Income Tax

The components of income tax are as follows:



	Con Edison			CECONY
(Millions of Dollars)	2018	2017	2016	2018	2017	2016
State
Current	$(10)	$(2)	$(42)	$6	$37	$(1)
Deferred	107	103	188	82	75	114
Federal
Current	3	(11)	(43)	(34)	73	59
Deferred	310	391	604	275	504	435
Amortization of investment tax credits	(9)	(9)	(9)	(3)	(4)	(4)
Total income tax expense	$401	$472	$698	$326	$685	$603

The tax effects of temporary differences, which gave rise to deferred tax assets and liabilities, are as follows:



	Con Edison		CECONY
(Millions of Dollars)	2018	2017	2018	2017
Deferred tax liabilities:
Property basis differences	$7,402	$6,555	$6,446	$5,968
Regulatory assets:
Unrecognized pension and other postretirement costs	627	697	591	656
Environmental remediation costs	227	219	200	187
Deferred storm costs	21	11	—	—
Other regulatory assets	273	269	252	241
Equity investments	102	263	—	—
Total deferred tax liabilities	$8,652	$8,014	$7,489	$7,052
Deferred tax assets:
Accrued pension and other postretirement costs	$248	$264	$180	$187
Regulatory liabilities:
Future income tax	702	698	662	660
Other regulatory liabilities	632	593	554	524
Superfund and other environmental costs	218	203	194	176
Asset retirement obligations	114	86	82	79
Loss carryforwards	229	95	—	—
Tax credits carryforward	817	658	—	—
Valuation allowance	(33)	(33)	—	—
Other	53	112	102	148
Total deferred tax assets	2,980	2,676	1,774	1,774
Net deferred tax liabilities	$5,672	$5,338	$5,715	$5,278
Unamortized investment tax credits	148	157	24	28
Net deferred tax liabilities and unamortized investment tax credits	$5,820	$5,495	$5,739	$5,306

The TCJA includes significant changes affecting the taxation of regulated public utilities, such as CECONY and O&R, and Con Edison’s other businesses. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA reduced the corporate federal income tax rate from 35 percent to 21 percent. The TCJA provisions related to regulated public utilities generally allow for the continued deductibility of interest expense, do not allow for full expensing of certain property acquired after September 27, 2017, and continue certain rate normalization requirements for the tax benefit of accelerated depreciation. For most non-utility businesses, TCJA provides for full expensing of property acquired after September 27, 2017 and limits a deduction for interest expense to 30 percent of adjusted taxable income (which resembles earnings before interest, taxes, depreciation and amortization or “EBITDA”).

In accordance with the accounting rules for income taxes (see “Federal Income Tax” in Note A), the tax effects of changes in tax laws are to be recognized in the period in which the law is enacted and deferred tax assets and liabilities are to be re-measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. For CECONY and O&R, in accordance with their New York rate plans and the accounting rules for regulated operations the change in deferred taxes was recorded as either an offset to a regulatory asset or a regulatory liability. See “Rate Plans” in Note B. For Con Edison’s other businesses, the change in deferred taxes was reflected as a decrease in income tax expense, which increased Con Edison's net income.

Upon enactment of the TCJA in December 2017, the Companies re-measured their deferred tax assets and liabilities based upon the TCJA’s 21 percent corporate federal income tax rate. As a result, Con Edison, decreased its net deferred tax liabilities by $5,312 million (including $4,781 million for CECONY), recognized $259 million in net income, decreased its regulatory asset for future income tax by $1,250 million (including $1,182 million for CECONY), decreased the regulatory asset for revenue taxes by $90 million (including $86 million for CECONY), and accrued a regulatory liability for future income tax of $3,713 million (including $3,513 million for CECONY). Since the Companies are in a net regulatory liability position with respect to these income tax matters, the Companies netted the regulatory asset for future income tax against the regulatory liability for future income tax. Under the rate normalization requirements continued by the TCJA, $2,684 million of the net regulatory liability (including $2,542 million for CECONY) related to certain accelerated tax depreciation benefits is to be amortized over the remaining lives of the related assets. The remainder of the net regulatory liability is to be refunded (or credited) to customers as determined by the NYSPSC or NJBPU, as applicable. See “Other Regulatory Matters” in Note B. The amount recognized in net income included $269 million for the Clean Energy Businesses, $11 million for Con Edison Transmission and $(21) million for the parent company. The re-measurement had no impact on the Companies’ cash flows for 2017.

