PG&E Corporation and the Utility use the asset and liability method of accounting for income taxes. The income tax provision includes current and deferred income taxes resulting from operations during the year. PG&E Corporation and the Utility estimate current period tax expense in addition to calculating deferred tax assets and liabilities. Deferred tax assets and liabilities result from temporary tax and accounting timing differences, such as those arising from depreciation expense.

PG&E Corporation and the Utility recognize a tax benefit if it is more likely than not that a tax position taken or expected to be taken in a tax return will be sustained upon examination by taxing authorities based on the merits of the position. The tax benefit recognized in the financial statements is measured based on the largest amount of benefit that is greater than 50% likely of being realized upon settlement. As such, the difference between a tax position taken or expected to be taken in a tax return in future periods and the benefit recognized and measured pursuant to this guidance in the financial statements represents an unrecognized tax benefit.

Investment tax credits are deferred and amortized to income over time. PG&E Corporation amortizes its investment tax credits over the projected investment recovery period. The Utility amortizes its investment tax credits over the life of the related property in accordance with regulatory treatment.

PG&E Corporation files a consolidated U.S. federal income tax return that includes the Utility and domestic subsidiaries in which its ownership is 80% or more. PG&E Corporation files a combined state income tax return in California. PG&E Corporation and the Utility are parties to a tax-sharing agreement under which the Utility determines its income tax provision (benefit) on a stand-alone basis.

The significant components of income tax provision (benefit) by taxing jurisdiction were as follows:

	PG&E Corporation									Utility
	Year Ended December 31,
(in millions)	2016		2015			2014			2016				2015			2014
Current:
Federal	$	(105)		$	(89)		$	(84)			$	(105)		$	(88)		$	(84)
State		(70)			11			(41)				(66)			6			(29)
Deferred:
Federal		218			131			396				229			136			426
State		16			(76)			78				16			(69)			75
Tax credits		(4)			(4)			(4)				(4)			(4)			(4)
Income tax provision (benefit)	$	55		$	(27)		$	345			$	70		$	(19)		$	384

The following table describes net deferred income tax liabilities:

	PG&E Corporation				Utility
	Year Ended December 31,
(in millions)	2016		2015			2016		2015
Deferred income tax assets:
Tax carryforwards		1,851		1,703			1,596		1,462
Other (1)		463		757			402		700
Total deferred income tax assets	$	2,314	$	2,460		$	1,998	$	2,162
Deferred income tax liabilities:
Property related basis differences		10,429		9,656			10,411		9,638
Income tax regulatory asset (2)		1,572		1,244			1,572		1,245
Other (3)		526		766			525		766
Total deferred income tax liabilities	$	12,527	$	11,666		$	12,508	$	11,649
Total net deferred income tax liabilities	$	10,213	$	9,206		$	10,510	$	9,487

(1) Amounts include compensation and benefits, environmental reserve, and customer advances for construction.

(2) Represents the deferred income tax component of the cumulative differences between amounts recognized for ratemaking purposes and amounts recognized in accordance with GAAP. (See Note 3 of the Notes to the Consolidated Financial Statements in Item 8.)

(3) Amounts primarily relate to regulatory balancing accounts. Greenhouse gas allowances are temporary timing differences that reverse through regulatory balancing accounts.

The following table reconciles income tax expense at the federal statutory rate to the income tax provision:

	PG&E Corporation										Utility
	Year Ended December 31,
	2016			2015			2014			2016				2015			2014
Federal statutory income tax rate	35.0	%	35.0		%	35.0		%	35.0			%	35.0		%	35.0		%
Increase (decrease) in income
tax rate resulting from:
State income tax (net of
federal benefit) (1)	(2.5)		(4.9)			1.4			(2.2)				(4.8)			1.6
Effect of regulatory treatment
of fixed asset differences (2)	(23.7)		(33.6)			(15.0)			(23.4)				(33.7)			(14.7)
Tax credits	(0.8)		(1.3)			(0.7)			(0.8)				(1.3)			(0.7)
Benefit of loss carryback	(1.1)		(1.5)			(0.8)			(1.1)				(1.5)			(0.8)
Non deductible penalties (3)	0.8		4.3			0.3			0.8				4.3			0.3
Other, net (4)	(3.9)		(1.1)			(0.8)			(3.5)				(0.2)			0.4
Effective tax rate	3.8	%	(3.1)		%	19.4		%	4.8			%	(2.2)		%	21.1		%

(1) Includes the effect of state flow-through ratemaking treatment. In 2016 and 2015, amounts include an agreement with the IRS on a 2011 audit related to electric transmission and distribution repairs deductions.

