INCOME TAXES

Income Tax Summary

DTE Energy files a consolidated federal income tax return. DTE Electric is a part of the consolidated federal income tax return of DTE Energy. DTE Energy and its subsidiaries file consolidated and/or separate company income tax returns in various states and localities, including a consolidated return in the State of Michigan. DTE Electric is part of the Michigan consolidated income tax return of DTE Energy. The federal, state and local income tax expense for DTE Electric is determined on an individual company basis with no allocation of tax expenses or benefits from other affiliates of DTE Energy. DTE Electric had income tax receivables with DTE Energy of $12 million and $9 million at December 31, 2017 and 2016, respectively.

The Registrants' total Income Tax Expense varied from the statutory federal income tax rate for the following reasons:



	2017			2016			2015
DTE Energy	(In millions)
Income Before Income Taxes	$	1,287		$	1,105		$	950
Income tax expense at 35% statutory rate	$	450		$	387		$	333
Production tax credits	(189		)	(145		)	(122		)
Investment tax credits	(4		)	(5		)	(7		)
Depreciation	(4		)	(4		)	(4		)
Noncontrolling interests	8			12			2
AFUDC equity	(18		)	(10		)	(8		)
Employee Stock Ownership Plan dividends	(5		)	(5		)	(5		)
Stock based compensation	(14		)	—			—
Subsidiary stock loss	—			(10		)	—
State and local income taxes, net of federal benefit	51			58			35
Enactment of the Tax Cuts and Jobs Act	(105		)	—			—
Other, net	5			(7		)	6
Income Tax Expense	$	175		$	271		$	230
Effective income tax rate	13.6		%	24.5		%	24.2		%



	2017			2016			2015
DTE Electric	(In millions)
Income Before Income Taxes	$	928		$	975		$	836
Income tax expense at 35% statutory rate	$	325		$	341		$	293
Production tax credits	(36		)	(30		)	(31		)
Investment tax credits	(4		)	(4		)	(5		)
Depreciation	3			3			3
AFUDC equity	(5		)	(6		)	(7		)
Employee Stock Ownership Plan dividends	(3		)	(3		)	(3		)
State and local income taxes, net of federal benefit	48			56			43
Other, net	(1		)	(4		)	(1		)
Income Tax Expense	$	327		$	353		$	292
Effective income tax rate	35.2		%	36.2		%	34.9		%

Components of the Registrants' Income Tax Expense were as follows:



	2017			2016			2015
DTE Energy	(In millions)
Current income tax expense (benefit)
Federal	$	(22	)	$	(1	)	$	(3	)
State and other income tax	1			7			(4		)
Total current income taxes	(21		)	6			(7		)
Deferred income tax expense
Federal	118			184			178
State and other income tax	78			81			59
Total deferred income taxes	196			265			237
	$	175		$	271		$	230



	2017			2016		2015
DTE Electric	(In millions)
Current income tax expense (benefit)
Federal	$	(17	)	$	—	$	(26	)
State and other income tax	(1		)	11		(2		)
Total current income taxes	(18		)	11		(28		)
Deferred income tax expense
Federal	270			268		252
State and other income tax	75			74		68
Total deferred income taxes	345			342		320
	$	327		$	353	$	292

Deferred tax assets and liabilities are recognized for the estimated future tax effect of temporary differences between the tax basis of assets or liabilities and the reported amounts in the Consolidated Financial Statements. Consistent with the original establishment of these deferred tax liabilities (assets), no recognition of these non-cash transactions have been reflected in the Consolidated Statements of Cash Flows.

The Registrants' deferred tax assets (liabilities) were comprised of the following at December 31:



	DTE Energy						DTE Electric
	2017			2016			2017			2016
	(In millions)
Property, plant, and equipment	$	(3,276	)	$	(4,880	)	$	(2,698	)	$	(3,819	)
Regulatory assets and liabilities	(94		)	(879		)	(31		)	(778		)
Tax credit carry-forwards	947			643			193			116
Pension and benefits	334			643			302			518
Federal net operating loss carry-forward	83			190			47			42
State and local net operating loss carry-forwards	70			59			5			1
Investments in equity method investees	(82		)	(119		)	—			—
Other	170			217			94			127
	(1,848		)	(4,126		)	(2,088		)	(3,793		)
Less valuation allowance	(40		)	(36		)	—			—
Long-term deferred income tax liabilities	$	(1,888	)	$	(4,162	)	$	(2,088	)	$	(3,793	)

Deferred income tax assets	$	1,814		$	1,463		$	830		$	569
Deferred income tax liabilities	(3,702		)	(5,625		)	(2,918		)	(4,362		)
	$	(1,888	)	$	(4,162	)	$	(2,088	)	$	(3,793	)

Tax credit carry-forwards for DTE Energy include $640 million of general business credits that expire from 2034 through 2037 and $307 million of alternative minimum tax credits that will be refundable over the next four years. The alternative minimum tax credits are production tax credits earned prior to 2006 but not utilized. The majority of these alternative minimum tax credits were generated from projects that had received a private letter ruling (PLR) from the IRS. These PLRs provide assurance as to the appropriateness of using these credits to offset taxable income, however, these tax credits are subject to IRS audit and adjustment. No valuation allowance is required for the tax credits carry-forward deferred tax asset.

