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Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

IPALCO follows a policy of comprehensive interperiod income tax allocation. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.

AES files federal and state income tax returns which consolidate IPALCO and its subsidiaries. Under a tax sharing agreement with AES, IPALCO is responsible for the income taxes associated with its own taxable income and records the provision for income taxes as if IPALCO and its subsidiaries each filed separate income tax returns. IPALCO is no longer subject to U.S. or state income tax examinations for tax years through March 27, 2001, but is open for all subsequent periods. IPALCO made tax sharing payments to AES of $29.6 million, $28.3 million and $65.1 million in 2019, 2018 and 2017 respectively.

On March 25, 2014, the state of Indiana amended Indiana Code 6-3-2-1 through Senate Bill 001, which phases in an additional 1.6% reduction to the state corporate income tax rate that was initially being reduced by 2%. While the statutory state income tax rate decreased to 5.625% for the calendar year 2019, the deferred tax balances were adjusted according to the anticipated reversal of temporary differences. The change in required deferred taxes on plant and plant-related temporary differences resulted in a reduction to the associated regulatory asset of $1.3 million. The change in required deferred taxes on non-property related temporary differences which are not probable to cause a reduction in future base customer rates resulted in a tax benefit of $0.1 million. The statutory state corporate income tax rate will be 5.375% for 2020.

In tax years prior to 2018, Internal Revenue Code Section 199 permitted taxpayers to claim a deduction from taxable income attributable to certain domestic production activities. IPL’s electric production activities qualify for this deduction. Beginning in 2010 and through the 2017 tax year, the deduction is equal to 9% of the taxable income attributable to qualifying production activity. The tax benefit associated with the Internal Revenue Code Section 199 domestic production deduction for the tax year 2017 was $3.9 million. Due to the enactment of TCJA (as described below), the 2017 tax year was the final year for this deduction.

U.S. Tax Reform

On December 22, 2017, the U.S. federal government enacted the TCJA. The TCJA significantly changes U.S. corporate income tax law. Notable items impacting the effective tax rate for the 2018 tax year related to the TCJA include a rate reduction in the corporate tax rate to 21% from 35% and an increase in the estimated flow-through depreciation partially offset by the repeal of the manufacturer’s production deduction.

In 2017, the Company recognized the income tax effects of the TCJA in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) which provides SEC guidance on the application of ASC 740, Income Taxes, in the reporting period in which the TCJA was signed into law. Accordingly, the Company’s financial statements reflected the income tax effects of U.S. tax reform for which the accounting was complete and provisional amounts for those impacts for which the accounting under ASC 740 was incomplete, but a reasonable estimate could be determined.

The Company completed its calculation of the impact of the TCJA in its income tax provision during the year ended December 31, 2018 in accordance with its understanding of the TCJA and guidance available as of that date, and as a result recognized $0.0 million and $0.2 million of discrete tax expense in the fourth quarters of 2018 and 2017, respectively. This total results from the remeasurement of certain deferred tax assets and liabilities from 35% to 21%. The most material deferred taxes to be remeasured related to property, plant and equipment. The remeasurement of deferred tax assets and liabilities related to regulated utility property of $7.7 million and $215.5 million in 2018 and 2017, respectively, was recorded as a regulatory liability, which was a non-cash adjustment.

Income Tax Provision

Federal and state income taxes charged to income are as follows:



	2019			2018			2017
	(In Thousands)
Components of income tax expense:
Current income taxes:
Federal	$	17,229		$	20,341		$	42,542
State	3,022			8,843			9,916
Total current income taxes	20,251			29,184			52,458
Deferred income taxes:
Federal	7,547			(15,150		)	(1,720		)
State	7,745			326			(332		)
Total deferred income taxes	15,292			(14,824		)	(2,052		)
Net amortization of investment credit	(15		)	(911		)	(1,455		)
Total income tax expense	$	35,528		$	13,449		$	48,951

Effective and Statutory Rate Reconciliation

The provision for income taxes (including net investment tax credit adjustments) is different than the amount computed by applying the statutory tax rate to pretax income. The reasons for the difference, stated as a percentage of pretax income, are as follows:



	2019		2018		2017
Federal statutory tax rate	21.0	%	21.0	%	35.0	%
State income tax, net of federal tax benefit	4.4	%	5.6	%	4.1	%
Research and development credit	—	%	(1.9	)%	—	%
Depreciation flow through and amortization	(5.7	)%	(15.6	)%	(0.1	)%
Additional funds used during construction - equity	0.2	%	0.3	%	(4.1	)%
Manufacturers’ Production Deduction (Sec. 199)	—	%	—	%	(2.5	)%
Other – net	1.3	%	(0.3	)%	(1.4	)%
Effective tax rate	21.2	%	9.1	%	31.0	%

Deferred Income Taxes

The significant items comprising IPALCO’s net accumulated deferred tax liability recognized on the audited Consolidated Balance Sheets as of December 31, 2019 and 2018, are as follows:



	2019		2018
	(In Thousands)
Deferred tax liabilities:
Relating to utility property, net	$	406,605	$	378,460
Regulatory assets recoverable through future rates	61,984		67,721
Other	17,996		12,161
Total deferred tax liabilities	486,585		458,342
Deferred tax assets:
Investment tax credit	7		11
Regulatory liabilities including ARO	191,676		184,413
Employee benefit plans	8,556		8,335
Other	13,485		12,498
Total deferred tax assets	213,724		205,257
Deferred income tax liability – net	$	272,861	$	253,085

Uncertain Tax Positions

The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017:



	2019		2018		2017
	(In Thousands)
Unrecognized tax benefits at January 1	$	7,056	$	7,049	$	6,634
Gross increases – current period tax positions	—		—		470
Gross decreases – prior period tax positions	—		7		(55		)
Unrecognized tax benefits at December 31	$	7,056	$	7,056	$	7,049

The unrecognized tax benefits at December 31, 2019 represent tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the timing of the deductions will not affect the annual effective tax rate but would accelerate the tax payments to an earlier period.

