Income Taxes

3 Months Ended

Mar. 31, 2021

Income Taxes

INCOME TAXES

The disclosures in this note apply to all Registrants unless indicated otherwise.

Effective Tax Rates (ETR)

The Registrants’ interim ETR reflect the estimated annual ETR for 2021 and 2020, adjusted for tax expense associated with certain discrete items.

The Registrants include the amortization of Excess ADIT not subject to normalization requirements in the annual estimated ETR when regulatory proceedings instruct the Registrants to provide the benefits of Tax Reform to customers over multiple interim periods.  Certain regulatory proceedings instruct the Registrants to provide the benefits of Tax Reform to customers in a single period (e.g. by applying the Excess ADIT not subject to normalization requirements against an existing regulatory asset balance) and in these circumstances, the Registrants recognize the tax benefit discretely in the period recorded. The annual amount of Excess ADIT approved by the Registrant’s regulatory commissions may not impact the ETR ratably during each interim period due to the variability of pretax book income between interim periods and the application of an annual estimated ETR.

The ETR for each of the Registrants are included in the following tables:

	Three Months Ended March 31, 2021
	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
U.S. Federal Statutory Rate	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%
Increase (decrease) due to:
State Income Tax, net of Federal Benefit	2.3	%	1.4	%	2.7	%	3.2	%	1.3	%	0.7	%	4.7	%	(0.8)	%
Tax Reform Excess ADIT Reversal	(9.2)	%	(7.8)	%	0.3	%	(18.0)	%	(17.9)	%	(9.7)	%	(24.7)	%	(5.9)	%
Production and Investment Tax Credits	(5.5)	%	(0.3)	%	—	%	—	%	(1.7)	%	—	%	(8.2)	%	(5.1)	%
Flow Through	0.3	%	0.3	%	0.2	%	1.6	%	(1.0)	%	1.1	%	0.6	%	(0.7)	%
AFUDC Equity	(0.9)	%	(1.4)	%	(1.7)	%	(1.1)	%	(0.2)	%	(1.1)	%	(0.5)	%	(0.4)	%
Parent Company Loss Benefit	—	%	—	%	(1.9)	%	(2.9)	%	(2.5)	%	—	%	—	%	—	%
Discrete Tax Adjustments	0.5	%	—	%	—	%	—	%	—	%	(4.0)	%	—	%	—	%
Other	0.1	%	0.1	%	0.1	%	0.1	%	—	%	0.2	%	(0.9)	%	0.1	%
Effective Income Tax Rate	8.6	%	13.3	%	20.7	%	3.9	%	(1.0)	%	8.2	%	(8.0)	%	8.2	%

	Three Months Ended March 31, 2020
	AEP		AEP Texas		AEPTCo		APCo		I&M		OPCo		PSO		SWEPCo
U.S. Federal Statutory Rate	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%
Increase (decrease) due to:
State Income Tax, net of Federal Benefit	2.5	%	1.5	%	2.9	%	3.0	%	3.2	%	0.7	%	4.6	%	2.7	%
Tax Reform Excess ADIT Reversal	(9.4)	%	(6.2)	%	0.4	%	(13.0)	%	(19.6)	%	(10.2)	%	(23.1)	%	(94.7)	%
Production and Investment Tax Credits	(4.3)	%	(0.4)	%	—	%	—	%	(1.9)	%	—	%	(1.3)	%	(0.5)	%
Flow Through	0.5	%	0.1	%	0.5	%	1.5	%	0.2	%	1.0	%	0.6	%	(1.0)	%
AFUDC Equity	(1.4)	%	(2.6)	%	(2.6)	%	(1.0)	%	(1.1)	%	(1.0)	%	(0.7)	%	(0.4)	%
Parent Company Loss Benefit	—	%	(0.2)	%	(0.9)	%	(3.3)	%	(3.9)	%	(0.1)	%	(2.2)	%	(2.4)	%
Discrete Tax Adjustments	—	%	—	%	—	%	—	%	2.7	%	—	%	—	%	—	%
Other	(0.4)	%	0.3	%	—	%	0.1	%	(0.2)	%	—	%	0.1	%	7.2	%
Effective Income Tax Rate	8.5	%	13.5	%	21.3	%	8.3	%	0.4	%	11.4	%	(1.0)	%	(68.1)	%

Federal and State Income Tax Audit Status

The statute of limitations for the IRS to examine AEP and subsidiaries originally filed federal return has expired for tax years 2016 and earlier. In the third quarter of 2019, AEP and subsidiaries elected to amend the 2014 and 2015 federal returns. In the first quarter of 2020, the IRS notified AEP that it was beginning an examination of these amended returns, including the net operating losses (NOL) carryback to 2015 that originated in the 2017 return. As of March 31, 2021, the IRS has not challenged any items on these returns and the IRS is limited in their proposed adjustments to the amount AEP claimed on the amended returns.

Federal Legislation

In March 2020, the CARES Act was signed into law. The CARES Act includes tax relief provisions including a 5-year NOL carryback from years 2018-2020. In the third quarter of 2020, AEP requested a $95 million refund of taxes paid in 2014 under the 5-year NOL carryback provision of the CARES Act. AEP carried back a NOL generated on the 2019 Federal income tax return at a 21% federal corporate income tax rate to the 2014 Federal income tax return at a 35% corporate income tax rate. As a result of the change in the corporate income tax rates between the two periods, AEP realized a tax benefit of $48 million primarily at the Generation & Marketing segment in 2020. Management expects to receive the $95 million refund in the second quarter of 2021.