On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the Act) was signed into legislation. The Act includes a broad range of tax reform proposals affecting businesses, effective January 1, 2018 which provide a corporate federal tax rate reduction from 35% to 21%, 100% asset expensing, limitation of interest deduction, the repeal of section 199 domestic production deduction and the preservation of the existing normalization rules. The Act also provides that regulated electric and gas companies are exempt from the 100% asset expensing and interest expense deduction limitation. In accordance with U.S. accounting standards, TEC was required to revalue its deferred income tax assets and liabilities based on the new 21% federal tax rate. Additionally, under FPSC rules TEC was required to adjust deferred income tax assets and liabilities for changes in tax rates with a corresponding regulatory liability for the excess deferred taxes generated by the tax rate differential. See Note 3.

On September 12, 2019, the state of Florida issued a corporate tax rate reduction from 5.5% to 4.46% effective January 1, 2019 through December 31, 2021. TEC recorded a $4 million tax benefit, of which $3 million is expected to be refunded to customers in 2020 and is reflected as a regulatory liability. In addition, TEC recorded an estimated $5 million decrease to its deferred tax liability and an increase to its regulatory tax liability due to the revaluation of TEC’s state deferred income tax balances at 4.46% over the 2019-2021 period. See Note 3.

Effective July 1, 2016 and due to the Merger with Emera, TEC is included in a consolidated U.S. federal income tax return with EUSHI and its subsidiaries. Prior to the Merger, TEC was included in the filing of a consolidated federal income tax return with TECO Energy and its subsidiaries. TEC’s income tax expense is based upon a separate return method, modified for the benefits-for-loss allocation in accordance with respective tax sharing agreements of TECO Energy and EUSHI. To the extent that TEC’s cash tax positions are settled differently than the amount reported as realized under the tax sharing agreement, the difference is accounted for as either a capital contribution or a distribution.

In 2019, 2018 and 2017, TEC recorded net tax provisions of $77 million, $81 million and $197 million, respectively.

(millions)
For the year ended December 31,	2019			2018			2017
Current income taxes
Federal	$	56		$	72		$	(1	)
State		6			10			6
Deferred income taxes
Federal		7			(13	)		170
State		13			13			23
Investment tax credits amortization		(5	)		(1	)		(1	)
Total income tax expense	$	77		$	81		$	197

For the three years presented, the overall effective tax rate differs from the U.S. federal statutory rate as presented below:

(millions)
For the year ended December 31,	2019			2018			2017
Income before provision for income taxes	$	447		$	422		$	513
Federal statutory income tax rates		21	%		21	%		35	%
Income taxes, at statutory income tax rate		94			89			180
Increase (decrease) due to
State income tax, net of federal income tax		15			19			19
Excess deferred tax amortization		(25	)		(24	)		0
ITC amortization		(5	)		(1	)		(1	)
AFUDC-equity		(2	)		(2	)		(1	)
Tax credits		(1	)		(2	)		(3	)
Other		1			2			3
Total income tax expense on consolidated statements of income	$	77		$	81		$	197
Income tax expense as a percent of income before income taxes		17.2	%		19.2	%		38.4	%

Deferred taxes result from temporary differences in the recognition of certain liabilities or assets for tax and financial reporting purposes. The principal components of TEC’s deferred tax assets and liabilities recognized in the balance sheet are as follows:

(millions)
As of December 31,	2019		2018
Deferred tax liabilities ⁽¹⁾
Property related	$	1,036	$	969
Pension and postretirement benefits		111		105
Total deferred tax liabilities		1,147		1,074
Deferred tax assets ⁽¹⁾
Loss and credit carryforwards ⁽²⁾		243		146
Medical benefits		27		24
Insurance reserves		16		17
Pension and postretirement benefits		63		63
Capitalized energy conservation assistance costs		17		16
Other		23		9
Total deferred tax assets		389		275
Total deferred tax liability, net	$	758	$	799

(1)

Certain property related assets and liabilities have been netted.

(2)

Deferred tax assets for net operating loss and tax credit carryforwards have been reduced by unrecognized tax benefits of $9 million.

At December 31, 2019, TEC had cumulative unused federal and Florida NOLs for income tax purposes of $340 million and $274 million, respectively, expiring between 2032 and 2037. TEC has unused general business credits of $175 million expiring between 2027 and 2039, of which $163 million relate to ITCs expiring between 2034 and 2039. As a result of the Merger with Emera, TECs NOLs and credits will be utilized by EUSHI, in accordance with the benefits-for-loss allocation which provide that tax attributes are utilized by the consolidated tax return group of EUSHI.

TEC accounts for uncertain tax positions as required by U.S. GAAP. This guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Authoritative guidance related to accounting for uncertainty in income taxes requires an enterprise to recognize in its financial statements the best estimate of the impact of a tax position by determining if the weight of the available evidence indicates that it is more likely than not, based solely on the technical merits, that the position will be sustained upon examination, including resolution of any related appeals and litigation processes.

The following table provides details of the change in unrecognized tax benefits as follows:

(millions)	2019		2018		2017
Balance at January 1,	$	8	$	8	$	7
Increases due to tax positions related to prior year	1		0		0
Increases due to tax positions related to current year	0		0			1
Balance at December 31,	$	9	$	8	$	8

As of December 31, 2019 and 2018, TEC’s uncertain tax positions for federal R&D tax credits were $9 million and $8 million, respectively, all of which was recorded as a reduction of deferred income tax assets for tax credit carryforwards. TEC expects that the total unrecognized tax benefits will decrease and be recognized within the next twelve months due to the ongoing audit examination of TECO Energy’s consolidated federal income tax return for the short tax year ending June 30, 2016. TEC had $9 million and $8 million of unrecognized tax benefits at December 31, 2019 and 2018, respectively, that, if recognized, would reduce TEC’s effective tax rate.

TEC recognizes interest accruals related to uncertain tax positions in “Other income” or “Interest expense”, as applicable, and penalties in “Operation and maintenance expense” in the Consolidated Statements of Income. In 2019, 2018 and 2017, TEC did not recognize any pre-tax charges (benefits) for interest. Additionally, TEC did not have any accrued interest at December 31, 2019, 2018 and 2017. No amounts have been recorded for penalties.

The short tax year ending June 30, 2016 is currently under examination by the IRS under its Compliance Assurance Program (CAP). EUSHI’s 2016 consolidated federal income tax return, which includes TEC’s short tax year ending December 31, 2016, is also currently under examination by the IRS. The U.S. federal statute of limitations remains open for the year 2016 and forward. Florida’s statute of limitations is three years from the filing of an income tax return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Years still open to examination by Florida’s tax authorities include 2005 and forward as a result of TECO Energy’s consolidated Florida net operating loss still being utilized.