NOTE 7. INCOME TAXES

Deferred Income Taxes

Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. Primarily due to differences in depreciation rates for federal income tax purposes and for financial reporting purposes, the Company has generated a net deferred tax liability.

Deferred tax (assets) and liabilities comprise the following (in millions):



	2014			2013
Excess of tax over book depreciation	$	1,042		$	919
Other—net	22			21
Gross deferred tax liabilities	1,064			940

Mileage Plan	(206		)	(185		)
Inventory obsolescence	(20		)	(18		)
Deferred gains	(10		)	(12		)
Employee benefits	(166		)	(85		)
Fuel hedge contracts	(5		)	(14		)
Other—net	(24		)	(30		)
Gross deferred tax assets	(431		)	(344		)
Net deferred tax liabilities	633			596

Current deferred tax asset	(117		)	(113		)
Noncurrent deferred tax liability	750			709
Net deferred tax liability	$	633		$	596

The Company has concluded that it is more likely than not that its deferred tax assets will be realizable and thus no valuation allowance has been recorded as of December 31, 2014. This conclusion is based on the expected future reversals of existing taxable temporary differences, anticipated future taxable income, and the potential for future tax planning strategies to generate taxable income, if needed. The Company will continue to reassess the need for a valuation allowance during each future reporting period.

Components of Income Tax Expense

The components of income tax expense were as follows (in millions):



	2014		2013		2012
Current tax expense:
Federal	$	229	145		$	83
State	27		17		11
Total current	256		162		94

Deferred tax expense:
Federal	103		131		94
State	11		15		10
Total deferred	114		146		104
Income tax expense	$	370	$	308	$	198

Income Tax Rate Reconciliation

Income tax expense reconciles to the amount computed by applying the U.S. federal rate of 35% to income before income tax and accounting change as follows (in millions):



	2014			2013			2012
Income before income tax	$	975		$	816		$	514

Expected tax expense	341			286			180
Nondeductible expenses	4			4			3
State income taxes	25			21			14
Other—net	—			(3		)	1
Actual tax expense	$	370		$	308		$	198

Effective tax rate	37.9		%	37.7		%	38.5		%

Uncertain Tax Positions

The Company has identified its federal tax return and its state tax returns in Alaska, Oregon, and California as “major” tax jurisdictions. A summary of the Company's jurisdictions and the periods that are subject to examination are as follows:



Jurisdiction	Period
Federal	2011 to 2013
Alaska	2011 to 2013
California	2010 to 2013
Oregon	2007 to 2013

The 2002 to 2007 Oregon tax returns are subject to examination only to the extent of net operating loss carryforwards from those years that were utilized in 2010 and later years.

At December 31, 2014, the total amount of unrecognized tax benefits is recorded as a liability, all of which impact the effective tax rate. Unrecognized tax benefits on uncertain tax positions were not material as of December 31, 2014, 2013 and 2012. No interest or penalties related to these tax positions were accrued as of December 31, 2014.