Income taxes

12 Months Ended

Dec. 31, 2019

Note 12 · Income taxes

The components of income taxes attributable to net income for common stock were as follows:



	HEI consolidated									Hawaiian Electric consolidated
Years ended December 31	2019			2018			2017			2019			2018			2017
(in thousands)
Federal
Current	$	28,736		$	42,903		$	61,534		$	21,751		$	29,649		$	36,267
Deferred*	(4,353		)	(6,099		)	33,967			(7,793		)	(5,245		)	35,229
Deferred tax credits, net**	13,410			(12		)	(20		)	13,155			(12		)	(20		)
	37,793			36,792			95,481			27,113			24,392			71,476
State
Current	10,472			17,361			10,076			5,579			13,210			8,947
Deferred	(10,732		)	(3,269		)	3,868			(8,491		)	(2,737		)	2,808
Deferred tax credits, net**	14,104			(87		)	(32		)	14,104			(87		)	(32		)
	13,844			14,005			13,912			11,192			10,386			11,723
Total	$	51,637		$	50,797		$	109,393		$	38,305		$	34,778		$	83,199


*	The 2018 deferred income tax expense includes the final adjustment to reduce the provisional amount recorded in 2017 pursuant to Staff Accounting Bulletin No. 118 (SAB No. 118). See “Major tax developments” disclosure below for details of the accounting for the enactment of the Tax Act.


**	Represents 2019 federal and state tax credits, primarily related to the West Loch PV project, deferred and amortized starting in 2020. See West Loch PV Project discussion in Note 3.

A reconciliation of the amount of income taxes computed at the federal statutory rate to the amount provided in the consolidated statements of income was as follows:



	HEI consolidated									Hawaiian Electric consolidated
Years ended December 31	2019			2018			2017			2019			2018			2017
(in thousands)
Amount at the federal statutory income tax rate	$	56,996		$	53,437		$	96,796		$	41,399		$	37,889		$	71,801
Increase (decrease) resulting from:
State income taxes, net of federal income tax benefit	11,658			11,832			9,789			8,703			8,080			7,584
Net deferred tax asset (liability) adjustment related to the Tax Act	(9,255		)	(9,540		)	13,420			(9,255		)	(9,285		)	9,168
Other, net	(7,762		)	(4,932		)	(10,612		)	(2,542		)	(1,906		)	(5,354		)
Total	$	51,637		$	50,797		$	109,393		$	38,305		$	34,778		$	83,199
Effective income tax rate	19.0		%	20.0		%	39.6		%	19.4		%	19.3		%	40.6		%

The tax effects of book and tax basis differences that give rise to deferred tax assets and liabilities were as follows:



	HEI consolidated				Hawaiian Electric consolidated
December 31	2019		2018		2019		2018
(in thousands)
Deferred tax assets
Regulatory liabilities, excluding amounts attributable to property, plant and equipment	$	100,427	$	104,868	$	100,427	$	104,868
Operating lease liabilities	51,573		—		45,608		—
Allowance for bad debts	14,858		14,647		560		659
Other¹	54,028		46,036		41,181		26,522
Total deferred tax assets	220,886		165,551		187,776		132,049
Deferred tax liabilities
Property, plant and equipment related	464,312		437,644		458,349		434,831
Operating lease right-of-use assets	51,542		—		45,608		—
Regulatory assets, excluding amounts attributable to property, plant and equipment	33,897		37,345		33,897		37,345
Deferred RAM and RBA revenues	—		11,278		—		11,278
Retirement benefits	9,684		20,173		13,072		25,430
Other	40,776		31,629		14,001		6,362
Total deferred tax liabilities	600,211		538,069		564,927		515,246
Net deferred income tax liability	$	379,325	$	372,518	$	377,151	$	383,197

As of December 31, 2019, HEI consolidated and Hawaiian Electric consolidated have deferred tax assets of $8.7 million and $6.7 million respectively, relating to the benefit of state tax credit carryforwards of $11.7 million and $9 million respectively. These state tax credit carryforwards primarily relate to the West Loch PV project and do not expire. The Company concluded that as of December 31, 2019, a valuation allowance is not required.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. Based upon historical taxable income and projections for future taxable income, management believes it is more likely than not the Company and the Utilities will realize substantially all of the benefits of the deferred tax assets. As of December 31, 2019 and 2018, valuation allowances for deferred tax benefits were nil. The Utilities are included in the consolidated federal and Hawaii income tax returns of HEI and are subject to the provisions of HEI’s tax sharing agreement, which determines each subsidiary’s (or subgroup’s) income tax return liabilities and refunds on a standalone basis as if it filed a separate return (or subgroup consolidated return).

The following is a reconciliation of the Company’s liability for unrecognized tax benefits for 2019, 2018 and 2017.



