in January 2017, all share-based payment tax effects have been recorded in earnings. In prior periods, tax benefits of employee share-based compensation were not recorded as a deferred tax asset as vesting occurred in periods we were in a net operation loss position, and a portion of the tax benefit did not reduce current taxes payable.