PG&E Corporation and the Utility use the liability method of accounting for income taxes. The income tax provision includes current and deferred income taxes resulting from operations during the year. PG&E Corporation and the Utility estimate current period tax expense in addition to calculating deferred tax assets and liabilities. Deferred tax assets and liabilities result from temporary tax and accounting timing differences, such as those arising from depreciation expense.

PG&E Corporation and the Utility recognize a tax benefit if it is more likely than not that a tax position taken or expected to be taken in a tax return will be sustained upon examination by taxing authorities based on the merits of the position. The tax benefit recognized in the financial statements is measured based on the largest amount of benefit that is greater than 50% likely of being realized upon settlement. As such, the difference between a tax position taken or expected to be taken in a tax return in future periods and the benefit recognized and measured pursuant to this guidance in the financial statements represents an unrecognized tax benefit.

Investment tax credits are deferred and amortized to income over time. PG&E Corporation amortizes its investment tax credits over the projected investment recovery period. The Utility amortizes its investment tax credits over the life of the related property in accordance with regulatory treatment.

PG&E Corporation files a consolidated U.S. federal income tax return that includes the Utility and domestic subsidiaries in which its ownership is 80% or more. PG&E Corporation files a combined state income tax return in California. PG&E Corporation and the Utility are parties to a tax-sharing agreement under which the Utility determines its income tax provision (benefit) on a stand-alone basis.

The significant components of income tax provision (benefit) by taxing jurisdiction were as follows:

	PG&E Corporation						Utility
	Year Ended December 31,
(in millions)	2015		2014		2013		2015		2014		2013
Current:
Federal	$	(89)	$	(84)	$	(218)	$	(88)	$	(84)	$	(222)
State		11		(41)		(26)		6		(29)		(23)
Deferred:
Federal		131		396		552		136		426		604
State		(76)		78		(35)		(69)		75		(28)
Tax credits		(4)		(4)		(5)		(4)		(4)		(5)
Income tax provision	$	(27)	$	345	$	268	$	(19)	$	384	$	326

The following table describes net deferred income tax liabilities:

	PG&E Corporation				Utility
	Year Ended December 31,
(in millions)	2015		2014		2015		2014
Deferred income tax assets:
Customer advances for construction	$	69	$	88	$	69	$	88
Environmental reserve		85		111		85		111
Compensation and benefits		219		244		145		173
Tax carryforwards		1,703		1,177		1,462		946
Greenhouse gas allowances		340		56		340		56
Other		44		74		61		100
Total deferred income tax assets	$	2,460	$	1,750	$	2,162	$	1,474
Deferred income tax liabilities:
Regulatory balancing accounts	$	691	$	512	$	691	$	512
Property related basis differences		9,656		8,683		9,638		8,666
Income tax regulatory asset (1)		1,244		974		1,245		974
Other		75		88		75		86
Total deferred income tax liabilities	$	11,666	$	10,257	$	11,649	$	10,238
Total net deferred income tax liabilities	$	9,206	$	8,507	$	9,487	$	8,764
Classification of net deferred income tax liabilities:
Included in current liabilities (assets)	$	-	$	(6)	$	-	$	(9)
Included in noncurrent liabilities		9,206		8,513		9,487		8,773
Total net deferred income tax liabilities	$	9,206	$	8,507	$	9,487	$	8,764

(1) Represents the deferred income tax component of the cumulative differences between amounts recognized for ratemaking purposes and amounts recognized in accordance with GAAP. (See Note 3 above.)

