10 INCOME TAXES

Income tax expense (benefit) consisted of the following:

	Federal			State			Total

2013
Current	$	7,974		$	(2,867	)	$	5,107
Deferred		15,667			(305	)		15,362


Total	$	23,641		$	(3,172	)	$	20,469




2012
Current	$	(9,018	)	$	(5,246	)	$	(14,264	)
Deferred		37,196			(1,480	)		35,716


Total	$	28,178		$	(6,726	)	$	21,452




2011
Current	$	7,413		$	2,629		$	10,042
Deferred		12,982			142			13,124


Total	$	20,395		$	2,771		$	23,166

In 2013, the Company recorded $4.4 million of State of California enterprise zone (EZ) credits for sales and use taxes and hiring incentives for the period from 2008 to 2013 based on an analysis of all district operations. The Company filed amended state income tax returns for tax years 2008, 2009, 2010 and 2011. The State of California hiring EZ credits were included on the Company's 2012 state income tax returns filed during the fourth quarter of 2013. The 2012 sales and use tax EZ credits will be filed on an amended 2012 state income tax return during 2014. Unused State of California EZ credits can be carried-forward ten years. The Company estimates the carried-forward portion of its State of California EZ credits at $2.3 million. The Company's analysis of State of California EZ credits as of December 31, 2013 resulted in the recognition of a $0.6 million liability for unrecognized tax benefits.

On September 19, 2013, the U. S. Department of the Treasury and Internal Revenue Service (IRS) issued the final and re-proposed tangible property regulations for repairs and maintenance deductions with an effective date of January 1, 2014. These tax regulations allowed the Company to deduct a significant amount of linear asset costs previously capitalized for book and tax purposes. The Company intends to reevaluate its unit of property for linear assets on its 2013 tax return. The Company's federal fourth quarter of 2013 qualified repairs and maintenance deductions was $25.0 million for 2012 and prior years and created a deferred income tax liability $8.8 million as of December 31, 2013. The Company's state fourth quarter of 2013 qualified repairs and maintenance deductions was $41.0 million for 2012 and prior years and was recorded as a $2.4 million reduction to state income tax expense. The total federal NOL was $14.8 million and state NOL was $42.0 million as of December 31, 2013 mostly due to repairs and maintenance deductions. The NOL carry-forward amounts are more likely than not to be recovered and therefore require no valuation allowance. The NOL carry-forward does not begin to expire until 2033.

During 2012, the Company filed an application for a change in tax accounting method with the IRS to implement the repairs and maintenance deduction. The Company's federal linear assets qualified repairs and maintenance deduction was $86.7 million for 2011 and prior years, and created a $30.4 million deferred income tax liability as of December 31, 2012. The Company's state linear assets qualified repairs and maintenance deduction was $122.2 million for 2011 and prior years and was recorded as a $7.0 million reduction to state income tax expense. The Company planned to carry-back the NOL as of December 31, 2012 and recorded a $0.8 million federal income tax expense. This adjustment was reversed in 2013 when the federal NOL was carried-forward to reduce 2013 income tax payments.

The American Taxpayer Relief Act of 2012 provided the Company with additional 50% first-year bonus depreciation for assets placed in service from December 31, 2012 to December 31, 2013. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 provided the Company with additional federal income tax deductions for assets placed in service after September 8, 2010 and before December 31, 2012. The federal income tax deduction was estimated at $2.1 million in 2013, was $5.1 million in 2012, and was $12.6 million in 2011. The 2013 estimate will be finalized when we file the 2013 tax returns in the third quarter of 2014. As of December 31, 2013 and 2012 the deferred tax liability for bonus depreciation was $2,100 and $5,000, respectively.

The Company filed an application for a change in tax accounting method with the State of California to change its plant-in-service state tax depreciation method from the double- declining method to the straight line method at the respective assets mid-life. The Company's application was approved by the State of California during the first quarter of 2011. California uses the flow-through method of accounting for income tax depreciation. As a result, the Company reduced its income tax obligation $1.6 million, net of federal income taxes in 2011. Income tax expense was computed by applying the current federal 35% tax rate to pretax book income differs from the amount shown in the Consolidated Statements of Income.

