Taxes
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Dec. 31, 2014
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Taxes | TAXES FirstEnergy records income taxes in accordance with the liability method of accounting. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts recognized for tax purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. Deferred income tax liabilities related to temporary tax and accounting basis differences and tax credit carryforward items are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. Deferred tax assets are recognized based on income tax rates expected to be in effect when they are settled. FES and the Utilities are party to an intercompany income tax allocation agreement with FirstEnergy and its other subsidiaries that provides for the allocation of consolidated tax liabilities. Net tax benefits attributable to FirstEnergy, excluding any tax benefits derived from interest expense associated with acquisition indebtedness from the merger with GPU, are reallocated to the subsidiaries of FirstEnergy that have taxable income. That allocation is accounted for as a capital contribution to the company receiving the tax benefit. On December 19, 2014, the President signed into law the Tax Increase Prevention Act of 2014 (the Act). The Act, among other things, extended retroactively the R&D tax credit until December 31, 2014, and also extended accelerated depreciation of qualified capital investments placed into service before January 1, 2015. FirstEnergy and FES recorded the effects of the Act in the fourth quarter of 2014. The retroactive extension of the tax benefits did not have a significant impact to the effective tax rate.
FirstEnergy and FES tax rates are affected by permanent items, such as AFUDC equity and other flow-through items as well as discrete items that may occur in any given period, but are not consistent from period to period. The following tables provide a reconciliation of federal income tax expense at the federal statutory rate to the total provision for income taxes on continuing operations for the three years ended December 31, 2014:
In 2014, FirstEnergy’s effective tax rate was (24.6)% compared to 34.2% in 2013. The decrease in the effective tax rate year over year relates primarily to a $399 million decrease in income from continuing operations, tax benefits associated with an IRS approved change in accounting method for costs associated with the refurbishment of meters and transformers ($27 million), and additional tax benefits on uncertain state tax positions due to expiration of the statute of limitations ($33 million). Additionally, during 2014, income tax benefits of $25 million were recorded that related to prior periods. The out-of-period adjustment primarily related to the correction of amounts included in the Company’s tax basis balance sheet. Management has determined that this adjustment is not material to the current or any prior period. These benefits were partially offset by higher valuation allowances recorded in 2014 on state and municipal NOL carryforwards that the Company believes are no longer realizable and the absence of tax benefits recorded in 2013 for changes in state apportionment factors as well as a decrease in deferred tax liabilities associated with the elimination of business nexus in certain state jurisdictions. In 2014, FES’ effective tax rate (on a loss from continuing operations) was 38.8% compared to 11.5% (on income from continuing operations) in 2013. During 2014, FES' effective tax rate benefited from changes to state apportionment factors but was offset by valuation allowances recorded on state and municipality NOL carryforwards. Accumulated deferred income taxes as of December 31, 2014 and 2013 are as follows:
FirstEnergy has tax returns that are under review at the audit or appeals level by the IRS and state taxing authorities. FirstEnergy's tax returns for all state jurisdictions are open from 2010-2013. In April 2014, the IRS completed its examination of FirstEnergy’s 2011 and 2012 federal income tax returns and issued Revenue Agent Reports for those years. In addition, in January 2015, the IRS completed its examination of the 2013 federal income tax return and issued a Revenue Agent Report. For tax years 2011-2013 there were no material impacts to FirstEnergy's effective tax rate associated with these examinations. Tax year 2014 is currently under review by the IRS. FirstEnergy has recorded as deferred income tax assets the effect of NOLs and tax credits that will more likely than not be realized through future operations and through the reversal of existing temporary differences. As of December 31, 2014, the deferred income tax assets, before any valuation allowances, consisted of $1.5 billion of Federal NOL carryforwards that expire from 2030 to 2034, Federal AMT credits of $25 million that have an indefinite carryforward period, and $413 million of state and local NOL carryforwards that will begin to expire in 2015. The table below summarizes pre-tax NOL carryforwards for state and local income tax purposes of approximately $9.9 billion for FirstEnergy, of which approximately $5.6 billion is expected to be utilized based on current estimates and assumptions. The ultimate utilization of these NOLs may be impacted by statutory limitations on the use of NOLs imposed by state and local tax jurisdictions, changes in statutory tax rates, and changes in business which, among other things, impact both future profitability and the manner in which future taxable income is apportioned to various state and local tax jurisdictions.
FirstEnergy accounts for uncertainty in income taxes recognized in its financial statements. A recognition threshold and measurement attribute is utilized for financial statement recognition and measurement of tax positions taken or expected to be taken on a company's tax return. As of December 31, 2014 and 2013, FirstEnergy's total unrecognized income tax benefits were approximately $34 million and $48 million, respectively. All $34 million of unrecognized income tax benefits as of December 31, 2014, would impact the effective tax rate if ultimately recognized in future years. As of December 31, 2014, it is reasonably possible that approximately $10 million of unrecognized tax benefits may be resolved during 2015 as a result of the statute of limitations expiring, all of which would affect FirstEnergy's effective tax rate. The following table summarizes the changes in unrecognized tax positions for the years ended 2014, 2013 and 2012:
FirstEnergy recognizes interest expense or income related to uncertain tax positions. That amount is computed by applying the applicable statutory interest rate to the difference between the tax position recognized and the amount previously taken or expected to be taken on the federal income tax return. FirstEnergy includes net interest and penalties in the provision for income taxes. FirstEnergy's reversal of accrued interest associated with unrecognized tax benefits reduced FirstEnergy's effective tax rate in 2014 and 2012 by approximately $6 million and $4 million, respectively. There was no reversal of accrued interest for the year ended December 31, 2013. The following table summarizes the net interest expense (income) for the three years ended December 31, 2014 and the cumulative net interest payable as of December 31, 2014 and 2013:
General Taxes
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