The following table reconciles income tax expense at the federal statutory rate to the income tax provision:

	PG&E Corporation										Utility
	Year Ended December 31,
	2015			2014			2013			2015				2014			2013
Federal statutory income tax rate	35.0	%	35.0		%	35.0		%	35.0			%	35.0		%	35.0		%
Increase (decrease) in income
tax rate resulting from:
State income tax (net of
federal benefit) (1)	(4.9)		1.4			(3.1)			(4.8)				1.6			(2.2)
Effect of regulatory treatment
of fixed asset differences (2)	(33.6)		(15.0)			(4.2)			(33.7)				(14.7)			(3.8)
Tax credits	(1.3)		(0.7)			(0.4)			(1.3)				(0.7)			(0.4)
Benefit of loss carryback	(1.5)		(0.8)			(1.1)			(1.5)				(0.8)			(1.0)
Non deductible penalties (3)	4.3		0.3			0.8			4.3				0.3			0.7
Other, net	(1.1)		(0.8)			(2.2)			(0.2)				0.4			(0.9)
Effective tax rate	(3.1)	%	19.4		%	24.8		%	(2.2)			%	21.1		%	27.4		%

(1) Includes the effect of state flow-through ratemaking treatment. In 2015, amounts include an agreement with the IRS on a 2011 audit related to electric transmission and distribution repairs deductions.

(2) Includes the effect of federal flow-through ratemaking treatment for certain property-related costs in 2015 and 2014 as authorized by the 2014 GRC decision. Amounts are impacted by the level of income before income taxes.

(3) Represents the effects of non-tax deductible fines and penalties associated with the Penalty Decision. (For more information about the Penalty Decision see Note 13 below.)

Unrecognized tax benefits

The following table reconciles the changes in unrecognized tax benefits:

	PG&E Corporation						Utility
(in millions)	2015		2014		2013		2015		2014		2013
Balance at beginning of year	$	713	$	666	$	581	$	707	$	660	$	575
Additions for tax position taken
during a prior year		40		7		12		40		7		12
Reductions for tax position
taken during a prior year		(349)		(9)		(6)		(349)		(9)		(6)
Additions for tax position
taken during the current year		64		61		79		64		61		79
Settlements		-		(12)		-		-		(12)		-
Balance at end of year	$	468	$	713	$	666	$	462	$	707	$	660

The component of unrecognized tax benefits that, if recognized, would affect the effective tax rate at December 31, 2015 for PG&E Corporation and the Utility was $50 million.

PG&E Corporation’s and the Utility’s unrecognized tax benefits may change significantly within the next 12 months due to the resolution of several matters, including audits. As of December 31, 2015, it is reasonably possible that unrecognized tax benefits will decrease by approximately $60 million within the next 12 months.

Interest income, interest expense and penalties associated with income taxes are reflected in income tax expense on the Consolidated Statements of Income. For the years ended December 31, 2015, 2014, and 2013, these amounts were immaterial.

IRS settlements

PG&E Corporation participated in the Compliance Assurance Process in 2015, a real-time IRS audit intended to expedite resolution of tax matters. The Compliance Assurance Process audit culminates with a letter from the IRS indicating its acceptance of the return.

PG&E Corporation’s tax returns have been accepted through 2014 except for a few matters, the most significant of which relates to deductible repair costs. In December 2015, PG&E Corporation reached an agreement with the IRS on deductible repair costs for the 2011 tax year, subject to approval by the Joint Committee on Taxation. Deductible repair costs will continue to be subject to examination by the IRS for subsequent years. The IRS is expected to issue guidance in 2016 that clarifies which repair costs are deductible for the natural gas transmission and distribution businesses. Tax years after 2004 remain subject to examination by the state of California.

Carryforwards

The following table describes PG&E Corporation’s operating loss and tax credit carryforward balances:

	December 31,		Expiration
(in millions)	2015		Year
Federal:
Net operating loss carryforward	$	4,856	2029 - 2035
Tax credit carryforward		110	2029 - 2035
Charitable contribution loss carryforward		178	2017 - 2020

State:
Net operating loss carryforward	$	80	2033 - 2034
Tax credit carryforward		59	Various
Charitable contribution loss carryforward		119	2019 - 2020

PG&E Corporation believes it is more likely than not the tax benefits associated with the federal and California net operating losses, charitable contributions and tax credits can be realized within the carryforward periods, therefore no valuation allowance was recognized as of December 31, 2015 for these tax attributes. As of December 31, 2015, PG&E Corporation had approximately $29 million of federal net operating loss carryforwards related to the tax benefit on employee stock plans that would be recorded in additional paid-in capital when used.