Income Taxes

The income tax provision from continuing operations consisted of the following amounts:



	Year Ended December 31,
	2016			2015			2014
	(In millions, except percentages)
Current
State	$	17		$	6		$	8
Total — current	17			6			8
Deferred
U.S. Federal	3			1,020			(50		)
State	(6		)	315			41
Foreign	2			1			4
Total — deferred	(1		)	1,336			(5		)
Total income tax expense	$	16		$	1,342		$	3
Effective tax rate	(1.8		)%	(26.3		)%	2.2		%

The following represents the domestic and foreign components of income/(loss) before income tax expense/(benefit):



	Year Ended December 31,
	2016			2015			2014
	(In millions)
U.S.	$	(886	)	$	(5,105	)	$	126
Foreign	11			11			9
Total	$	(875	)	$	(5,094	)	$	135

A reconciliation of the U.S. federal statutory rate of 35% to NRG's effective rate is as follows:



	Year Ended December 31,
	2016			2015			2014
	(In millions, except percentages)
(Loss)/income before income taxes	$	(875	)	$	(5,094	)	$	135
Tax at 35%	(306		)	(1,783		)	47
State taxes	11			(218		)	9
Foreign operations	10			1			1
Federal and state tax credits, excluding PTCs	—			(5		)	(1		)
Valuation allowance	306			3,039			6
Impact of non-taxable equity earnings	22			(10		)	(11		)
Book goodwill impairment	—			340			—
Net interest accrued on uncertain tax positions	1			(3		)	(2		)
Production tax credit	(26		)	(33		)	(48		)
Recognition of uncertain tax benefits	2			(15		)	(30		)
Tax expense attributable to consolidated partnerships	(1		)	12			4
Impact of change in effective state tax rate	1			19			22
Other	(4		)	(2		)	6
Income tax expense	$	16		$	1,342		$	3
Effective income tax rate	(1.8		)%	(26.3		)%	2.2		%

For the year ended December 31, 2016, NRG's overall effective tax rate was different than the statutory rate of 35% primarily due to the change in valuation allowance, the impact of non-taxable equity earnings and current state tax expense, partially offset by the generation of PTCs from various wind facilities.

For the year ended December 31, 2015, NRG's overall effective tax rate was different than the statutory rate of 35% primarily due to recording of a valuation allowance on the federal and certain state net deferred tax assets that may not be realizable under a “more likely than not” measurement. In addition, a portion of the book goodwill impairment is classified as a permanent reversal impacting the effective tax rate.

For the year ended December 31, 2014, NRG's overall effective tax rate was different than the statutory rate of 35% primarily due to the generation of PTCs generated from various wind facilities including assets acquired in the EME transaction, and a benefit resulting from the recognition of uncertain tax benefits, partially offset by state and local income taxes including a change in the effective state rate.

The temporary differences, which gave rise to the Company's deferred tax assets and liabilities consisted of the following:



	As of December 31,
	2016			2015
	(In millions)
Deferred tax liabilities:
Emissions allowances	$	30		$	31
Derivatives, net	—			22
Cumulative translation adjustments	11			2
Investment in projects	374			838
Total deferred tax liabilities	415			893
Deferred tax assets:
Deferred compensation, accrued vacation and other reserves	318			255
Discount/premium on notes	45			68
Difference between book and tax basis of property	1,511			1,210
Goodwill	83			39
Differences between book and tax basis of contracts	301			516
Pension and other postretirement benefits	183			218
Equity compensation	11			50
Bad debt reserve	12			6
U.S. capital loss carryforwards	1			1
U.S. Federal net operating loss carryforwards	1,171			1,373
Foreign net operating loss carryforwards	63			59
State net operating loss carryforwards	223			230
Foreign capital loss carryforwards	1			1
Deferred financing costs	4			6
Federal and state tax credit carryforwards	446			439
Federal benefit on state uncertain tax positions	12			17
Intangibles amortization (excluding goodwill)	211			90
Derivatives, net	101			—
Inventory obsolescence	31			27
Other	8			11
Total deferred tax assets	4,736			4,616
Valuation allowance	(4,116		)	(3,575		)
Total deferred tax assets, net of valuation allowance	620			1,041
Net deferred tax asset	$	205		$	148