The difference between the total income tax expense and computed tax expense was reconciled in the table below:

	2013			2012			2011

Computed "expected" tax expense	$	23,708		$	24,600		$	21,308
Increase (reduction) in taxes due to:
State income taxes net of federal tax benefit		3,895			4,041			3,500
Effect of regulatory treatment of fixed asset differences		(4,112	)		(7,030	)		(1,614	)
State tax credits		(2,465	)		—			—
Investment tax credits		(74	)		(74	)		(74	)
Other		(483	)		(85	)		46


Total income tax	$	20,469		$	21,452		$	23,166

The effect of regulatory treatment of fixed asset differences includes a 2013 tax accounting method change benefit of ($3,061) due to the service mains and hydrant tax repairs and maintenance deductions for 2012 and prior years. The 2012 tax accounting method change was a benefit of ($7,030) due to the transmission and distribution mains tax repairs and maintenance deductions for 2011 and prior years. The 2011 section 481 adjustment was a benefit of ($1,614) due to an accounting method change with the State of California to change its plant-in-service state tax depreciation method from the double- declining method to the straight line method at the respective assets mid-life.

The tax effects of differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012 are presented in the following table:

	2013		2012

Deferred tax assets:
Developer deposits for extension agreements and contributions in aid of construction	$	44,592	$	44,530
Net operating loss carryforward and tax credits		9,095		8,437
Other		4,330		3,607


Total deferred tax assets		58,017		56,574


Deferred tax liabilities:
Utility plant, principally due to depreciation differences		231,141		207,642
WRAM/MCBA balancing accounts		18,556		19,533
Other		3,789		3,245


Total deferred tax liabilities		253,486		230,420


Net deferred tax liabilities	$	195,469	$	173,846

The current portion of our deferred income tax liability is $12,224 and $15,000 as of December 31, 2013 and 2012, respectively, which includes prepaid expenses and billed WRAM/MCBA surcharge, expected to reverse in the following 12 months.

A valuation allowance was not required at December 31, 2013 and 2012. Based on historical taxable income and future taxable income projections over the period in which the deferred assets are deductible, management believes it is more likely than not that the Company will realize the benefits of the deductible differences.

The following table reconciles the changes in unrecognized tax benefits:

	December 31, 2013		December 31, 2012			December 31, 2011

Balance at beginning of year	$	—	$	831		$	831
Additions for tax positions taken during prior year		—		—			—
Additions for tax positions taken during current year		612		—			—
Reductions for tax positions taken during a prior year		—		—			—
Lapse of statute of limitations		—		(831	)		—


Balance at end of year	$	612	$	—		$	831

As of December 31, 2013 and 2012, the total amount of net unrecognized tax benefits was $612 and none, respectively. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total accrued penalties and interest of $114 was reversed as of December 31, 2012 and the total amount of penalties and interest was $114 as of December 31, 2011. Additionally, the Company does not expect a material change in its unrecognized tax benefits within the next 12 months.

Tax years of 2013 and 2012 are subject to examination by federal taxing authorities and 2013, 2012, 2011, and 2010 are subject to examination by state taxing authorities. On October 24, 2013, the IRS completed its audit of the Company's 2010 and 2011 federal income tax returns with no audit adjustment. In December 2012, the California Franchise Tax Board completed an audit of the Company's 2008 and 2009 state income tax returns with no audit adjustment. The State of Hawaii Department of Taxation is presently auditing the Company's 2011 and 2012 Hawaii state income tax returns. The State of California Board of Equalization Franchise is presently auditing the Company's 2010, 2011, and 2012 sales and use tax filings. It is uncertain when the State audits will be completed. The Company believes that the final resolution of the state audits will not have a material impact on its financial condition or results of operations.