We use the liability method of accounting for income taxes under which deferred tax assets and liabilities are adjusted to reflect changes in tax rates and laws in the period such changes are enacted resulting in adjustments to the current fiscal year’s provision for income taxes.

TMCC files a consolidated federal income tax return with TFSIC and its subsidiaries. Current and deferred federal income taxes are allocated to TMCC as if it were a separate taxpayer. TMCC’s net operating losses and tax credits are utilized when those losses and credits are used by TFSIC and its subsidiaries including TMCC in the consolidated federal income tax return. TMCC files either separate or consolidated/combined state income tax returns with TMNA, TFSIC, or subsidiaries of TMCC. State income tax expense is generally recognized as if TMCC and its subsidiaries filed their tax returns on a stand-alone basis. In those states where TMCC and its subsidiaries join in the filing of consolidated or combined income tax returns, TMCC and its subsidiaries are allocated their share of the total income tax expense based on combined allocation/apportionment factors and separate company income or loss. Based on the federal and state tax sharing agreements, TFSIC and TMCC and its subsidiaries pay for their share of the income tax expense and are reimbursed for the benefit of any of their tax losses and credits utilized in the federal and state income tax returns.

	Years ended March 31,
	2020			2019			2018
Current
Federal	$	(19	)	$	(55	)	$	(45	)
State		120			76			(10	)
Foreign		8			4			3
Total		109			25			(52	)

Deferred
Federal		145			207			(2,625	)
State		(141	)		(49	)		48
Foreign		(2	)		(1	)		-
Total		2			157			(2,577	)
Provision (benefit) for income taxes	$	111		$	182		$	(2,629	)

A reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows:

	Years ended March 31,
	2020			2019			2018
Provision for income taxes at U.S. federal statutory tax rate		21.0	%		21.0	%		31.6	%
State and local taxes (net of federal tax benefit)		4.0	%		4.6	%		4.8	%
Effect of state tax law changes		(3.9	)%		(1.3	)%		(0.1	)%
Federal tax credits		(3.7	)%		(1.0	)%		(1.1	)%
Tax rate differential from tax loss carryback		(5.6	)%		(2.8	)%		-
Adjustment for prior year provision to return differences		(1.0	)%		(1.4	)%		0.4	%
Revaluation of federal deferred tax liability from TCJA		-			-			(371.6	)%
Other, net		-			(0.5	)%		(0.6	)%
Effective tax rate		10.8	%		18.6	%		(336.6	)%

The amounts in Federal tax credits include tax benefits from alternative fuel vehicle credits and foreign tax credits for fiscal 2020, and plug-in vehicle credits and research and development credits for fiscal 2020, 2019, and 2018.

During fiscal 2018, the TCJA reduced the corporate income tax rate from 35% to 21%. As a result, our federal statutory rate for fiscal 2018 was a blended rate of 31.6% and we recorded a $2.9 billion income tax benefit from the revaluation of our net deferred tax liabilities. We completed our assessment of the impact of the TCJA within twelve months from its enactment date, and such impact has been reflected in our Consolidated Financial Statements as of and for the year ended March 31, 2019.

Our net deferred income tax liability consisted of the following deferred tax liabilities and assets:

	March 31,
	2020			2019
Liabilities:
Lease transactions	$	5,180		$	7,121
State taxes, net of federal tax benefit		629			847
Insurance dealer commissions		254			235
Mark-to-market of investments in marketable securities and derivatives		14			44
Other		83			53
Deferred tax liabilities	$	6,160		$	8,300

Assets:
Provision for credit and residual value losses		370			361
Deferred costs and fees		188			192
Net operating loss and tax credit carryforwards		100			2,297
Lease obligations		25			-
Other		32			22
Deferred tax assets		715			2,872
Valuation allowance		(13	)		(24	)
Net deferred tax assets	$	702		$	2,848
Net deferred income tax liability¹	$	5,458		$	5,452

¹ Balance includes deferred tax liabilities attributable to unrealized gains or losses included in accumulated other comprehensive income or loss, net of $4 million and $1 million at March 31, 2020 and 2019, respectively. The change in this balance is not included in total deferred tax expense.