The following table summarizes NRG's net deferred tax position:



	As of December 31,
	2016			2015
	(In millions)
Net deferred tax asset — noncurrent	$	225		$	167
Net deferred tax liability — noncurrent	(20		)	(19		)
Net deferred tax asset	$	205		$	148

Deferred tax assets and valuation allowance

Net deferred tax balance — As of December 31, 2016 and 2015, NRG recorded a net deferred tax asset of $4.3 billion and $3.7 billion, respectively. The Company believes the federal and certain state net deferred tax assets may not be realizable under a “more likely than not” measurement and as such, a valuation allowance has been recorded to reduce the asset accordingly. The Company assesses cumulative and forecasted pretax book earnings and the future reversal of existing taxable temporary differences.

Based on the Company's assessment of positive and negative evidence, including available tax planning strategies, NRG believes that it is more likely than not that a benefit will not be realized on $4.1 billion and $3.6 billion of tax assets as of December 31, 2016, and 2015, respectively, thus a valuation allowance has been recorded. The net deferred tax asset of $205 million is predominantly due to the inclusion of NRG Yield Inc.'s net deferred tax asset consisting primarily of net operating losses.

NOL carryforwards — At December 31, 2016, the Company had tax effected cumulative domestic NOLs consisting of carryforwards for federal income tax purposes of $1.2 billion and state of $223 million. The Company estimates it will need to generate future taxable income to fully realize the net federal deferred tax asset before expiration commencing in 2026. In addition, NRG has cumulative foreign NOL carryforwards of $63 million with no expiration date.

Valuation allowance — As of December 31, 2016, the Company's tax effected valuation allowance was $4.1 billion, consisting of domestic federal net deferred tax assets of approximately $3.6 billion, domestic state net deferred tax assets of $504 million, foreign net operating loss carryforwards of $63 million and foreign capital loss carryforwards of approximately $1 million. Based upon the assessment of cumulative and forecasted pretax book earnings, and the future reversal of existing taxable temporary differences, it was determined that a valuation allowance was required to be recorded during the year.

Taxes Receivable and Payable

As of December 31, 2016, NRG recorded a current tax payable of $8 million that represents a tax liability due for state income taxes. NRG has a tax receivable of $29 million, comprised of, $10 million due from the New York State Empire Zone program, and $11 million of refunds due from state income tax estimated payments and return filings for 2016 and 2015, respectively. The remaining balance of $8 million relates to federal cash grants applied for eligible solar energy projects, net of sequestration.

Uncertain tax benefits

NRG has identified uncertain tax benefits whose after-tax value is $34 million for which, as of December 31, 2016, and 2015, NRG has recorded a non-current tax liability of $37 million and $35 million, respectively. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. During the year ended December 31, 2016, the Company recognized an expense of $1 million in interest. As of December 31, 2016 and 2015, NRG had cumulative interest and penalties related to these uncertain tax benefits of $4 million and $3 million, respectively.

Tax jurisdictions — NRG is subject to examination by taxing authorities for income tax returns filed in the U.S. federal jurisdiction and various state and foreign jurisdictions including operations located in Australia.

The Company is no longer subject to U.S. federal income tax examinations for years prior to 2015. With few exceptions, state and local income tax examinations are no longer open for years before 2010.

The following table reconciles the total amounts of uncertain tax benefits:



	As of December 31,
	2016			2015
	(In millions)
Balance as of January 1	$	32		$	71
Increase due to current year positions	8			4
Decrease due to prior year positions	—			(25		)
Decrease due to settlements and payments	(6		)	(18		)
Uncertain tax benefits as of December 31	$	34		$	32