Income Taxes

12 Months Ended

Dec. 31, 2019

(14) Income Taxes

The details of income tax (benefit) expense are as follows:


Puget Energy	Year Ended December 31,
(Dollars in Thousands)	2019		2018		2017
Charged to operating expenses:
Current:
Federal	$	9,424	$	10,382	$	1,127
State	164		263		17
Deferred:
Federal	7,357		19,451		254,420
State	128		(4)		(421)
Total income tax expense	$	17,073	$	30,092	$	255,143


Puget Sound Energy	Year Ended December 31,
(Dollars in Thousands)	2019		2018		2017
Charged to operating expenses:
Current:
Federal	$	18,093	$	19,283	$	1,127
State	570		438		17
Deferred:
Federal	20,485		30,979		210,842
State	—		—		—
Total income tax expense	$	39,148	$	50,700	$	211,986

The following reconciliation compares pre-tax book income at the federal statutory rate of 21.0% in 2019 and 2018 and 35.0% in 2017 to the actual income tax expense in the Statements of Income:


Puget Energy	Year Ended December 31,
(Dollars in Thousands)	2019			2018			2017
Income taxes at the statutory rate	$	47,834		$	55,800		$	148,847
Increase (decrease):
Utility plant differences¹	$	(23,025)		$	(25,871)		$	—
AFUDC, net	(4,462)			(4,173)			(4,506)
Executive compensation	2,596			4,439			—
Treasury grant amortization	(7,870)			(4,861)			(9,537)
Tax reform	—			—			117,185
Other–net	2,000			4,758			3,154
Total income tax expense	$	17,073		$	30,092		$	255,143
Effective tax rate	7.5		%	11.3		%	60.0		%


Puget Sound Energy	Year Ended December 31,
(Dollars in Thousands)	2019			2018			2017
Income taxes at the statutory rate	$	69,735		$	77,251		$	185,430
Increase (decrease):
Utility plant differences¹	$	(23,025)		$	(25,871)		$	—
AFUDC, net	(4,462)			(4,173)			(4,506)
Executive Compensation	2,596			4,439			—
Treasury grant amortization	(7,870)			(4,861)			(9,537)
Tax reform	—			—			36,328
Other–net	2,174			3,915			4,271
Total income tax expense	$	39,148		$	50,700		$	211,986
Effective tax rate	11.8		%	13.8		%	40.0		%

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^1.Utility plant differences include the reversal of excess deferred taxes using the average rate assumption method in the amount of $27.6 million and $29.8 million in 2019, and 2018, respectively.

The Company’s net deferred tax liability at December 31, 2019, and 2018, is composed of amounts related to the following types of temporary differences:


Puget Energy	At December 31,
(Dollars in Thousands)	2019		2018
Utility plant and equipment	$	1,943,730	$	1,998,721
Other deferred tax liabilities	133,440		113,051
Subtotal deferred tax liabilities	2,077,170		2,111,772
Net operating loss carryforward	(238,869)		(224,885)
Net regulatory liability for income taxes	(946,179)		(975,974)
Production tax credit carryforward	(67,402)		(121,616)
Subtotal deferred tax assets	(1,252,450)		(1,322,475)
Total net deferred tax liabilities	$	824,720	$	789,297


Puget Sound Energy	At December 31,
(Dollars in Thousands)	2019		2018
Utility plant and equipment	$	1,943,730	$	1,998,721
Other, net deferred tax liabilities	47,774		25,880
Subtotal deferred tax liabilities	1,991,504		2,024,601
Net regulatory liability for income taxes	(946,936)		(976,582)
Production tax credit carryforward	(67,405)		(121,616)
Subtotal deferred tax assets	(1,014,341)		(1,098,198)
Total net deferred tax liabilities	$	977,163	$	926,403

The Company calculates its deferred tax assets and liabilities under ASC 740, “Income Taxes” (ASC 740). ASC 740 requires recording deferred tax balances, at the currently enacted tax rate, on assets and liabilities that are reported differently for income tax purposes than for financial reporting purposes. The utilization of deferred tax assets requires sufficient taxable income in future years. ASC 740 requires a valuation allowance on deferred tax assets when it is more likely than not that the deferred tax assets will not be realized. PSE’s PTC carryforwards expire from 2033 through 2036. Puget Energy’s net operating loss carryforwards expire from 2027 through 2037. Net operating losses generated in 2018 and thereafter have no expiration date. No valuation allowance has been provided for PTC or net operating loss carryforwards.