DTE Energy has a federal net operating loss carry-forward of $397 million as of December 31, 2017, which will expire from 2035 through 2037. No valuation allowance is required for the federal net operating loss deferred tax asset.

DTE Energy has state and local deferred tax assets related to net operating loss carry-forwards of $70 million and $59 million at December 31, 2017 and 2016, respectively. The state and local net operating loss carry-forwards expire from 2018 through 2037. DTE Energy has recorded valuation allowances at December 31, 2017 and 2016 of approximately $40 million and $36 million, respectively, with respect to these deferred tax assets. In assessing the realizability of deferred tax assets, DTE Energy considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

Tax credit carry-forwards for DTE Electric include $193 million of general business credits that expire from 2035 through 2037. No valuation allowance is required for the tax credits carry-forward deferred tax asset.

DTE Electric has a federal net operating loss carry-forward of $226 million as of December 31, 2017, which will expire in 2035. No valuation allowance is required for the federal net operating loss deferred tax asset.

DTE Electric has state and local deferred tax assets related to net operating loss carry-forwards of $5 million at December 31, 2017, while there was $1 million state and local deferred tax asset related to net operating loss carry-forwards at December 31, 2016. No valuation allowance is required for DTE Electric's state and local net operating loss carry-forwards.

The above tables exclude unamortized investment tax credits that are shown separately on the Registrants' Consolidated Statements of Financial Position. Investment tax credits are deferred and amortized to income over the average life of the related property.

Tax Cuts and Jobs Act

On December 22, 2017, the TCJA was enacted reducing the corporate income tax rate from 35% to 21%, effective January 1, 2018. As a result of the enactment, the deferred tax assets and liabilities were remeasured to reflect the impact of the TCJA on the cumulative temporary differences expected to reverse after the effective date. The net impact of this remeasurement was a decrease in deferred tax liabilities of $2.56 billion, of which $2.45 billion was attributable to regulated utilities and offset to regulatory assets and liabilities. This regulatory treatment is consistent with prior precedent set by the MPSC from previous tax law changes. The remaining $105 million was attributable to the non-utility entities and was recognized as a net reduction to income tax expense in 2017.

On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), directing taxpayers to consider the implications of the TCJA as provisional when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The amounts above represent our best estimate based on interpretations of the TCJA. In accordance with SAB 118, the amounts recorded are considered provisional and will continue to be analyzed throughout 2018, which may result in additional changes.

Uncertain Tax Positions

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the Registrants is as follows:



	2017		2016		2015
DTE Energy	(In millions)
Balance at January 1	$	10	$	3	$	9
Additions for tax positions of prior years	—		7		—
Lapse of statute of limitations	—		—		(6		)
Balance at December 31	$	10	$	10	$	3



	2017		2016		2015
DTE Electric	(In millions)
Balance at January 1	$	13	$	4	$	4
Additions for tax positions of prior years	—		9		—
Balance at December 31	$	13	$	13	$	4

DTE Energy had $8 million of unrecognized tax benefits at December 31, 2017 and 2016 that, if recognized, would favorably impact its effective tax rate. DTE Energy does not anticipate any material decrease in unrecognized tax benefits in the next twelve months.

DTE Electric had $10 million of unrecognized tax benefits at December 31, 2017 and 2016 that, if recognized, would favorably impact its effective tax rate. DTE Electric does not anticipate any material decrease in unrecognized tax benefits in the next twelve months.

The Registrants recognize interest and penalties pertaining to income taxes in Interest expense and Other expenses, respectively, on their Consolidated Statements of Operations.

Accrued interest pertaining to income taxes for DTE Energy totaled $3 million at December 31, 2017 and 2016. DTE Energy recognized interest expense related to income taxes of a nominal amount in 2017, $2 million in 2016, and a nominal amount in 2015. DTE Energy had accrued no penalties pertaining to income taxes.

Accrued interest pertaining to income taxes for DTE Electric totaled $4 million at December 31, 2017 and 2016. DTE Electric recognized interest expense related to income taxes of a nominal amount in 2017, $3 million in 2016, and a nominal amount in 2015. DTE Electric had accrued no penalties pertaining to income taxes.

In 2017, DTE Energy, including DTE Electric, settled a federal tax audit for the 2015 tax year. DTE Energy's federal income tax returns for 2016 and subsequent years remain subject to examination by the IRS. DTE Energy's Michigan Business Tax and Michigan Corporate Income Tax returns for the year 2008 and subsequent years remain subject to examination by the State of Michigan. DTE Energy also files tax returns in numerous state and local jurisdictions with varying statutes of limitation.