	HEI consolidated									Hawaiian Electric consolidated
(in millions)	2019			2018			2017			2019			2018			2017
Unrecognized tax benefits, January 1	$	2.1		$	4.0		$	3.8		$	1.6		$	3.5		3.8
Additions based on tax positions taken during the year	0.5			0.3			0.9			0.5			0.3			0.4
Reductions based on tax positions taken during the year	—			—			(0.2		)	—			—			(0.2		)
Additions for tax positions of prior years	0.1			0.1			—			0.1			0.1			—
Reductions for tax positions of prior years	(0.2		)	(0.1		)	(0.5		)	(0.2		)	(0.1		)	(0.5		)
Lapses of statute of limitations	(0.3		)	(2.2		)	—			(0.3		)	(2.2		)	—
Unrecognized tax benefits, December 31	$	2.2		$	2.1		$	4.0		$	1.7		$	1.6		$	3.5

At December 31, 2019 and 2018, there were $0.5 million of unrecognized tax benefits, if recognized, would affect the Company’s annual effective tax rate. As of December 31, 2019 and 2018, the Utilities had no unrecognized tax benefits that, if recognized, would affect the Utilities’ annual effective tax rate. The Company and Utilities believe that the unrecognized tax benefits will not significantly increase or decrease within the next 12 months.

HEI consolidated. The Company recognizes interest accrued related to unrecognized tax benefits in “Interest expense-other than on deposit liabilities and other bank borrowings” and penalties, if any, in operating expenses. In 2019, 2018 and 2017, the Company recognized approximately $0.1 million, $(0.1) million and $0.2 million in interest expense. The Company had $0.6 million and $0.4 million of interest accrued as of December 31, 2019 and 2018, respectively.

Hawaiian Electric consolidated. The Utilities recognize interest accrued related to unrecognized tax benefits in “Interest expense and other charges, net” and penalties, if any, in operating expenses. In 2019, 2018 and 2017, the Utilities recognized approximately $0.1 million in interest expense. The Utilities had $0.4 million and $0.3 million of interest accrued as of December 31, 2019 and 2018, respectively.

As of December 31, 2019, the disclosures above present the Company’s and the Utilities’ accruals for potential tax liabilities, which involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts. Based on information currently available, the Company and the Utilities believe these accruals have adequately provided for potential income tax issues with federal and state tax authorities, and that the ultimate resolution of tax issues for all open tax periods will not have a material adverse effect on its results of operations, financial condition or liquidity.

IRS examinations have been completed and settled through the tax year 2011 and the statute of limitations has expired for years prior to 2016, leaving subsequent years subject to IRS examination. The tax years 2011 and subsequent are still subject to examination by the Hawaii Department of Taxation.

Major tax developments. The changes enacted in the 2017 Tax Cuts and Jobs Act continue to impact corporate taxpayers. The following summarizes the provisions that have a major impact on the Company.

Lower tax rate. The corporate income tax rate reduction from 35% to 21% lowered the Company’s effective tax rate in 2018 and the subsequent years. For the regulated Utilities, the excess ADIT resulting from the rate change is being returned to customers over various periods determined with the approval of the PUC.

Bonus depreciation. The Tax Act allows 100% bonus depreciation through the end of 2022 for qualified property purchased and placed in service after September 27, 2017. The Tax Act provides that property used in the trade or business of a regulated utility (including the furnishing or selling electrical energy) is not qualified property. However, property placed into service after September 27, 2017 are grandfathered under the pre-Tax Act rules allowing 50% bonus depreciation if subject to written binding purchase contracts prior to September 28, 2017.

Other applicable provisions. There are a number of other provisions in the Tax Act that have an impact on the Company, including the repeal of the domestic production activities deduction (DPAD), non-deductibility of transportation fringe benefits excluded from employees income, and the increased limitation on the deductibility of executive compensation.

SAB No. 118. On December 22, 2017, the SEC staff issued SAB No. 118 to address the application of GAAP in situations

when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in

reasonable detail to complete the accounting for certain income tax effects of the Tax Act.

The Company applied the guidance in SAB No. 118 when accounting for enactment date effects of the Tax Act in 2017 and throughout 2018. At December 31, 2017, the Company had not completed its re-measurement of deferred tax assets and liabilities as a result of the reduction in the US federal corporate income tax rate to 21% and, in accordance with SAB No. 118, recorded a provisional amount. The Tax Act’s reduction of the corporate tax rate to 21% resulted in a net deferred tax balance that was in excess of the taxes the Company expected to pay or be refunded in the future when the temporary differences that created these deferred taxes reverse. The excess related to the Utilities’ deferred taxes that were identified to be refunded in rates was reclassified to a regulatory liability and is currently being returned to the customers over various periods of time. The remaining excess was written off through deferred tax expense. Consequently, in 2017, the Company recorded a provisional increase in deferred tax expense of $13.4 million ($9.2 million at the Utilities). In December 2018, the end date of the measurement period for purposes of SAB No. 118 passed, and consequently, the Company (and Utilities) completed its analysis based on available Treasury and legislative guidance relating to the Tax Act.

In 2018, the Company re-measured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future. For the period ended December 31, 2018, the net deferred tax liabilities decreased by $13.9 million ($13.6 million at the Utilities) with the corresponding net adjustment that decreased deferred tax expense by $5.5 million ($5.2 million at the Utilities) and increased the regulatory liability by $11.3 million. The decrease in deferred tax expense is included as a component of income tax expense and had the effect of decreasing the effective tax rate in 2018 from 22.1% to 20.0% (22.2% to 19.3% at the Utilities).