Federal Income Tax Law Changes

On December 22, 2017, President Trump signed into law legislation referred to as the TCJA. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA includes significant changes to the Internal Revenue Code of 1986 (as amended, the Code), including amendments which significantly change the taxation of business entities and includes specific provisions related to regulated public utilities including PSE. The most significant change that impacts the Company included in the TCJA is the reduction in the corporate federal income tax rate from 35.0% to 21.0% and the limitation of deductibility of executive compensation. The specific provisions related to regulated public utilities in the TCJA generally allow for the continued deductibility of interest expense, the elimination of full expensing for tax purposes of certain property acquired after December 31, 2017, and continues normalization requirements for accelerated depreciation benefits.

Under GAAP, specifically ASC Topic 740, Income Taxes, the tax effects of changes in tax laws must be recognized in the period in which the law is enacted and deferred tax assets and liabilities are to be re-measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. For PSE, the change in deferred taxes is recorded as either an offset to a regulatory asset or liability and is subject to approval by the Washington Commission. For Puget Energy, the change in deferred taxes is recorded as an adjustment to Puget Energy’s income tax expense, which decreased Puget Energy’s net income.

Upon enactment of the TCJA, the Company re-measured its deferred tax assets and liabilities based upon the TCJA’s 21.0% percent corporate federal income tax rate. The corporate tax rate change for PSE is captured in the deferred tax balance with an offset to the regulatory liability for deferred income taxes. The balance of the regulatory deferred tax account at the beginning of 2017, before tax reform, was a $71.5 million asset. As a result of tax reform, the balance was a liability of $1,012.3 million. Since PSE is in a net regulatory liability position with respect to these income tax matters, PSE netted the regulatory asset for deferred income taxes against the regulatory liability for deferred income taxes. Under the normalization requirements continued by the TCJA, $919.8 million of the net regulatory liability related to certain accelerated tax depreciation benefits is to be reversed over the remaining lives of the related assets using ARAM. The remainder of the net regulatory liability of $91.9 million is available for PSE and the Washington Commission regulatory process to determine how the amounts will be refunded to customers. PSE requested to delay the impact of tax reform in an accounting petition which was filed with the Washington Commission on December 29, 2017. For further details regarding PSE's ERF and Accounting Petition, see Note 4, "Regulation and Rates" to the consolidated financial statements included in Item 8 of this report. In 2019 and 2018, the Company reversed excess deferred taxes for plant-related items using ARAM in the amount of $27.6 million and $29.8 million, respectively.

The impact of the TCJA to income tax expense as of December 31, 2017, was $36.3 million of which $3.0 million relates to deferred tax balances that are not subject to regulatory treatment. In addition, $33.3 million relates to the revaluation of the deferred tax for regulatory liability on PTC balances. The regulatory liability owed to customers for PTCs, which previously reduced revenue upon generation of the PTCs, was also revalued at the new rate of 21.0%. The change in the liability owed to customers for PTCs increased revenue by $51.2 million, which increased tax expense by $17.9 million, to reverse the initial deferral. The changes in the deferred tax and the liability owed to customers for PTCs had no impact on net income. Incrementally, Puget Energy increased its tax expense by $80.9 million primarily due to the revaluation of Puget Energy's net deferred tax asset on its net operating loss carryforward.

The staff of the US Securities and Exchange Commission (SEC) has recognized the complexity of reflecting the impacts of the TCJA and on December 22, 2017, issued guidance in Staff Accounting Bulletin 118 (SAB 118). The guidance clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and provides for up to a one year period in which to complete the required analysis and accounting (the measurement period). The Company completed the required analysis and accounting for the effects of the TCJA's enactment and did not identify any additional adjustments required.

Unrecognized Tax Benefits

The Company accounts for uncertain tax positions under ASC 740, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements. ASC 740 requires the use of a two-step approach for recognizing and measuring tax positions taken or expected to be taken in a tax return. First, a tax position should only be recognized when it is more likely than not, based on technical merits, that the position will be sustained upon challenge by the taxing authorities and taken by management to the court of last resort. Second, a tax position that meets the recognition threshold should be measured at the largest amount that has a greater than 50.0% likelihood of being sustained.

As of December 31, 2019, and 2018, the Company had no material unrecognized tax benefits. As a result, no interest or penalties were accrued for unrecognized tax benefits during the year.

The Company has open tax years from 2016 through 2019. The Company classifies interest as interest expense and penalties as other expense in the financial statements.