10 INCOME TAXES

Income tax expense consisted of the following:

	Federal			State			Total

2012
Current	$	(9,018	)	$	(5,246	)	$	(14,264	)
Deferred		37,196			(1,480	)		35,716

Total	$	28,178		$	(6,726	)	$	21,452

2011
Current	$	7,413		$	2,629		$	10,042
Deferred		12,982			142			13,124

Total	$	20,395		$	2,771		$	23,166

2010
Current	$	4,027		$	3,020		$	7,047
Deferred		15,730			1,779			17,509

Total	$	19,757		$	4,799		$	24,556

The Company filed an application for a change in accounting method (section 481 adjustment) with the Internal Revenue Service (IRS) in 2012 to implement the new repairs and maintenance deduction. The new deduction is for qualified tangible property placed into service during 2012 and prior years. The new tax regulations allow the Company to deduct a significant amount of costs previously capitalized for book and tax purposes. During 2012, the Company completed its analysis of the federal repairs maintenance deduction related to 2012 and prior years. The Company's federal repairs and maintenance deductions for qualified tangible property placed into service during 2012 and prior years was $100.7 million and created a $35.3 million deferred tax liability for the temporary timing difference between book and tax treatments in 2012. The 2012 and prior years federal repairs and maintenance deduction eliminated the Company's 2010 and 2011 previously filed federal qualified U.S. production activities deductions (QPAD) and was recorded as a $0.8 million federal income tax expense in 2012. The Company's state repairs deduction for qualified tangible property deductions placed into service during 2012 and prior years was $136.2 million and was recorded as a $7.8 million reduction to state income tax expense in 2012.

The Company filed an application for a change in accounting method (Section 481 adjustment) with the State of California to change its plant-in-service state tax depreciation method from the double- declining method to the straight line method at the respective assets mid-life. The Company's application was approved by the State of California during the first quarter of 2011. California uses the flow-through method of accounting for income tax depreciation. As a result, the Company reduced its income tax obligation $1.6 million, net of federal income taxes in 2011. Income tax expense was computed by applying the current federal 35% tax rate to pretax book income differs from the amount shown in the Consolidated Statements of Income. The difference is reconciled in the table below:

	2012			2011			2010

Computed "expected" tax expense	$	24,600		$	21,308		$	21,774
Increase (reduction) in taxes due to:
State income taxes net of federal tax benefit		4,041			3,500			3,577
Effect of regulatory treatment of fixed asset differences		(7,030	)		(1,614	)		—
Investment tax credits		(74	)		(74	)		(74	)
Other		(85	)		46			(721	)

Total income tax	$	21,452		$	23,166		$	24,556

The 2012 section 481 adjustment was a benefit of ($7,030) due to the tax repairs and maintenance deductions for 2011 and prior years. The 2011 section 481 adjustment was a benefit of ($1,614) due to an accounting method change with the State of California to change its plant-in-service state tax depreciation method from the double- declining method to the straight line method at the respective assets mid-life.

Included in "Other" in the above table is the recognition of the flow-through accounting for federal depreciation expense on assets acquired prior to 1982 and retirement costs of such assets. For assets acquired prior to 1982, the benefit of excess tax depreciation was previously passed through to the ratepayers. The tax benefit is now reversing and a higher tax expense is being recognized and is included in customer rates. Offsetting the flow-through depreciation in 2012, 2011, and 2010 was the impact of cost to remove pre-1982 assets. Also included in "Other" in the above table, were 2012, 2011 and 2010 QPAD deductions. QPAD activities include production of potable water, but exclude the transmission and distribution of the potable water. The impact of the deduction is being reported in the year in which the deduction is claimed on the Company's tax return. The QPAD is limited to the lesser of 9% of taxable income or 50% of taxable gross wages in 2012. The 2012 section 481adjustment eliminated the QPAD deduction for 2012 and eliminated the 2011 and 2010 QPAD deductions which were recognized as an $831 increase to the income tax provision in 2012. The QPAD lowered the income tax provision by $397 and $433 in 2011 and 2010, respectively.

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 will provide the Company with additional federal income tax deductions for assets placed in service after September 8, 2010 and before December 31, 2012. As of December 31, 2012 and 2011 the deferred income tax liability for bonus depreciation was $1,610 and $12,600, respectively.

The tax effects of differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 are presented in the following table:

	2012		2011

Deferred tax assets:
Developer deposits for extension agreements and contributions in aid of construction	$	44,530	$	45,587
Net operating loss		8,437		1,015
Other		3,607		3,449

Total deferred tax assets		56,574		50,051

Deferred tax liabilities:
Utility plant, principally due to depreciation differences		207,642		155,916
WRAM/MCBA balancing accounts		19,533		17,393
Other		3,245		3,645

Total deferred tax liabilities		230,420		176,954

Net deferred tax liabilities	$	173,846	$	126,903

The current portion of our deferred income tax liability is $15,000 and $10,535 as of December 31, 2012 and 2011, respectively, which includes prepaid expenses and billed WRAM/MCBA surcharge, expected to reverse in the following 12 months.

A valuation allowance was not required at December 31, 2012 and 2011. Based on historical taxable income and future taxable income projections over the period in which the deferred assets are deductible, management believes it is more likely than not that the Company will realize the benefits of the deductible differences.

The following table reconciles the changes in unrecognized tax benefits:

	December 31, 2012			December 31, 2011

Balance at beginning of year	$	831		$	831
Additions for tax positions taken during prior year		—			—
Additions for tax positions taken during current year		—			—
Reductions for tax positions taken during a prior year		—			—
Lapse of statute of limitations		(831	)		—

Balance at end of year	$	—		$	831

As of December 31, 2012 and 2011, the total amount of net unrecognized tax benefits was none and $831, respectively. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest was $114 as of December 31, 2011 and 2010. The total accrued penalties and interest of $114 was reversed as of December 31, 2012. Additionally, the Company does not expect a material change in its unrecognized tax benefits within the next 12 months.

Tax years of 2010 and 2011 are subject to examination by the federal and state taxing authorities, respectively. The IRS is presently auditing the Company's 2010 and 2011 federal income tax returns. It is uncertain when the IRS will complete its audit. The Company believes that the final resolution of the IRS audit will not have a material adverse impact on its financial condition or results of operations. The California Franchise Tax Board (FTB) finished the examination for the Company's 2008 and 2009 California income tax returns in December 2012 with no audit adjustment.