At December 31, 2017, the Companies recorded provisional income tax amounts in its accounting for certain effects of the provisions of the TCJA as allowed under SEC Staff Accounting Bulletin 118 (SAB 118). SAB 118 allowed a one year period for companies to finalize the provisional amounts recorded as of December 31, 2017. In August 2018, the Internal Revenue Service (IRS) and U.S. Department of Treasury issued proposed regulations that clarified provisions in the TCJA on the allowance for additional first-year depreciation for qualified property of regulated public utilities placed in service in the fourth quarter of 2017. Under this guidance, which Con Edison elected to adopt, the Utilities deducted $477 million in additional depreciation in Con Edison’s 2017 federal income tax return. The additional depreciation increased Con Edison’s 2017 federal net operating loss (NOL) carryover to $563 million (CECONY’s 2017 federal NOL carryover of $153 million was applied in full to CECONY's 2018 tax liability), which required a re-measurement of deferred tax assets and liabilities associated with the filing of its 2017 federal income tax return. As a result, Con Edison decreased its net deferred tax liabilities by $13 million (including $50 million for CECONY), recognized $42 million in income tax expense at the parent company related to re-measuring the 2017 federal NOL carryover to 2018, decreased the regulatory asset for revenue taxes by $1 million (entirely attributable to CECONY) and accrued a regulatory liability for future income tax of $54 million (including $49 million for CECONY). The Companies completed their assessment in the fourth quarter of 2018 and no further adjustments to the provisional amounts were recorded.

Reconciliation of the difference between income tax expense and the amount computed by applying the prevailing statutory income tax rate to income before income taxes is as follows:



	Con Edison						CECONY
(% of Pre-tax income)	2018		2017		2016		2018		2017		2016
STATUTORY TAX RATE
Federal	21	%	35	%	35	%	21	%	35	%	35	%
Changes in computed taxes resulting from:
State income tax	4		4		4		5		4		4
Cost of removal	1		1		(1	)	1		1		(1	)
Other plant-related items	(1	)	(1	)	—		(1	)	(1	)	(1	)
TCJA deferred tax re-measurement	2		(13	)	—		—		—		—
Amortization of excess deferred federal income taxes	(3	)	—		—		(3	)	—		—
Renewable energy credits	(1	)	(1	)	(1	)	—		—		—
Research and development credits	—		—		(1	)	(1	)	—		(1	)
Other	—		(2	)	—		(1	)	(1	)	—
Effective tax rate	23	%	23	%	36	%	21	%	38	%	36	%

CECONY and O&R deferred as regulatory liabilities their estimated net benefits under the TCJA for the year ended December 31, 2018. RECO deferred as a regulatory liability its estimated net benefits under the TCJA for the three months ended March 31, 2018. The net benefits include the revenue requirement impact of the reduction in the corporate federal income tax rate to 21 percent, the elimination for utilities of bonus depreciation and the amortization of excess deferred federal income taxes the utilities collected from customers that will not be paid to the IRS under the TCJA. See “Other Regulatory Matters” in Note B.

Con Edison has a federal net operating loss carryover of approximately $711 million, due primarily to accelerated depreciation (including bonus depreciation). The 2017 federal net operating loss carryover of $520 million will expire, if unused, in 2037 and the 2018 federal net operating loss carryover of $191 million can be carried forward indefinitely. Con Edison has $817 million in general business tax credit carryovers (primarily renewable energy tax credits), which if unused will begin to expire in 2032. A deferred tax asset for these tax attribute carryforwards was recorded, and no valuation allowance has been provided, as it is more likely than not that the deferred tax asset will be realized.

For New York State income tax purposes, Con Edison had a net operating loss of $97 million from 2017, primarily as a result of accelerated tax deductions on renewable energy projects. This loss was carried back to 2015 and will result in recovery of $9 million of income tax. In 2018, Con Edison had a New York State net operating loss of approximately $398 million, primarily as a result of accelerated tax deductions on renewable energy projects. Con Edison expects to carry back approximately $99 million of its 2018 net operating loss to 2015 and 2016, which will result in recovery of $9 million of income tax. The remaining 2018 New York State net operating loss of $299 million will be carried forward to future years. A deferred tax asset has been recognized for this New York State net operating loss that will expire, if unused, in 2038. A valuation allowance has not been provided; as it is more likely than not that the deferred tax asset will be realized.

Charitable contributions carryforward of $5 million, $5 million, $7 million and $5 million for 2015, 2016, 2017 and 2018, respectively, will expire in 2020, 2021, 2022 and 2023, respectively. The carryforwards were recorded as a deferred tax asset, and no valuation allowance has been provided, as it is more likely than not that the deferred tax asset will be realized. In addition, a $12 million valuation allowance for New York City net operating loss carryforward and a $21 million valuation allowance for state net operating losses carryforward has been provided; as it is not more likely than not that the deferred tax asset will be realized.

