Entity information:
Income Taxes

The components of “Income Before Income Taxes” are as follows (in millions):
 
Year Ended December 31,
 
2017
 
2016
 
2015
U.S.
$
1,976

 
$
1,466

 
$
611

Foreign
185

 
172

 
161

Total Income Before Income Taxes
$
2,161

 
$
1,638

 
$
772



Components of the income tax provision applicable for federal, foreign and state taxes are as follows (in millions): 
 
Year Ended December 31,
 
2017
 
2016
 
2015
Current tax expense (benefit)
 
 
 
 
 
Federal
$
(137
)
 
$
(148
)
 
$
(125
)
State
(16
)
 
(28
)
 
(7
)
Foreign
18

 
6

 
4

Total
(135
)
 
(170
)
 
(128
)
Deferred tax expense (benefit)
 

 
 

 
 

Federal
2,022

 
998

 
653

State
4

 
51

 
(4
)
Foreign
47

 
38

 
43

Total
2,073

 
1,087

 
692

Total tax provision
$
1,938

 
$
917

 
$
564



We are subject to taxation in Canada and Mexico. In Canada we recognized income tax expense of $58 million, $38 million and $46 million at December 31, 2017, 2016, and 2015, respectively.  In Mexico we recognized income tax expense of $7 million, $6 million and $1 million at December 31, 2017, 2016, and 2015, respectively. 

The difference between the statutory federal income tax rate and our effective income tax rate is summarized as follows (in millions, except percentages):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Federal income tax
$
756

 
35.0
 %
 
$
573

 
35.0
 %
 
$
271

 
35.0
 %
Increase (decrease) as a result of:
 

 
 

 
 

 
 

 
 

 
 

State deferred tax rate change
10

 
0.5
 %
 
11

 
0.7
 %
 
(24
)
 
(3.1
)%
Taxes on foreign earnings, net of federal benefit
42

 
1.9
 %
 
28

 
1.7
 %
 
26

 
3.5
 %
Net effects of noncontrolling interests
(14
)
 
(0.7
)%
 
(4
)
 
(0.3
)%
 
15

 
2.0
 %
State income tax, net of federal benefit
38

 
1.8
 %
 
26

 
1.6
 %
 
12

 
1.5
 %
Dividend received deduction
(56
)
 
(2.6
)%
 
(48
)
 
(2.9
)%
 
(51
)
 
(6.6
)%
Adjustments to uncertain tax positions
(12
)
 
(0.6
)%
 
(23
)
 
(1.4
)%
 
(14
)
 
(1.9
)%
Valuation allowance on investment and tax credits
13

 
0.6
 %
 
34

 
2.1
 %
 
—

 
—
 %
Impact of the 2017 Tax Reform
1,240

 
57.4
 %
 
—

 
—
 %
 
—

 
—
 %
Nondeductible goodwill
—

 
—
 %
 
301

 
18.5
 %
 
323

 
41.7
 %
General business credit
(95
)
 
(4.4
)%
 
—

 
—
 %
 
—

 
—
 %
Other
16

 
0.8
 %
 
19

 
1.1
 %
 
6

 
0.8
 %
Total
$
1,938

 
89.7
 %
 
$
917

 
56.1
 %
 
$
564

 
72.9
 %


Deferred tax assets and liabilities result from the following (in millions):
 
December 31,
 
2017
 
2016
Deferred tax assets
 
 
 
Employee benefits
$
251

 
$
401

Accrued expenses
73

 
118

Net operating loss, capital loss and tax credit carryforwards
1,113

 
1,307

Derivative instruments and interest rate and currency swaps
12

 
22

Debt fair value adjustment
37

 
74

Investments
968

 
2,804

Other
6

 
14

Valuation allowances
(171
)
 
(184
)
Total deferred tax assets
2,289

 
4,556

Deferred tax liabilities
 

 
 

Property, plant and equipment
225

 
177

Other
20

 
27

Total deferred tax liabilities
245

 
204

Net deferred tax assets
$
2,044

 
$
4,352

 
 
 
 


Deferred Tax Assets and Valuation Allowances: The step-up in tax basis from the merger transactions that occurred in November 2014 resulted in a deferred tax asset, primarily related to our investment in KMP. As book earnings from our investment in KMP are projected to exceed taxable income (primarily as a result of the partnership’s tax depreciation in excess of book depreciation), the deferred tax asset related to our investment in KMP is expected to be fully realized.

We decreased our valuation allowances in 2017 by $13 million, primarily due to $4 million release for capital loss carryover as a result of the 2016 return to provision adjustment, $5 million release for foreign operating losses and $24 million reduction related to our investment in NGPL as a result of the reduction of federal tax rate, partially offset by $18 million for state net operating losses and $2 million for foreign tax credits.

We have deferred tax assets of $935 million related to net operating loss carryovers, $178 million related to general business, alternative minimum and foreign tax credits and $133 million of valuation allowances related to these deferred tax assets at December 31, 2017. As of December 31, 2016, we had deferred tax assets of $1,128 million related to net operating loss carryovers, $175 million related to alternative minimum and foreign tax credits, $4 million related to capital loss carryovers and valuation allowances related to these deferred tax assets of $123 million. We expect to generate taxable income and utilize federal net operating loss carryforwards and tax credits beginning in 2022.

