14:Income Taxes

CMS Energy and its subsidiaries file a consolidated U.S. federal income tax return as well as a Michigan Corporate Income Tax return for the unitary business group and various other state unitary group combined income tax returns. Income taxes are allocated based on each company’s separate taxable income in accordance with the CMS Energy tax sharing agreement.

In December 2017, President Trump signed the TCJA, which changed existing federal tax law and included numerous provisions that affect businesses. Provisions significantly impacting CMS Energy and Consumers include:

As a rate-regulated utility, Consumers is excluded from certain provisions of the TCJA, including those allowing companies to expense 100 percent of the cost of certain property acquired after September 27, 2017 and limiting the amount companies may deduct for net interest expense.

Substantially all of the tax law changes enacted by the TCJA are effective for taxable years beginning after December 31, 2017. Under GAAP (ASC 740), however, companies must recognize the effects of a tax law change in the period of enactment. The staff of the SEC issued guidance in Staff Accounting Bulletin No. 118 that clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and provides for up to a one-year period in which to complete the required analyses and accounting for the impacts of the TCJA. CMS Energy and Consumers have made reasonable estimates in measuring and accounting for the effects of the TCJA, which have been reflected in the December 31, 2017 financial statements. Given expected changes to U.S. Treasury regulations, interpretations of the TCJA by the U.S. Treasury, interpretations of the application of ASC 740, and the companies’ analysis of their historical records, these estimates could change.

Presented in the following table is the difference between actual income tax expense on continuing operations and income tax expense computed by applying the statutory U.S. federal income tax rate:



1In September 2017, CMS Energy completed the evaluation of its methodology for the state apportionment of Consumers’ electricity sales to MISO, taking into account recent state tax law developments in the electric utility sector. As a result, CMS Energy intends to amend state income tax filings for 2013 through 2016 to seek a refund of taxes previously paid. To recognize the anticipated refund and the impact of the expected lower effective tax rate on their deferred state tax liabilities, CMS Energy, including Consumers, recorded a $14 million income tax benefit in 2017. The $14 million income tax benefit was net of reserves for uncertain tax positions and primarily attributable to Consumers.

2In 2013, the MPSC issued an order authorizing Consumers to accelerate the flow-through to electric and gas customers of certain income tax benefits associated primarily with the cost of removal of plant placed in service before 1993. Consumers implemented this regulatory treatment beginning in 2014. This change, which also accelerates Consumers’ recognition of the income tax benefits, reduced Consumers’ income tax expense by $39 million for each of the years ended December 31, 2017, 2016, and 2015.

Presented in the following table are the significant components of income tax expense on continuing operations:



At CMS Energy, including Consumers, the impact of the TCJA was a $148 million increase in deferred income tax expense for the year ended December 31, 2017. At Consumers, the impact was a $33 million increase in deferred income tax expense. The TCJA had no impact on current income tax expense.

Presented in the following table are the principal components of deferred income tax assets (liabilities) recognized:



Deferred tax assets and liabilities are recognized for the estimated future tax effect of temporary differences between the tax basis of assets or liabilities and the reported amounts on CMS Energy’s and Consumers’ consolidated financial statements. At December 31, 2017, CMS Energy and Consumers remeasured their deferred tax assets and liabilities and related valuation allowances using the 21 percent federal tax rate enacted in the TCJA. To reflect the lower corporate tax rate, Consumers reduced its net deferred tax liabilities associated with its utility book-tax temporary differences by $1.6 billion. Of this amount, Consumers recognized deferred tax expense of $33 million related to non-recoverable net deferred tax assets, with the remaining amount being recorded as a net regulatory tax liability.

Presented in the following table are the components of the net regulatory tax liability recorded at Consumers related to the TCJA:



1Relates to deferred taxes arising from accelerated tax depreciation on assets in rate base that are governed by normalization provisions of the U.S. Internal Revenue Code. These normalization provisions generally require that customer rate refunds associated with changes in deferred taxes be returned to customers over the remaining average service life of the associated assets. Consumers will collect from customers the portion not subject to normalization over a period to be determined in a future regulatory proceeding. Consumers cannot predict the impact of orders from the MPSC related to the treatment of regulatory balances not subject to amortization. 

In addition to the amounts recorded at Consumers, CMS Energy reduced its net deferred tax assets associated with its non-utility book-tax temporary differences by $239 million. In total, CMS Energy, including Consumers, reduced its net deferred tax liabilities by $1.3 billion.

Presented in the following table are the tax loss and credit carryforwards at December 31, 2017:



CMS Energy has provided a valuation allowance of $2 million for the local tax loss carryforward, and $3 million for general business credits. The TCJA repealed the corporate alternative minimum tax and requires companies to recover (through offsets of regular tax and through cash refunds) all alternative minimum tax credits over the next four years. To reflect policy enacted by the federal Budget Control Act of 2011, CMS Energy has provided a valuation allowance of $10 million for sequestration of cash refunds of alternative minimum tax credits. Additionally, at December 31, 2017, CMS Energy reclassified $124 million of alternative minimum tax credits to a current receivable, net of a charge of $9 million for sequestration.

CMS Energy and Consumers expect to utilize fully their tax loss and credit carryforwards for which no valuation allowance has been provided. It is reasonably possible that further adjustments will be made to the valuation allowances within one year.

Presented in the following table is a reconciliation of the beginning and ending amount of uncertain tax benefits:



If recognized, all of these uncertain tax benefits would affect CMS Energy’s and Consumers’ annual effective tax rates in future years.

CMS Energy and Consumers recognize accrued interest and penalties, where applicable, as part of income tax expense. CMS Energy, including Consumers, recognized no interest or penalties for the years ended December 31, 2017,  2016, or 2015.

The amount of income taxes paid is subject to ongoing audits by federal, state, local, and foreign tax authorities, which can result in proposed assessments. CMS Energy’s federal income tax returns for 2014 and subsequent years remain subject to examination by the IRS. CMS Energy’s Michigan Corporate Income Tax and Michigan Business Tax returns for 2008 and subsequent years, excluding 2012, remain subject to examination by the State of Michigan. CMS Energy’s and Consumers’ estimate of the potential outcome for any uncertain tax issue is highly judgmental. CMS Energy and Consumers believe that their accrued tax liabilities at December 31, 2017 were adequate for all years.