INCOME TAXES

Income tax expense differs from the amount of income tax determined by applying the United States statutory federal income tax rate of 35% to pre-tax income due to the following:



	Years Ended December 31,
(in millions)	2017			2016			2015
Federal Income Tax Expense at Statutory Rate	$	97		$	64		$	70
State Income Tax Expense, Net of Federal Deduction	9			6			8
Federal/State Tax Credits	(9		)	(8		)	(8		)
Allowance for Equity Funds Used During Construction	(2		)	(1		)	(1		)
Deferred Tax Asset Valuation Allowance	—			(2		)	1
Impact of Enactment, TCJA	7			—			—
Other	(1		)	—			2
Total Federal and State Income Tax Expense	$	101		$	59		$	72

Income tax expense included in the income statement consists of the following:



	Years Ended December 31,
(in millions)	2017			2016			2015
Current Income Tax Expense
Federal	$	—		$	—		$	—
State	—			—			—
Total Current Income Tax Expense	—			—			—
Deferred Income Tax Expense
Federal	98			60			66
Federal Investment Tax Credits	(6		)	(6		)	(6		)
State	9			5			12
Total Deferred Income Tax Expense	101			59			72
Total Federal and State Income Tax Expense	$	101		$	59		$	72

On December 22, 2017, the President of the United States of America signed into law the TCJA, which enacted significant changes to the Internal Revenue Code including a reduction in the U.S. federal corporate income tax rate from 35% to 21% effective for tax years beginning after 2017. In addition, the TCJA provides modifications to bonus depreciation rules and limitations on the deductibility of interest expense, both of which include carve-outs for regulated utilities. The Company was required to revalue its deferred tax assets and liabilities at the new federal corporate income tax rate as of the date of enactment of the TCJA. This resulted in a net decrease to deferred income tax liabilities. Since the Company believes it is probable that a significant portion of the decrease will be returned to customers through future rates, a regulatory liability was established. The impacts of the new tax law to the Company's financial results included: (i) a $7 million increase to Income Tax Expense on the Consolidated Statements of Income in 2017; and (ii) a $343 million net increase to Regulatory Liabilities and a $336 million net decrease to Deferred Income Tax Liabilities on the Consolidated Balance Sheets as of December 31, 2017.

TEP is still in the process of evaluating the bonus depreciation carve-out for regulated utilities and anticipates further clarification from the IRS. TEP has recorded an estimated provision for bonus depreciation for its fixed assets placed in service between September 27, 2017 and December 31, 2017, which impacts TEP’s Operating Loss Carryforward Deferred Tax Asset and Plant Deferred Tax Liability.

The significant components of deferred income tax assets and liabilities consist of the following:



	December 31,
(in millions)	2017			2016
Gross Deferred Income Tax Assets
Capital Lease Obligations	$	10		$	35
Operating Loss Carryforwards, Net	56			129
Customer Advances and Contributions in Aid of Construction	14			20
Alternative Minimum Tax Credit	26			25
Other Postretirement Benefits	15			23
Emission Allowance Inventory	3			9
Investment Tax Credit Carryforward	34			32
Income Taxes Recoverable Through Future Rates	88			—
Other	47			60
Total Gross Deferred Income Tax Assets	293			333
Deferred Tax Assets Valuation Allowance	—			—
Gross Deferred Income Tax Liabilities
Plant, Net	(518		)	(774		)
Plant Abandonments	(21		)	—
Capital Lease Assets, Net	(5		)	(24		)
Pensions	(16		)	(26		)
Income Taxes Payable Through Future Rates	(10		)	—
Other	(23		)	(38		)
Total Gross Deferred Income Tax Liabilities	(593		)	(862		)
Deferred Income Taxes, Net	$	(300	)	$	(529	)

TEP recorded no valuation allowance against credit and loss carryforward deferred income tax assets as of December 31, 2017 and 2016. Management believes TEP will produce sufficient taxable income in the future to realize credit and loss carryforwards before they expire.

As of December 31, 2017, TEP had the following carryforward amounts:



(in millions)	Amount		Expiring Year
Federal Net Operating Loss	$	263	2031-35
State Credits	8		2021-29
Alternative Minimum Tax Credit	26		None
Investment Tax Credits	34		2031-37

Uncertain Tax Positions

A reconciliation of the beginning and ending balances of unrecognized tax benefits follows:



	December 31,
(in millions)	2017			2016
Beginning of Period	$	12		$	5
Additions Based on Tax Positions Taken in the Current Year	7			7
Reduction to Positions, TCJA	(6		)	—
End of Period	$	13		$	12

Unrecognized tax benefits, if recognized, would reduce income tax expense by $1 million as of December 31, 2017 and 2016.

TEP recorded no interest expense during 2017, 2016, or 2015 related to uncertain tax positions. In addition, TEP had no interest payable and no penalties accrued as of December 31, 2017 and 2016.

TEP has been audited by the IRS through tax year 2010. TEP is not currently under audit by any federal or state tax agencies. The balance in unrecognized tax benefits could change in the next 12 months as a result of IRS audits, but the Company is unable to determine the amount of change.