Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

(14)  Income Taxes

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

Puget Energy	Year Ended December 31,
(Dollars in Thousands)	2021		2020		2019
Charged to operating expenses:
Current:
Federal	$	25,395	$	7,962	$	9,424
State	721		7		164
Deferred:
Federal	(1,759)		(6,414)		7,357
State	158		109		128
Total income tax expense	$	24,515	$	1,664	$	17,073

Puget Sound Energy	Year Ended December 31,
(Dollars in Thousands)	2021		2020		2019
Charged to operating expenses:
Current:
Federal	$	52,616	$	10,607	$	18,093
State	670		383		570
Deferred:
Federal	(9,027)		15,252		20,485
State	—		—		—
Total income tax expense	$	44,259	$	26,242	$	39,148

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

Puget Energy	Year Ended December 31,
(Dollars in Thousands)	2021			2020			2019
Income taxes at the statutory rate	$	59,927		$	38,720		$	47,834
Increase (decrease):
Utility plant differences1	$	(22,325)		$	(22,991)		$	(23,025)
AFUDC, net	1,509			(6,095)			(4,462)
Executive compensation	1,386			2,440			2,596
Treasury grant amortization	(5,424)			(8,935)			(7,870)
Excess deferred tax amortization	(13,392)			(3,038)			—
Other–net	2,834			1,563			2,000
Total income tax expense	$	24,515		$	1,664		$	17,073
Effective tax rate	8.6		%	0.9		%	7.5		%

Puget Sound Energy	Year Ended December 31,
(Dollars in Thousands)	2021			2020			2019
Income taxes at the statutory rate	$	79,868		$	63,110		$	69,735
Increase (decrease):
Utility plant differences1	$	(22,325)		$	(22,991)		$	(23,025)
AFUDC, net	1,509			(6,095)			(4,462)
Executive compensation	1,386			2,440			2,596
Treasury grant amortization	(5,424)			(8,935)			(7,870)
Excess deferred tax amortization	(13,392)			(3,038)			—
Other–net	2,637			1,751			2,174
Total income tax expense	$	44,259		$	26,242		$	39,148
Effective tax rate	11.6		%	8.7		%	11.8		%

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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 in both 2021 and 2020.

The Company’s net deferred tax liability at December 31, 2021, and 2020, is composed of amounts related to the following types of temporary differences:

Puget Energy	At December 31,
(Dollars in Thousands)	2021		2020
Utility plant and equipment	$	1,892,674	$	1,923,933
Other deferred tax liabilities	202,783		175,333
Subtotal deferred tax liabilities	2,095,457		2,099,266
Net operating loss carryforward	(254,007)		(261,260)
Net regulatory liability for income taxes	(865,976)		(953,274)
Production tax credit carryforward	—		(35,995)
Other deferred tax assets	(62,990)		(38,008)
Subtotal deferred tax assets	(1,182,973)		(1,288,537)
Total net deferred tax liabilities	$	912,484	$	810,729

Puget Sound Energy	At December 31,
(Dollars in Thousands)	2021		2020
Utility plant and equipment	$	1,892,674	$	1,923,933
Other, net deferred tax liabilities	121,060		91,438
Subtotal deferred tax liabilities	2,013,734		2,015,371
Net regulatory liability for income taxes	(866,541)		(953,987)
Production tax credit carryforward	—		(35,995)
Other deferred tax assets	(62,990)		(38,007)
Subtotal deferred tax assets	(929,531)		(1,027,989)
Total net deferred tax liabilities	$	1,084,203	$	987,382

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 fully utilized it’s PTC balance in 2021 and has no carryforwards at the end of 2021.  Puget Energy’s net operating loss carryforwards expire from 2029 through 2037. Net operating losses generated in 2018 and thereafter have no expiration date. No valuation allowance has been provided for net operating loss carryforwards.

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, 2021, and 2020, the Company had no material unrecognized tax benefits.  As a result, no interest or penalties were accrued for unrecognized tax benefits during the year.

On July 30, 2021, the IRS issued a PLR to PSE which concluded that the Washington Commission’s methodology for reversing plant-related excess deferred income taxes was an impermissible methodology under the IRS normalization and consistency rules. The PLR requires adjustments to PSE's rates to bring PSE back into compliance with IRS rules. Accordingly, on September 28, 2021, the Washington Commission issued an order amending their previous order to correct the impermissible methodology and adjust customer rates in accordance with the PLR. For more information, see Note 4, "Regulation and Rates," to the consolidated financial statements included in Item 8 of this report.

The Company has open tax years from 2018 through 2021. The Company classifies interest as interest expense and penalties as other expense in the financial statements.