Income Taxes

Earnings before income taxes of $3.1 billion, $2.7 billion and $3.1 billion for fiscal years 2017, 2016 and 2015, respectively, represent earnings from domestic operations. The breakdown of income tax expense between current and deferred is as follows:



	Fiscal Years
(Dollars in Millions)	2017			2016		2015
Current:
Federal	$	787		$	540	$	619
State	117			82		95
Subtotal Current	904			622		714

Deferred:
Federal	(3,277		)	355		414
State	44			50		42
Subtotal Deferred	(3,233		)	405		456
Total	$	(2,329	)	$	1,027	$	1,170

NOTE 11. Income Taxes, continued

Income tax expense reconciled to the tax computed at statutory rates is presented in the table below. With the enactment of the Tax Cuts and Jobs Act (the "Act" or "tax reform") on December 22, 2017, the Company's 2017 financial results included a $3.5 billion, or $3.81 per share, non-cash reduction in income tax expense, primarily resulting from revaluing the Company's net deferred tax liabilities to reflect the recently enacted 21% federal corporate tax rate effective January 1, 2018. These estimates are based on the Company's initial analysis of the Act and may be adjusted in future periods as required. The Act has significant complexity and implementation guidance from the Internal Revenue Service, clarifications of state tax law and the completion of the Company’s 2017 tax return filings could all impact these estimates. The Company does not believe potential adjustments in future periods would materially impact the Company's financial condition or results of operations. The provisions of the Act related to foreign earnings will not impact CSX.

The Company's affiliates also revalued their deferred tax liabilities to reflect the lower federal corporate tax rate, which resulted in the Company recognizing a benefit of $142 million, or $0.10 per share after-tax, in equity earnings of affiliates, which is included in operating income. (See additional discussion over equity earnings of affiliates in Note 12, Related Parties and Affiliates.)

In addition to the tax benefit related to tax reform, the Company recorded a 2017 income tax benefit of $21 million primarily as a result of the additional tax benefit associated with vesting of share-based awards, state legislative changes, a change in the apportionment of state taxable income and the related impact on the valuation of deferred taxes, and the settlement of certain state tax matters. In 2016, the Company recorded an income tax expense adjustment of $10 million as a result of a change in the apportionment of state income taxes and the related impact on the valuation of deferred taxes as well as a $7 million tax benefit as a result of federal and state legislative changes. In 2015, the Company recorded a tax benefit of $4 million primarily as a result of federal and state legislative changes as well as the resolution of federal and state tax matters.



	Fiscal Years
(Dollars In Millions)	2017					2016					2015

Federal Income Taxes	$	1,100		35.0	%	$	959		35.0	%	$	1,098		35.0	%
State Income Taxes	102			3.2	%	83			3.0	%	86			2.7	%
Deferred Tax Rate Change	(3,506		)	(111.6	)%	—			—	%	—			—	%
Other	(25		)	(0.8	)%	(15		)	(0.5	)%	(14		)	(0.4	)%
Income Tax (Benefit) Expense/Rate	$	(2,329	)	(74.2	)%	$	1,027		37.5	%	$	1,170		37.3	%

NOTE 11. Income Taxes, continued

The significant components of deferred income tax assets and liabilities include:



	2017				2016
(Dollars in Millions)	Assets		Liabilities		Assets		Liabilities
Pension Plans	$	41	$	—	$	125	$	—
Other Employee Benefit Plans	182		—		272		—
Accelerated Depreciation	—		6,576		—		9,925
Other	657		722		225		293
Total	$	880	$	7,298	$	622	$	10,218
Net Deferred Income Tax Liabilities			$	6,418			$	9,596

The primary factors in the change in year-end net deferred income tax liability balances include:


•	annual provision for deferred income tax expense including the impact of the recently enacted federal corporate tax rate change from 35 percent to 21 percent, and


•	accumulated other comprehensive income/loss.

The Company files a consolidated federal income tax return, which includes its principal domestic subsidiaries. CSX and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. CSX participated in a contemporaneous IRS audit of tax years 2016 and 2017. Federal examinations of original federal income tax returns for all years through 2015 are resolved.

As of December 2017, 2016 and 2015, the Company had approximately $24 million, $25 million and $23 million, respectively, of total unrecognized tax benefits as a result of uncertain tax positions. Net tax benefits of $19 million, $16 million and $15 million in 2017, 2016 and 2015, respectively, could favorably impact the effective income tax rate in each year. The Company does not expect that unrecognized tax benefits as of December 2017 for various state and federal income tax matters will significantly change over the next 12 months. The final outcome of these uncertain tax positions is not yet determinable. The change to the total gross unrecognized tax benefits and prior year audit resolutions of the Company during the fiscal year ended December 2017 is reconciled in the table below.



Unrecognized Tax Benefits:	Fiscal Year
(Dollars in Millions)	2017			2016			2015
Balance at beginning of the year	$	25		$	23		$	21
Additions based on tax positions related to current year	1			1			1
Additions based on tax positions related to prior years	4			4			4
Reductions based on tax positions related to prior years	—			—			—
Settlements with taxing authorities	(4		)	—			1
Lapse of statute of limitations	(2		)	(3		)	(4		)
Balance at end of the year	$	24		$	25		$	23

NOTE 11. Income Taxes, continued

CSX’s continuing practice is to recognize net interest and penalties related to income tax matters in income tax expense. Included in the consolidated income statements are expenses of $3 million, $2 million and $2 million in 2017, 2016 and 2015, respectively, for changes to reserves for interest and penalties for all prior year tax positions. The Company had $6 million, $6 million and $4 million accrued for interest and penalties at 2017, 2016 and 2015, respectively, for all prior year tax positions.