We have deferred tax assets related to cumulative state net operating loss carry forwards of $37 million at March 31, 2020, compared to $2.1 billion in federal net operating loss deferred tax assets and $147 million in state net operating loss deferred tax assets at March 31, 2019, respectively. We have no deferred tax assets related to cumulative federal net operating loss carry forwards at March 31, 2020. Some state net operating loss carryforwards have no expiration while others expire beginning in fiscal 2022.

We have deferred tax assets related to federal tax credits for alternative fuel vehicles and plug-in vehicles, research and development, and foreign tax of $52 million, $10 million, $1 million, at March 31, 2020, respectively. This is compared to deferred tax assets related to federal tax credits for plug-in vehicles, research and development, foreign tax, and alternative minimum tax of $38 million, $14 million, $3 million, and $12 million at March 31, 2019, respectively. The federal tax credit carryforwards will expire beginning in fiscal 2028.

The deferred tax assets related to foreign tax credit and state tax net operating loss carryforwards are reduced by a valuation allowance of $13 million and $24 million at March 31, 2020 and March 31, 2019, respectively. The determination of the valuation allowance is based on management’s estimate of future taxable income during the respective carryforward periods. Apart from the valuation allowance, we believe that the remaining deferred tax assets will be realized in full. The amount of the deferred tax assets considered realizable could be reduced if management’s estimates change.

We have made an assertion of permanent reinvestment of earnings from our foreign subsidiary; as a result, other than the deemed repatriation tax that is provided pursuant to the TCJA, state and local taxes have not been provided for unremitted earnings of our foreign subsidiary. At March 31, 2020 and 2019, these unremitted earnings totaled $243 million and $233 million, respectively. Determination of the amount of the deferred state and local tax liability is not practicable, and accordingly no estimate of the unrecorded deferred state and local tax liability is provided.

Although we do not foresee any events causing repatriation of earnings, possible examples may include but are not limited to parent company capital needs or exiting the business in the foreign country.

At March 31, 2020, we had an income tax payable of $47 million for our share of the income tax in those states where we filed consolidated or combined returns with TMNA and its subsidiaries. Our share of the income tax payable or receivable in those states where we filed consolidated or combined returns with TMNA and its subsidiaries was not significant at March 31, 2019. Additionally, our federal and state income tax payable or receivable from TMCC affiliated companies, including TFSIC, TFSB, and Toyota Financial Services Securities USA Corporation, was not significant for both March 31, 2020 and 2019.

The guidance for the accounting and reporting for income taxes requires us to assess tax positions in cases where the interpretation of the tax law may be uncertain. The change in unrecognized tax benefits are as follows:

	March 31,
	2020		2019		2018
Balance at beginning of the year	$	7	$	6	$	6
Increases related to positions taken during the current year		12		1		-
Balance at end of year	$	19	$	7	$	6

At March 31, 2020, 2019 and 2018 approximately $17 million, $6 million and $6 million of the respective unrecognized tax benefits would, if recognized, have an effect on the effective tax rate. The remaining amounts in the respective unrecognized tax benefits at March 31, 2020, 2019 and 2018 are related to timing matters. During fiscal 2020, $11 million of the increase in unrecognized tax benefits had an effect on the effective tax rate. We do not have any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months.

We accrue interest, if applicable, related to uncertain income tax positions in interest expense. Statutory penalties, if applicable, accrued with respect to uncertain income tax positions are recognized as an addition to the income tax liability. For each of fiscal 2020, 2019, and 2018, accrued interest was not significant and no penalties were accrued.

As of March 31, 2020, we remained under IRS examination for fiscal 2020, fiscal 2019, and fiscal 2018.