Income Taxes

12 Months Ended

Dec. 31, 2017

14:Income Taxes

CMS Energy and its subsidiaries file a consolidated U.S. federal income tax return as well as a Michigan Corporate Income Tax return for the unitary business group and various other state unitary group combined income tax returns. Income taxes are allocated based on each company’s separate taxable income in accordance with the CMS Energy tax sharing agreement.

In December 2017, President Trump signed the TCJA, which changed existing federal tax law and included numerous provisions that affect businesses. Provisions significantly impacting CMS Energy and Consumers include:

Reduction of the corporate income tax rate from 35 percent to 21 percent

Repeal of the alternative minimum tax along with a provision requiring companies to recover alternative minimum tax credit carryforwards over the next four years

Limitation on the use of net operating loss carryforwards arising after December 31, 2017 to 80 percent of a company’s taxable income with an indefinite carryforward

A provision allowing companies to expense 100 percent of the cost of certain property when placed in service

Limitation on the deduction for net interest expense to 30 percent of adjusted taxable income

A requirement to use a normalization method of accounting for excess tax reserves associated with public utility property

As a rate-regulated utility, Consumers is excluded from certain provisions of the TCJA, including those allowing companies to expense 100 percent of the cost of certain property acquired after September 27, 2017 and limiting the amount companies may deduct for net interest expense.

Substantially all of the tax law changes enacted by the TCJA are effective for taxable years beginning after December 31, 2017. Under GAAP (ASC 740), however, companies must recognize the effects of a tax law change in the period of enactment. The staff of the SEC issued guidance in Staff Accounting Bulletin No. 118 that clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and provides for up to a one-year period in which to complete the required analyses and accounting for the impacts of the TCJA. CMS Energy and Consumers have made reasonable estimates in measuring and accounting for the effects of the TCJA, which have been reflected in the December 31, 2017 financial statements. Given expected changes to U.S. Treasury regulations, interpretations of the TCJA by the U.S. Treasury, interpretations of the application of ASC 740, and the companies’ analysis of their historical records, these estimates could change.

Presented in the following table is the difference between actual income tax expense on continuing operations and income tax expense computed by applying the statutory U.S. federal income tax rate:



In Millions, Except Tax Rate
Years Ended December 31	2017				2016				2015
CMS Energy, including Consumers
Income from continuing operations before income taxes		$	886			$	826			$	796

Income tax expense at statutory rate			310				289				279
Increase (decrease) in income taxes from:
Impact of the TCJA			148				-				-
State and local income taxes, net of federal effect1			26				37				39
Accelerated flow-through of regulatory tax benefits2			(39)				(39)				(39)
Employee share-based awards			(6)				(7)				-
Other, net			(15)				(7)				(8)
Income tax expense		$	424			$	273			$	271
Effective tax rate			47.9	%			33.1	%			34.0	%
Consumers
Income from continuing operations before income taxes		$	971			$	936			$	896

Income tax expense at statutory rate			340				328				314
Increase (decrease) in income taxes from:
Impact of the TCJA			33				-				-
State and local income taxes, net of federal effect1			30				44				42
Accelerated flow-through of regulatory tax benefits2			(39)				(39)				(39)
Employee share-based awards			(6)				(6)				-
Other, net			(19)				(7)				(15)
Income tax expense		$	339			$	320			$	302
Effective tax rate			34.9	%			34.2	%			33.7	%

1In September 2017, CMS Energy completed the evaluation of its methodology for the state apportionment of Consumers’ electricity sales to MISO, taking into account recent state tax law developments in the electric utility sector. As a result, CMS Energy intends to amend state income tax filings for 2013 through 2016 to seek a refund of taxes previously paid. To recognize the anticipated refund and the impact of the expected lower effective tax rate on their deferred state tax liabilities, CMS Energy, including Consumers, recorded a $14 million income tax benefit in 2017. The $14 million income tax benefit was net of reserves for uncertain tax positions and primarily attributable to Consumers.

