NOTE 8 – INCOME TAXES

 

We had an income tax benefit of $1.1 and $1.4 million in 2017 and 2016, respectively, and no income tax expense or benefit in 2015. The income tax benefit of $1.1 million in 2017 is due to our election to receive an alternative minimum tax credit refund in lieu of recognizing bonus depreciation.

The liability method of accounting for income taxes is utilized. In accordance with our regulatory accounting treatment, changes in deferred tax assets or liabilities result in the establishment of a regulatory asset or liability. A regulatory asset or liability associated with deferred income taxes generally represents the future increase or decrease in income taxes payable that will be received or settled through future rate revenues. Under this regulatory accounting approach, the income tax expense (benefit) on our consolidated statements of operations includes only the current portion.

Under the liability method, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes.

Components of our net deferred tax liability are as follows (dollars in thousands):

The decrease in the net deferred tax liability from $30.5 million at December 31, 2016 to $17.2 million at December 31, 2017 is primarily due to a $17.2 million decrease in the net deferred tax liability resulting from a reduction in the corporate income tax rate. The Tax Cuts and Jobs Act, enacted on December 22, 2017, reduced the corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. Deferred tax assets and deferred tax liabilities at December 31, 2017 are measured at 21 percent, which is the rate in effect when the book to tax differences that comprise the net deferred tax liability reverse. Although the $17.2 million decrease in the net deferred tax liability and the corresponding decrease in the regulatory asset established for deferred income tax expense represent what we believe to be a reasonable estimate of the impact of the income tax effect of the Tax Cuts and Jobs Act on our financial statements as of December 31, 2017, this assessment should be considered provisional. After we finalize certain tax positions when we file our 2017 U.S. tax return, we will be able to conclude whether any further adjustments are required to our net deferred tax liability balance of $17.2 million as of December 31, 2017. Any adjustments to these provisional amounts will be reported in the period the adjustments are made, which will be no later than the fourth quarter of 2018.

The $13.3 million decrease in net deferred tax liabilities is not recognized as a tax benefit in 2017 due to our regulatory accounting treatment of deferred taxes. Instead, the tax benefit is deferred and reflected as a decrease in the regulatory asset established for deferred income tax expense. The accounting for regulatory assets is discussed further in Note 2—Accounting for Rate Regulation. The regulatory asset account for deferred income tax expense has a balance of $17.2 million and $30.5 million at December 31, 2017 and 2016, respectively.

The reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:

We had a taxable loss of $63.7 million for 2017. At December 31, 2017, we have a federal net operating loss carryforward of $439.1 million which, if not utilized, will expire between 2030 and 2037. The future reversal of existing temporary differences will more likely than not enable the realization of the net operating loss carryforward. We have $1.2 million of alternative minimum tax credit carryforwards at December 31, 2017 that have no expiration date.

The authoritative guidance for income taxes addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. We may 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 on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement.

We file a U.S. federal consolidated income tax return and income tax returns in state jurisdictions where required. The statute of limitations remains open for federal and state returns for the years 2014 forward. We do not have any liabilities recorded for uncertain tax positions.