Income Taxes

We compute income tax expense for each quarter based on the estimated annual effective tax rate for the year, adjusted for certain discrete items. Our effective tax rate typically differs from the federal statutory tax rate of 35% primarily due to the regulatory impact of flowing through the federal and state tax benefit of repairs deductions, state tax benefit of accelerated tax depreciation deductions (including bonus depreciation when applicable) and production tax credits. The regulatory accounting treatment of these deductions requires immediate income recognition for temporary tax differences of this type, which is referred to as the flow-through method. When the flow-through method of accounting for temporary differences is reflected in regulated revenues, we record deferred income taxes and establish related regulatory assets and liabilities.

The following table summarizes the significant differences in income tax expense based on the differences between our effective tax rate and the federal statutory rate (in thousands):



	Three Months Ended March 31,
	2017					2016
Income Before Income Taxes	$	63,244				$	40,526

Income tax calculated at 35% federal statutory rate	22,135			35.0	%	14,184			35.0	%

Permanent or flow through adjustments:
State income, net of federal provisions (1)	(834		)	(1.3	)	(1,267		)	(3.1	)
Flow-through repairs deductions	(8,797		)	(13.9	)	(6,674		)	(16.5	)
Production tax credits	(3,831		)	(6.1	)	(2,775		)	(6.8	)
Plant and depreciation of flow through items	(1,440		)	(2.3	)	(938		)	(2.3	)
Share-based compensation (1)	(399		)	(0.6	)	(1,646		)	(4.1	)
Other, net	(157		)	(0.2	)	(225		)	(0.6	)
	(15,458		)	(24.4	)	(13,525		)	(33.4	)

Income Tax Expense	$	6,677		10.6	%	$	659		1.6	%

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(1) We adopted the provisions of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, during the fourth quarter of 2016, which resulted in the recognition of $1.8 million in excess tax benefits. In accordance with the guidance, the impact of this adoption is reflected as of January 1, 2016, and included in the state income, net of federal provisions, and share-based compensation lines, resulting in a reduction in tax expense for the three months ended March 31, 2016.

Uncertain Tax Positions

We recognize tax positions that meet the more-likely-than-not threshold as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. We have unrecognized tax benefits of approximately $86.3 million as of March 31, 2017, including approximately $66.6 million that, if recognized, would impact our effective tax rate. We do not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statutes of limitation within the next twelve months.

Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. During the three months ended March 31, 2017 we recognized $0.1 million of expense for interest and penalties in the Condensed Consolidated Statements of Income. As of March 31, 2017, we had $0.8 million of interest accrued in the Condensed Consolidated Balance Sheets. During the three months ended March 31, 2016, we did not recognize any expense for interest or penalties and did not have any amounts accrued at March 31, 2016. As of December 31, 2016, we had $0.7 million of interest accrued in the Consolidated Balance Sheet.

Our federal tax returns from 2000 forward remain subject to examination by the Internal Revenue Service.