INCOME TAXES

12 Months Ended

Dec. 31, 2019

Income tax expense differs from the amount of income tax determined by applying the United States statutory federal income tax rate of 21% in 2019 and 2018 and 35% in 2017 to pre-tax income due to the following:



	Years Ended December 31,
(in millions)	2019			2018			2017
Federal Income Tax Expense at Statutory Rate	$	46		$	49		$	97
State Income Tax Expense, Net of Federal Deduction	9			9			9
Federal/State Tax Credits	(6		)	(10		)	(9		)
Allowance for Equity Funds Used During Construction	(3		)	(1		)	(2		)
Impact of Enactment, TCJA	—			—			7
Excess Deferred Income Taxes	(9		)	(6		)	—
Impact of AMT Sequestration	(2		)	2			—
Other	(1		)	—			(1		)
Total Federal and State Income Tax Expense	$	34		$	43		$	101

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



	Years Ended December 31,
(in millions)	2019			2018			2017
Current Income Tax Expense
Federal	$	(8	)	$	(13	)	$	—
State	—			—			—
Total Current Income Tax Expense	(8		)	(13		)	—
Deferred Income Tax Expense
Federal	41			53			98
Federal Investment Tax Credits	(4		)	(6		)	(6		)
State	5			9			9
Total Deferred Income Tax Expense	42			56			101
Total Federal and State Income Tax Expense	$	34		$	43		$	101

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 2018, ACC Refund Orders were approved requiring TEP to share EDIT amortization of the ACC-jurisdictional assets with customers. The EDIT activity of $9 million was amortized from Regulatory Liabilities on the Consolidated Balance Sheets as of December 31, 2019. 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, 2019, TEP had a receivable of $7 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 2019, TEP reversed the $2 million in income tax expense, as the AMT credit refunds were no longer subject to sequestration due to the IRS revising previously issued guidance.

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



	December 31,
(in millions)	2019			2018
Gross Deferred Income Tax Assets
Finance Lease Obligations	$	21		$	48
Operating Loss Carryforwards, Net	3			23
Customer Advances and Contributions in Aid of Construction	19			16
AMT Credit	7			13
Other Postretirement Benefits	15			15
Investment Tax Credit Carryforward	34			34
Income Taxes Recoverable Through Future Rates	81			87
Other	79			60
Total Gross Deferred Income Tax Assets	259			296
Deferred Tax Assets Valuation Allowance	—			—
Gross Deferred Income Tax Liabilities
Plant, Net	(602		)	(552		)
Plant Abandonments	(17		)	(18		)
Finance Lease Assets, Net	(18		)	(44		)
Pensions	(17		)	(19		)
Income Taxes Payable Through Future Rates	(9		)	(12		)
Other	(28		)	(21		)
Total Gross Deferred Income Tax Liabilities	(691		)	(666		)
Deferred Income Taxes, Net	$	(432	)	$	(370	)

TEP recorded no valuation allowance against credit and net operating loss carryforward deferred income tax assets as of December 31, 2019 and 2018. 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, 2019, TEP had the following carryforward amounts:



(in millions)	Amount		Expiring Year
Federal Net Operating Loss	$	17	2034 - 35
State Credits	9		2022 - 29
AMT Credit	7		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)	2019		2018
Beginning of Period	$	16	$	13
Additions Based on Tax Positions Taken in the Current Year	2		3
End of Period	$	18	$	16

Unrecognized tax benefits, if recognized, would reduce income tax expense by less than $1 million as of December 31, 2019 and 2018.

TEP recorded no interest expense during 2019 and 2018 related to uncertain tax positions. In addition, TEP had no interest payable and no penalties accrued as of December 31, 2019 and 2018.

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.

A decrease of $17 million in the Company's uncertain tax position obligations could occur within the next twelve months pending the outcome of an application for change in accounting method filed with the IRS.

TAX SHARING AGREEMENT

Under the terms of the tax sharing agreement with UNS Energy, TEP received $14 million in 2019 related to the 2018 Federal income tax returns and no payments in 2018 related to the 2017 Federal income tax returns.