The Protecting Americans from Tax Hikes Act of 2015 extended bonus depreciation for property acquired and placed in service during 2015 through 2019. The bonus depreciation percentage is 50 percent for property placed in service during 2015, 2016 and 2017 and phases down to 40 percent in 2018, and 30 percent in 2019. Since Con Edison meets the de minimis exception set forth in the proposed Treasury regulations to qualify as a utility company for the consolidated group, the TCJA does not allow bonus depreciation for property acquired and placed in service by the Companies after December 31, 2017 (excluding the transition rules for incurred property costs prior to September 28, 2017 and subsequently placed in service in 2018 or 2019).

In August 2018, the Federal government issued proposed regulations providing guidance on provisions in the TCJA allowing for full expensing of qualified plant additions. These proposed regulations, which Con Edison adopted, allows Con Edison’s utilities a full expense tax deduction for plant additions in the fourth quarter of 2017, and the Utilities continue additional first year depreciation transition rules for plant additions placed in service in tax years beginning in 2018, under long-term construction contracts entered into before September 28, 2017. The impact on the Utilities of these regulations is discussed above.

In November 2018, the Federal government issued, and Con Edison adopted, proposed regulations providing guidance on the tax deductibility of interest expense under the TCJA. The proposed regulations provide guidance on the treatment of consolidated interest expense. The regulations provide a safe harbor test that if at least 90% of consolidated plant assets consist of utility property, the entire consolidated group will be treated as a regulated public utility, and all of the consolidated group’s interest expense will be currently tax deductible. Qualifying consolidated groups would not be entitled to the full expensing provisions in the TCJA noted above. This safe harbor test must be met for each year in order to achieve a current tax deduction for consolidated interest expense. The safe harbor rules do not apply to partnerships in which Con Edison and its subsidiaries are a partner. Con Edison qualified for the safe harbor treatment in 2018.

Uncertain Tax Positions

Under the accounting rules for income taxes, the Companies are not permitted to recognize the tax benefit attributable to a tax position unless such position is more likely than not to be sustained upon examination by taxing authorities, including resolution of any related appeals and litigation processes, based solely on the technical merits of the position.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits for Con Edison and CECONY follows:



	Con Edison			CECONY
(Millions of Dollars)	2018	2017	2016	2018	2017	2016
Balance at January 1,	$12	$42	$34	$5	$21	$2
Additions based on tax positions related to the current year	2	1	2	2	1	2
Additions based on tax positions of prior years	1	1	19	1	1	19
Reductions for tax positions of prior years	(2)	(24)	(13)	(1)	(18)	(2)
Reductions from expiration of statute of limitations	(4)	(2)	—	—	—	—
Settlements	(3)	(6)	—	(3)	—	—
Balance at December 31,	$6	$12	$42	$4	$5	$21

In 2018, Con Edison reached a settlement with the IRS on tax years 2012 through 2016 and certain state statute of limitations expired which resulted in Con Edison reversing $9 million in uncertain tax positions. Of this amount, $6 million reduced Con Edison’s effective tax rate. The amount related to CECONY was $4 million, of which $1 million reduced CECONY’s effective tax rate. Current and prior year additions in 2018 are for tax credits.

As of December 31, 2018, Con Edison reasonably expects to resolve within the next twelve months approximately $4 million of various federal and state uncertainties due to the expected completion of ongoing tax examinations and resolution of state refund claims, of which the entire amount, if recognized, would reduce Con Edison’s effective tax rate. The amount related to CECONY is approximately $2 million, of which the entire amount, if recognized, would reduce CECONY’s effective tax rate.

The Companies recognize interest on liabilities for uncertain tax positions in interest expense and would recognize penalties, if any, in operating expenses in the Companies’ consolidated income statements. In 2018, 2017 and 2016, the Companies recognized an immaterial amount of interest and no penalties for uncertain tax positions in their consolidated income statements. At December 31, 2018 and 2017, the Companies reflected an immaterial amount of interest and no penalties in their consolidated balance sheets.

At December 31, 2018, the total amount of unrecognized tax benefits that, if recognized, would reduce the Companies’ effective tax rate is $6 million with $4 million attributable to CECONY.

Federal tax returns for 2017 remain under examination. State income tax returns remain open for examination in New York for tax years 2010 through 2017 and in New Jersey for tax years 2008 through 2017.