(2) Includes the effect of federal flow-through ratemaking treatment for certain property-related costs as authorized by the 2014 GRC decision in all periods presented and by the 2015 GT&S decision which impacts only 2016. All amounts are impacted by the level of income before income taxes. The 2014 GRC and 2015 GT&S rate case decisions authorized revenue requirements that reflect flow-through ratemaking for temporary income tax differences attributable to repair costs and certain other property-related costs for federal tax purposes. For these temporary tax differences, PG&E Corporation and the Utility recognize the deferred tax impact in the current period and record offsetting regulatory assets and liabilities. Therefore, PG&E Corporation’s and the Utility’s effective tax rates are impacted as these differences arise and reverse. PG&E Corporation and the Utility recognize such differences as regulatory assets or liabilities as it is probable that these amounts will be recovered from or returned to customers in future rates.

(3) Primarily represents the effects of non-tax deductible fines and penalties associated with the natural gas distribution facilities record-keeping decision for the year ended December 31, 2016 and the effects of the Penalty Decision for the year ended December 31, 2015. For more information about the Penalty Decision see “Enforcement and Litigation Matters” in Note 13 of the Notes to the Consolidated Financial Statements in Item 8.

(4) In 2016, the amount primarily represents the impact of tax audit settlements.

Unrecognized tax benefits

The following table reconciles the changes in unrecognized tax benefits:

	PG&E Corporation						Utility
(in millions)	2016		2015		2014		2016		2015		2014
Balance at beginning of year	$	468	$	713	$	666	$	462	$	707	$	660
Additions for tax position taken
during a prior year		-		40		7		-		40		7
Reductions for tax position
taken during a prior year		(77)		(349)		(9)		(77)		(349)		(9)
Additions for tax position
taken during the current year		56		64		61		56		64		61
Settlements		(59)		-		(12)		(59)		-		(12)
Balance at end of year	$	388	$	468	$	713	$	382	$	462	$	707

The component of unrecognized tax benefits that, if recognized, would affect the effective tax rate at December 31, 2016 for PG&E Corporation and the Utility was $25 million.

PG&E Corporation’s and the Utility’s unrecognized tax benefits may change significantly within the next 12 months due to the resolution of several matters, including audits. As of December 31, 2016, it is reasonably possible that unrecognized tax benefits will decrease by approximately $70 million within the next 12 months. PG&E Corporation and the Utility believe that the majority of the decrease will not impact net income.

Interest income, interest expense and penalties associated with income taxes are reflected in income tax expense on the Consolidated Statements of Income. For the years ended December 31, 2016, 2015, and 2014, these amounts were immaterial.

IRS settlements

PG&E Corporation previously participated in the Compliance Assurance Process, a real-time IRS audit intended to expedite resolution of tax matters. The Compliance Assurance Process audit culminates with a letter from the IRS indicating its acceptance of the return. PG&E Corporation’s participation in the Compliance Assurance Process ended effective with the submission of its 2015 tax return.

PG&E Corporation’s tax returns have been accepted through 2015 except for a few matters, the most significant of which relates to deductible repair costs. In March 2016, PG&E Corporation reached an agreement with the IRS on deductible electric transmission and distribution repair costs for the 2012 tax year. The agreement provided that the methodology used in determining the deductible amount should be followed for all subsequent periods, absent any material change in facts. Deductible repair costs for other lines of business will continue to be subject to examination by the IRS for subsequent years. The IRS is expected to issue guidance in 2017 that clarifies which repair costs are deductible for the natural gas transmission and distribution businesses.

Tax years after 2008 remain subject to examination by the state of California.

2015 Gas Transmission and Storage Rate Case

In comments to the proposed decision in phase two of the 2015 GT&S rate case, the Utility questioned whether the methodology employed to calculate the capital disallowance portion of the San Bruno penalty might constitute a normalization violation. In recognition of this concern, the CPUC, in the final phase two decision, provided the Utility an opportunity to submit a ruling to the IRS for guidance and establish a memorandum account to track the additional revenue that would be recoverable if the method is deemed to be a normalization violation. The Utility anticipates filing the ruling request in early 2017.

As a result of the final phase two decision, PG&E Corporation and the Utility applied flow through accounting to property-related timing differences for 2016 and 2015.

Carryforwards

The following table describes PG&E Corporation’s operating loss and tax credit carryforward balances:

	December 31,		Expiration
(in millions)	2016		Year
Federal:
Net operating loss carryforward	$	5,009	2029 - 2036
Tax credit carryforward		116	2029 - 2036
Charitable contribution loss carryforward		192	2017 - 2021

State:
Net operating loss carryforward	$	-	N/A
Tax credit carryforward		51	Various
Charitable contribution loss carryforward		112	2019 - 2021

PG&E Corporation believes it is more likely than not the tax benefits associated with the federal and California net operating losses, charitable contributions and tax credits can be realized within the carryforward periods, therefore no valuation allowance was recognized as of December 31, 2016 for these tax attributes.