Income Taxes
Tax Cuts and Jobs Act
The 2017 Tax Reform impacts many areas of income tax law. The most material items include the reduction of the federal corporate tax rate from 35% to 21% effective January 1, 2018, the one-time repatriation tax of foreign earnings and profits and limitations on bonus depreciation for utility property. GAAP requires the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted. As a result of the 2017 Tax Reform, the Company reduced deferred income tax liabilities $7,115 million. As it is probable the change in deferred taxes for the Company's regulated businesses will be passed back to customers through regulatory mechanisms, the Company increased net regulatory liabilities by $5,950 million. The reduction in deferred income tax liabilities also resulted in a decrease in deferred income tax expense of $1,150 million, mostly driven by the Company's non-regulated businesses, primarily BHE Renewables, BHE's investment in BYD Company Limited and HomeServices.
As a result of the 2017 Tax Reform, BHE's consolidated net income increased by $516 million primarily due to benefits from reductions in deferred income tax liabilities of $1,150 million, partially offset by an accrual for the deemed repatriation of undistributed foreign earnings and profits totaling $419 million and equity earnings charges totaling $228 million mainly for amounts to be returned to the customers of equity investments in regulated entities.
In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 118 to assist in the implementation process of the 2017 Tax Reform by allowing for calculations to be classified as provisional and subject to remeasurement. There are three different classifications for the accounting: (1) completed, (2) not complete but reasonably estimable or (3) not complete and amounts are not reasonably estimable. The Company has recorded the impacts of the 2017 Tax Reform and believes all the impacts to be complete with the exception of the repatriation tax on foreign earnings and interpretations of the bonus depreciation rules. The Company has determined the amounts recorded and the interpretations relating to these two items to be provisional and subject to remeasurement during the measurement period upon obtaining the necessary additional information to complete the accounting. The Company believes the estimates for the repatriation tax to be reasonable, however, additional time is required to validate the inputs to the foreign earnings and profits calculation, the basis on which the repatriation tax is determined, and additional guidance is required to determine state income tax implications. The Company also believes its interpretations for bonus depreciation to be reasonable, however, as the guidance is clarified estimates may change. The accounting is estimated to be completed by December 2018.
Income tax (benefit) expense consists of the following for the years ended December 31 (in millions):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | (653 | ) | | $ | (743 | ) | | $ | (929 | ) |
State | (3 | ) | | 1 |
| | 29 |
|
Foreign | 83 |
| | 55 |
| | 84 |
|
| (573 | ) | | (687 | ) | | (816 | ) |
Deferred: | | | | | |
Federal | (76 | ) | | 1,164 |
| | 1,310 |
|
State | 100 |
| | (59 | ) | | (53 | ) |
Foreign | 2 |
| | (7 | ) | | 17 |
|
| 26 |
| | 1,098 |
| | 1,274 |
|
| | | | | |
Investment tax credits | (7 | ) | | (8 | ) | | (8 | ) |
Total | $ | (554 | ) | | $ | 403 |
| | $ | 450 |
|
A reconciliation of the federal statutory income tax rate to the effective income tax rate applicable to income before income tax (benefit) expense is as follows for the years ended December 31:
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
| | | | | |
Federal statutory income tax rate | 35 | % | | 35 | % | | 35 | % |
Income tax credits | (20 | ) | | (14 | ) | | (11 | ) |
State income tax, net of federal income tax benefit | 3 |
| | (1 | ) | | (1 | ) |
Effects of tax rate change and repatriation tax | (31 | ) | | — |
| | — |
|
Income tax effect of foreign income | (5 | ) | | (6 | ) | | (7 | ) |
Equity income | (2 | ) | | 2 |
| | 2 |
|
Other, net | (2 | ) | | (2 | ) | | (2 | ) |
Effective income tax rate | (22 | )% | | 14 | % | | 16 | % |
Effects of 2017 Tax Reform have been included in state income tax, net of federal income tax benefit, effects of tax rate change and repatriation tax and equity income.
Income tax credits relate primarily to production tax credits from wind-powered generating facilities owned by MidAmerican Energy, PacifiCorp and BHE Renewables. Federal renewable electricity production tax credits are earned as energy from qualifying wind-powered generating facilities is produced and sold and are based on a per-kilowatt hour rate pursuant to the applicable federal income tax law. Wind-powered generating facilities are eligible for the credits for 10 years from the date the qualifying generating facilities are placed in-service.