Our alternative minimum tax credit carryforwards decreased by $143 million in 2017 as a result of our decision to elect to forgo bonus depreciation on property placed in service in that year. Code Section 168(k)(4) allows for corporate taxpayers with minimum tax credit carryforwards to forgo bonus depreciation and accelerate their use of the credits to reduce tax liability in that same tax year if the amount of the allowable credit exceeds the taxpayer’s tax liability. The corporation may receive a cash refund of the excess notwithstanding that it may not otherwise be paying taxes. We received an income tax refund of $144 million in 2017.

The tax impact of ASU 2016-09, which was adopted and effective January 1, 2017, resulted in $8 million of deferred tax assets being recorded through a cumulative-effect adjustment to our retained deficit. The previously unrecorded deferred tax asset is related to net operating loss carryovers as a result of the delayed recognition of a windfall tax benefit related to share-based compensation. Post-adoption the excess tax benefits or deficiencies are recognized for income tax purposes in the period in which they occur through the income statement.

Expiration Periods for Deferred Tax Assets: As of December 31, 2017, we have U.S. federal net operating loss carryforwards of $3.4 billion, which will expire from 2018 - 2037; state losses of $3.2 billion which will expire from 2018 - 2037; and foreign losses of $134 million which will expire from 2029 - 2036. We also have $8 million of federal alternative minimum tax credits which do not expire; $147 million of general business credits which will expire from 2018 - 2027; and approximately $21 million of foreign tax credits, which will expire from 2018 - 2023. Use of a portion of our U.S. federal carryforwards is subject to the limitations provided under Sections 382 and 383 of the Internal Revenue Code as well as the separate return limitation rules of Internal Revenue Service regulations. If certain substantial changes in our ownership occur, there would be an annual limitation on the amount of carryforwards that could be utilized.

Unrecognized Tax Benefits: We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based not only on the technical merits of the tax position based on tax law, but also the past administrative practices and precedents of the taxing authority.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.

A reconciliation of our gross unrecognized tax benefit excluding interest and penalties is as follows (in millions): 
 
Year Ended December 31,
 
2017
 
2016
 
2015
Balance at beginning of period
$
122

 
$
148

 
$
189

Additions based on current year tax positions
3

 
3

 
4

Additions based on prior year tax positions
—

 
7

 
—

Reductions based on prior year tax positions
—

 
(1
)
 
(6
)
Reductions based on settlements with taxing authority
(22
)
 
(26
)
 
(25
)
Reductions due to lapse in statute of limitations
(2
)
 
(9
)
 
(14
)
Impact of the 2017 Tax Reform
(4
)
 
—

 
—

Balance at end of period
$
97

 
$
122

 
$
148



We recognize interest and/or penalties related to income tax matters in income tax expense. We recognized a tax benefit of $9 million, expense of $2 million and a benefit of $4 million at December 31, 2017, 2016, and 2015, respectively. As of December 31, 2017, 2016, and 2015, we had $19 million, $28 million and $24 million, respectively, of accrued interest. We had no accrued penalties as of both December 31, 2017 and 2016 and $2 million in accrued penalties as of December 31, 2015.  All of the $97 million of unrecognized tax benefits, if recognized, would affect our effective tax rate in future periods.  In addition, we believe it is reasonably possible that our liability for unrecognized tax benefits will decrease by approximately $6 million during the next year to approximately $91 million, primarily due to lapses in statute of limitations partially offset by additions for state filing positions taken in prior years.
 
We are subject to taxation, and have tax years open to examination for the periods 2011-2016 in the U.S., 2005-2016 in various states and 2007-2016 in various foreign jurisdictions.

Impact of 2017 Tax Reform

On December 22, 2017, the U.S. enacted the 2017 Tax Reform. Among the many provisions included in the 2017 Tax Reform is a provision to reduce the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018.

As of December 31, 2017, we had deferred tax assets related to our net operating loss carryforwards and tax credits, in addition to tax basis in excess of accounting basis primarily related to our investment in KMP. Prior to the 2017 Tax Reform, the value of these deferred tax assets was recorded at the previous income tax rate of 35%, which represented their expected future benefit to us. As a result of the 2017 Tax Reform, the future benefit of these deferred tax assets was re-measured at the new income tax rate of 21% and we recorded an approximate $1,240 million provisional non-cash adjustment for the year ended December 31, 2017. We determined the effects of the rate change using our best estimate of temporary book-to-tax differences. Upon final analysis and remeasurement of our deferred tax balances, the December 31, 2017 adjustment we recorded to reflect the change in corporate income tax rates may need to be adjusted in subsequent periods.

In addition, the 2017 Tax Reform will require a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits. As of December 31, 2017, we have recorded a provisional amount for this 2017 Tax Reform provision and we are continuing to finalize earnings and profits used in this calculation as well assess other 2017 Tax Reform impacts to complete our analysis on this provision. However, we do not expect this provision of the 2017 Tax Reform to be material to us.

The income tax rate change in the 2017 Tax Reform had an impact not only on our corporate income taxes but also resulted in us recording an approximate $144 million after-tax ($219 million pre-tax) provisional non-cash adjustment, including our share of equity investee provisional adjustments, related to our FERC regulated business for the year ended December 31, 2017.  We have determined a reasonable estimate of its impact and recorded a provisional regulatory reserve as of December 31, 2017. However, as the impact on the regulatory rate making process is currently uncertain, we have not completed our assessment of the 2017 Tax Reform’s effect on our FERC regulated business.

As described above, we continue to assess the impact of the 2017 Tax Reform on our business in order to complete our analysis. Any adjustment to our provisional amounts will be reported in the reporting period in which any such adjustments are determined and may be material in the period in which the adjustments are made.