2In 2013, the MPSC issued an order authorizing Consumers to accelerate the flow-through to electric and gas customers of certain income tax benefits associated primarily with the cost of removal of plant placed in service before 1993. Consumers implemented this regulatory treatment beginning in 2014. This change, which also accelerates Consumers’ recognition of the income tax benefits, reduced Consumers’ income tax expense by $39 million for each of the years ended December 31, 2017, 2016, and 2015.

Presented in the following table are the significant components of income tax expense on continuing operations:



In Millions
Years Ended December 31	2017			2016			2015
CMS Energy, including Consumers
Current income taxes
Federal		$	-		$	-		$	-
State and local			6			9			24
		$	6		$	9		$	24
Deferred income taxes
Federal		$	368		$	200		$	192
State and local			36			47			36
		$	404		$	247		$	228
Deferred income tax credit			14			17			19
Tax expense		$	424		$	273		$	271
Consumers
Current income taxes
Federal		$	159		$	9		$	66
State and local			17			22			32
		$	176		$	31		$	98
Deferred income taxes
Federal		$	120		$	227		$	153
State and local			29			45			32
		$	149		$	272		$	185
Deferred income tax credit			14			17			19
Tax expense		$	339		$	320		$	302

At CMS Energy, including Consumers, the impact of the TCJA was a $148 million increase in deferred income tax expense for the year ended December 31, 2017. At Consumers, the impact was a $33 million increase in deferred income tax expense. The TCJA had no impact on current income tax expense.

Presented in the following table are the principal components of deferred income tax assets (liabilities) recognized:



In Millions
December 31	2017			2016
CMS Energy, including Consumers
Deferred income tax assets
Tax loss and credit carryforwards		$	453		$	871
Net regulatory tax liability			411			27
Reserves and accruals			40			69
Total deferred income tax assets		$	904		$	967
Valuation allowance			(15)			(5)
Total deferred income tax assets, net of valuation reserves		$	889		$	962
Deferred income tax liabilities
Plant, property, and equipment		$	(1,891)		$	(2,902)
Employee benefits			(96)			(158)
Securitized costs			(71)			(118)
Gas inventory			(37)			(65)
Other			(63)			(6)
Total deferred income tax liabilities		$	(2,158)		$	(3,249)
Total net deferred income tax liabilities		$	(1,269)		$	(2,287)
Consumers
Deferred income tax assets
Net regulatory tax liability		$	411		$	27
Tax loss and credit carryforwards			101			190
Reserves and accruals			21			37
Total deferred income tax assets		$	533		$	254
Deferred income tax liabilities
Plant, property, and equipment		$	(1,901)		$	(2,924)
Employee benefits			(105)			(181)
Securitized costs			(71)			(118)
Gas inventory			(37)			(65)
Other			(59)			(8)
Total deferred income tax liabilities		$	(2,173)		$	(3,296)
Total net deferred income tax liabilities		$	(1,640)		$	(3,042)

Deferred tax assets and liabilities are recognized for the estimated future tax effect of temporary differences between the tax basis of assets or liabilities and the reported amounts on CMS Energy’s and Consumers’ consolidated financial statements. At December 31, 2017, CMS Energy and Consumers remeasured their deferred tax assets and liabilities and related valuation allowances using the 21 percent federal tax rate enacted in the TCJA. To reflect the lower corporate tax rate, Consumers reduced its net deferred tax liabilities associated with its utility book-tax temporary differences by $1.6 billion. Of this amount, Consumers recognized deferred tax expense of $33 million related to non-recoverable net deferred tax assets, with the remaining amount being recorded as a net regulatory tax liability.