Income tax effect of foreign income includes, among other items, deferred income tax benefits of $16 million in 2016 and $39 million in 2015 related to the enactment of reductions in the United Kingdom corporate income tax rate. In September 2016, the corporate income tax rate was reduced from 18% to 17% effective April 1, 2020. In November 2015, the corporate income tax rate was reduced from 20% to 19% effective April 1, 2017, with a further reduction to 18% effective April 1, 2020.
Berkshire Hathaway includes the Company in its United States federal income tax return. As of December 31, 2017, the Company had current income taxes receivable from Berkshire Hathaway of $334 million. As of December 31, 2016, the Company had current income taxes payable to Berkshire Hathaway of $27 million.
The net deferred income tax liability consists of the following as of December 31 (in millions):
|
| | | | | | | |
| 2017 | | 2016 |
Deferred income tax assets: | | | |
Regulatory liabilities | $ | 1,707 |
| | $ | 909 |
|
Federal, state and foreign carryforwards | 1,118 |
| | 987 |
|
AROs | 223 |
| | 326 |
|
Employee benefits | 45 |
| | 209 |
|
Derivative contracts | 2 |
| | 29 |
|
Other | 448 |
| | 707 |
|
Total deferred income tax assets | 3,543 |
| | 3,167 |
|
Valuation allowances | (126 | ) | | (64 | ) |
Total deferred income tax assets, net | 3,417 |
| | 3,103 |
|
| | | |
Deferred income tax liabilities: | | | |
Property-related items | (9,950 | ) | | (14,237 | ) |
Investments | (843 | ) | | (962 | ) |
Regulatory assets | (651 | ) | | (1,449 | ) |
Other | (215 | ) | | (334 | ) |
Total deferred income tax liabilities | (11,659 | ) | | (16,982 | ) |
Net deferred income tax liability | $ | (8,242 | ) | | $ | (13,879 | ) |
The following table provides the Company's net operating loss and tax credit carryforwards and expiration dates as of December 31, 2017 (in millions):
|
| | | | | | | | | | | | | | | |
| Federal | | State | | Foreign | | Total |
Net operating loss carryforwards(1) | $ | 172 |
| | $ | 10,813 |
| | $ | 605 |
| | $ | 11,590 |
|
Deferred income taxes on net operating loss carryforwards | $ | 37 |
| | $ | 858 |
| | $ | 163 |
| | $ | 1,058 |
|
Expiration dates | 2023-2025 | | 2018-2037 | | 2035-2037 | |
|
|
| | | | | | | |
Tax credits | $ | 31 |
| | $ | 29 |
| | $ | — |
| | $ | 60 |
|
Expiration dates | 2023- indefinite | | 2018- indefinite | |
| |
|
| |
(1) | The federal net operating loss carryforwards relate principally to net operating loss carryforwards of subsidiaries that are tax residents in both the United States and the United Kingdom. The federal net operating loss carryforwards were generated prior to Berkshire Hathaway Inc.'s ownership and will begin to expire in 2023. |
The United States Internal Revenue Service has closed its examination of the Company's income tax returns through December 31, 2009. State tax agencies have closed their examinations of, or the statute of limitations has expired for, the Company's income tax returns through December 31, 2005, for California and Utah, through December 31, 2007 for Kansas and Minnesota, through December 31, 2008 for Illinois, through December 31, 2009 for Idaho, Montana, Nebraska and Oregon and through December 31, 2013 for Iowa. The closure of examinations, or the expiration of the statute of limitations, for state filings may not preclude the state from adjusting the state net operating loss carryforward utilized in a year for which the examination is not closed.
A reconciliation of the beginning and ending balances of the Company's net unrecognized tax benefits is as follows for the years ended December 31 (in millions):
|
| | | | | | | |
| 2017 | | 2016 |
| | | |
Beginning balance | $ | 128 |
| | $ | 198 |
|
Additions based on tax positions related to the current year | 6 |
| | 7 |
|
Additions for tax positions of prior years | 70 |
| | 6 |
|
Reductions for tax positions of prior years | (18 | ) | | (11 | ) |
Statute of limitations | (4 | ) | | (1 | ) |
Settlements | (1 | ) | | (67 | ) |
Interest and penalties | — |
| | (4 | ) |
Ending balance | $ | 181 |
| | $ | 128 |
|
As of December 31, 2017 and 2016, the Company had unrecognized tax benefits totaling $158 million and $104 million, respectively, that if recognized, would have an impact on the effective tax rate. The remaining unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain but for which there is uncertainty as to the timing of such deductibility. Recognition of these tax benefits, other than applicable interest and penalties, would not affect the Company's effective income tax rate.