Tax-related interest expense and income is reported as part of the provision for federal and state income taxes. Penalties, if incurred, would also be recognized as a component of tax expense. There are no interest or penalties applicable to the periods contained in this report.

Indianapolis Power And Light Company

Entity Information [Line Items]

Income Taxes

INCOME TAXES

IPL follows a policy of comprehensive interperiod income tax allocation. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.

AES files federal and state income tax returns which consolidate IPALCO and IPL. Under a tax sharing agreement with IPALCO, IPL is responsible for the income taxes associated with its own taxable income and records the provision for income taxes as if IPL filed separate income tax returns. IPL is no longer subject to U.S. or state income tax examinations for tax years through March 27, 2001, but is open for all subsequent periods. IPL made tax sharing payments to IPALCO of $37.4 million, $33.8 million and $87.0 million in 2019, 2018 and 2017 respectively.

In tax years prior to 2018, Internal Revenue Code Section 199 permitted taxpayers to claim a deduction from taxable income attributable to certain domestic production activities. IPL’s electric production activities qualify for this deduction. Beginning in 2010 and through the 2017 tax year, the deduction is equal to 9% of the taxable income attributable to qualifying production activity. The tax benefit associated with the Internal Revenue Code Section 199 domestic production deduction for 2017 was $4.8 million. Due to the enactment of TCJA (as described below), the 2017 tax year was the final year for this deduction.

U.S. Tax Reform

In 2017, IPL recognized the income tax effects of the TCJA in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) which provides SEC guidance on the application of ASC 740, Income Taxes, in the reporting period in which the TCJA was signed into law. Accordingly, IPL’s financial statements reflected the income tax effects of U.S. tax reform for which the accounting was complete and provisional amounts for those impacts for which the accounting under ASC 740 was incomplete, but a reasonable estimate could be determined.

IPL completed its calculation of the impact of the TCJA in its income tax provision during the year ended December 31, 2018 in accordance with its understanding of the TCJA and guidance available as of that date, and as a result recognized $0.0 million and $0.2 million of discrete tax expense in the fourth quarters of 2018 and 2017, respectively. This total results from the remeasurement of certain deferred tax assets and liabilities from 35% to 21%. The most material deferred taxes to be remeasured related to property, plant and equipment. The remeasurement of deferred tax assets and liabilities related to regulated utility property of $7.7 million and $215.5 million in 2018 and 2017, respectively, was recorded as a regulatory liability, which was a non-cash adjustment.

Income Tax Provision

Federal and state income taxes charged to income are as follows:



	2019			2018			2017
	(In Thousands)
Components of income tax expense:
Current income taxes:
Federal	$	23,941		$	26,021		$	56,377
State	4,370			11,215			12,656
Total current income taxes	28,311			37,236			69,033
Deferred income taxes:
Federal	7,578			(15,080		)	(1,634		)
State	7,556			345			(353		)
Total deferred income taxes	15,134			(14,735		)	(1,987		)
Net amortization of investment credit	(15		)	(911		)	(1,455		)
Total income tax expense	$	43,430		$	21,590		$	65,591

Effective and Statutory Rate Reconciliation



	2019		2018		2017
Federal statutory tax rate	21.0	%	21.0	%	35.0	%
State income tax, net of federal tax benefit	4.4	%	5.6	%	4.0	%
Amortization of investment tax credits	—	%	(0.5	)%	(0.7	)%
Research and development credit	—	%	(1.6	)%	—	%
Depreciation flow through and amortization	(4.7	)%	(12.6	)%	(0.1	)%
Additional funds used during construction - equity	0.2	%	0.3	%	(3.1	)%
Manufacturers’ Production Deduction (Sec. 199)	—	%	—	%	(2.4	)%
Other – net	0.8	%	(0.1	)%	(0.2	)%
Effective tax rate	21.7	%	12.1	%	32.5	%

Deferred Income Taxes

The significant items comprising IPL’s net accumulated deferred tax liability recognized on the audited Consolidated Balance Sheets as of December 31, 2019 and 2018, are as follows:



	2019		2018
	(In Thousands)
Deferred tax liabilities:
Relating to utility property, net	$	406,538	$	378,527
Regulatory assets recoverable through future rates	62,051		67,653
Other	17,547		11,812
Total deferred tax liabilities	486,136		457,992
Deferred tax assets:
Investment tax credit	7		11
Regulatory liabilities including ARO	191,676		184,413
Employee benefit plans	8,556		8,335
Other	6,738		12,504
Total deferred tax assets	206,977		205,263
Deferred income tax liability – net	$	279,159	$	252,729

Uncertain Tax Positions

The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017:



	2019		2018		2017
	(In Thousands)
Unrecognized tax benefits at January 1	$	7,056	$	7,049	$	6,634
Gross increases – current period tax positions	—		—		470
Gross decreases – prior period tax positions	—		7		(55		)
Unrecognized tax benefits at December 31	$	7,056	$	7,056	$	7,049

deferred tax accounting, other than interest and penalties, the timing of the deductions will not affect the annual effective tax rate but would accelerate the tax payments to an earlier period.