Presented in the following table are the components of the net regulatory tax liability recorded at Consumers related to the TCJA:



In Millions
December 31	2017
Consumers
Plant, property, and equipment (subject to normalization1)		$	1,781
All other, net (not subject to normalization1)			(193)
Net regulatory tax liability		$	1,588

1Relates to deferred taxes arising from accelerated tax depreciation on assets in rate base that are governed by normalization provisions of the U.S. Internal Revenue Code. These normalization provisions generally require that customer rate refunds associated with changes in deferred taxes be returned to customers over the remaining average service life of the associated assets. Consumers will collect from customers the portion not subject to normalization over a period to be determined in a future regulatory proceeding. Consumers cannot predict the impact of orders from the MPSC related to the treatment of regulatory balances not subject to amortization.

In addition to the amounts recorded at Consumers, CMS Energy reduced its net deferred tax assets associated with its non-utility book-tax temporary differences by $239 million. In total, CMS Energy, including Consumers, reduced its net deferred tax liabilities by $1.3 billion.

Presented in the following table are the tax loss and credit carryforwards at December 31, 2017:



In Millions
	Gross Amount			Tax Attribute			Expiration
CMS Energy, including Consumers
Federal net operating loss carryforward		$	855		$	179	2028 – 2036
Local net operating loss carryforwards			487			5	2023 – 2036
Alternative minimum tax credits			137			137	Not applicable
General business credits			130			130	2018 – 2037
Charitable contribution carryover			8			2	2021
Total tax attributes					$	453
Consumers
Federal net operating loss carryforward		$	309		$	65	2028 – 2036
General business credits			34			34	2032 – 2037
Charitable contribution carryover			8			2	2021
Total tax attributes					$	101

CMS Energy has provided a valuation allowance of $2 million for the local tax loss carryforward, and $3 million for general business credits. The TCJA repealed the corporate alternative minimum tax and requires companies to recover (through offsets of regular tax and through cash refunds) all alternative minimum tax credits over the next four years. To reflect policy enacted by the federal Budget Control Act of 2011, CMS Energy has provided a valuation allowance of $10 million for sequestration of cash refunds of alternative minimum tax credits. Additionally, at December 31, 2017, CMS Energy reclassified $124 million of alternative minimum tax credits to a current receivable, net of a charge of $9 million for sequestration.

CMS Energy and Consumers expect to utilize fully their tax loss and credit carryforwards for which no valuation allowance has been provided. It is reasonably possible that further adjustments will be made to the valuation allowances within one year.

Presented in the following table is a reconciliation of the beginning and ending amount of uncertain tax benefits:



In Millions
Years Ended December 31	2017			2016			2015
CMS Energy, including Consumers
Balance at beginning of period		$	5		$	6		$	5
Additions for current-year tax positions			10			-			1
Additions for prior-year tax positions			-			-			1
Reductions for prior-year tax positions			(1)			-			(1)
Settlements			-			(1)			-
Balance at end of period		$	14		$	5		$	6
Consumers
Balance at beginning of period		$	5		$	6		$	5
Additions for current-year tax positions			17			-			1
Additions for prior-year tax positions			-			-			1
Reductions for prior-year tax positions			(1)			-			(1)
Settlements			-			(1)			-
Balance at end of period		$	21		$	5		$	6

If recognized, all of these uncertain tax benefits would affect CMS Energy’s and Consumers’ annual effective tax rates in future years.

CMS Energy and Consumers recognize accrued interest and penalties, where applicable, as part of income tax expense. CMS Energy, including Consumers, recognized no interest or penalties for the years ended December 31, 2017, 2016, or 2015.

The amount of income taxes paid is subject to ongoing audits by federal, state, local, and foreign tax authorities, which can result in proposed assessments. CMS Energy’s federal income tax returns for 2014 and subsequent years remain subject to examination by the IRS. CMS Energy’s Michigan Corporate Income Tax and Michigan Business Tax returns for 2008 and subsequent years, excluding 2012, remain subject to examination by the State of Michigan. CMS Energy’s and Consumers’ estimate of the potential outcome for any uncertain tax issue is highly judgmental. CMS Energy and Consumers believe that their accrued tax liabilities at December 31, 2017 were adequate for all years.

Consumers Energy Company [Member]

Income Taxes