INCOME TAXES

Income tax expense differs from the amount of income tax determined by applying the United States statutory federal income tax rate of 21% in 2018 and 35% in 2017 and 2016 to pre-tax income due to the following:



	Years Ended December 31,
(in millions)	2018			2017			2016
Federal Income Tax Expense at Statutory Rate	$	49		$	97		$	64
State Income Tax Expense, Net of Federal Deduction	9			9			6
Federal/State Tax Credits	(10		)	(9		)	(8		)
Allowance for Equity Funds Used During Construction	(1		)	(2		)	(1		)
Deferred Tax Asset Valuation Allowance	—			—			(2		)
Impact of Enactment, TCJA	—			7			—
Excess Deferred Income Taxes	(6		)	—			—
Impact of AMT Sequestration	2			—			—
Other	—			(1		)	—
Total Federal and State Income Tax Expense	$	43		$	101		$	59

Income Tax Expense included on the Consolidated Income Statement consists of the following:



	Years Ended December 31,
(in millions)	2018			2017			2016
Current Income Tax Expense
Federal	$	(13	)	$	—		$	—
State	—			—			—
Total Current Income Tax Expense	(13		)	—			—
Deferred Income Tax Expense
Federal	53			98			60
Federal Investment Tax Credits	(6		)	(6		)	(6		)
State	9			9			5
Total Deferred Income Tax Expense	56			101			59
Total Federal and State Income Tax Expense	$	43		$	101		$	59

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 federal corporate income tax rate from 35% to 21% effective for tax years beginning after 2017. In addition, the TCJA provided modifications to bonus depreciation rules and limitations on the deductibility of interest expense, both of which include carve-outs for regulated utilities.

As a result of the TCJA, 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. 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. TEP is amortizing the EDIT balance in accordance with applicable federal income tax laws, which require the amortization of a majority of the balance over the remaining life of the related plant.

In 2018, ACC Refund Orders were approved requiring TEP to share EDIT amortization of the ACC-jurisdictional assets with customers. The EDIT activity of $6 million was amortized from Regulatory Liabilities on the Consolidated Balance Sheets as of December 31, 2018. See Note 2 for additional information regarding the ACC Refund Order and the FERC NOPR.

Under the TCJA, AMT credit carryforwards will be refunded if not used to offset federal income tax liabilities. As of December 31, 2018, TEP had a receivable of $13 million related to the AMT credit carryforwards in Current Assets—Other on the Consolidated Balance Sheets.

In 2018, the Company recorded $2 million of income tax expense related to the estimated impact of sequestration on future AMT credit refunds. In January 2019, the IRS revised its previously-issued guidance on this matter and announced that future AMT credit refunds will no longer be subject to sequestration. As a result, the Company anticipates receiving additional AMT credit refunds of $2 million in future periods.

In August 2018, the IRS proposed regulations on bonus depreciation. Based on the proposed regulation, the Company adjusted its estimated provision for its 2017 tax year and the results of such adjustment did not have a material impact on TEP's financial position or results of operations. TEP's accounting for the income tax effects of the bonus depreciation provisions included in the TCJA has been completed as of December 31, 2018.

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



	December 31,
(in millions)	2018			2017
Gross Deferred Income Tax Assets
Capital Lease Obligations	$	48		$	10
Operating Loss Carryforwards, Net	23			56
Customer Advances and Contributions in Aid of Construction	16			14
Alternative Minimum Tax Credit	13			26
Other Postretirement Benefits	15			15
Investment Tax Credit Carryforward	34			34
Income Taxes Recoverable Through Future Rates	87			88
Other	60			50
Total Gross Deferred Income Tax Assets	296			293
Deferred Tax Assets Valuation Allowance	—			—
Gross Deferred Income Tax Liabilities
Plant, Net	(552		)	(518		)
Plant Abandonments	(18		)	(21		)
Capital Lease Assets, Net	(44		)	(5		)
Pensions	(19		)	(16		)
Income Taxes Payable Through Future Rates	(12		)	(10		)
Other	(21		)	(23		)
Total Gross Deferred Income Tax Liabilities	(666		)	(593		)
Deferred Income Taxes, Net	$	(370	)	$	(300	)

TEP recorded no valuation allowance against credit and net operating loss carryforward deferred income tax assets as of December 31, 2018 and 2017. Management believes TEP will produce sufficient taxable income in the future to realize credit and net operating loss carryforwards before they expire.

As of December 31, 2018, TEP had the following carryforward amounts:



(in millions)	Amount		Expiring Year
Federal Net Operating Loss	$	108	2033-35
State Credits	9		2021-29
Alternative Minimum Tax Credit	13		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)	2018		2017
Beginning of Period	$	13	$	12
Additions Based on Tax Positions Taken in the Current Year	3		7
Reduction to Positions, TCJA	—		(6		)
End of Period	$	16	$	13

Unrecognized tax benefits, if recognized, would reduce income tax expense by less than $1 million as of December 31, 2018 and 2017.

TEP recorded no interest expense during 2018 and 2017 related to uncertain tax positions. In addition, TEP had no interest payable and no penalties accrued as of December 31, 2018 and 2017.

TEP has been audited by the IRS through tax year 2010. TEP's 2011 to 2018 tax years are open for audit by federal and state tax agencies.

The balance in unrecognized tax benefits could change in the next 12 months as a result of the IRS audit, but the Company is unable to determine the amount of change.