INCOME TAXES

12 Months Ended

Dec. 31, 2019

Income Tax Provision (Benefit)

Income (loss) before income taxes, which is all domestic, was $100 million, $429 million and $(262) million for the years ended December 31, 2019, 2018 and 2017, respectively. We did not record a significant income tax provision (benefit) in any of the years ended December 31, 2019, 2018 and 2017.

Total income tax expense (benefit) differs from the amounts computed by applying the U.S. federal income tax rate to pre-tax income (loss) as follows:



	For the years ended December 31,
	2019		2018		2017
U.S. federal statutory tax rate	21	%	21	%	(35	)%
State income taxes, net	7		6		(6	)
Exclusion of tax attributable to noncontrolling interests, net	(35	)	(5	)	—
Decrease in U.S. federal corporate tax rate	—		—		91
Tax credits, net	(9	)	(6	)	(19	)
Nondeductible compensation, net	3		—		—
Stock-based compensation, net	—		—		1
Change in valuation allowance, net	14		(17	)	(33	)
Other, net	—		1		1
Effective tax rate	1	%	—	%	—	%

Our effective tax rate is primarily affected by state taxes, income included in our consolidated results which is taxed to noncontrolling interests, and tax credits including the enhanced oil recovery credit. Our U.S. federal deferred tax assets and liabilities were remeasured due to the reduction of the top corporate tax rate from 35% to 21% under the Tax Cuts and Jobs Act (TCJA) enacted on December 22, 2017. The TCJA also included significant changes to the deduction for executive compensation by public corporations.

Given our income tax position, any item affecting our effective tax rate described above is generally offset by an equal change in the valuation allowance. Our valuation allowance increased $21 million during 2019, $16 million of which was recorded to income tax provision and $5 million was recorded to accumulated other comprehensive income. Our valuation allowance decreased $81 million in 2018, $76 million of which was recorded to income tax provision and $5 million was recorded to accumulated other comprehensive income. Our valuation allowance decreased $74 million in 2017, $78 million of which was recorded as an income tax benefit and $4 million reduced accumulated other comprehensive income.

Under the TCJA, for taxable years beginning in 2018, our deduction for business interest is limited to 30% of our adjusted taxable income. For purposes of this limitation, adjustable taxable income is computed without regard to net business interest expense and in the case of taxable years beginning before January 1, 2022, any deduction allowable for depreciation, amortization or depletion. Proposed Treasury Regulations issued in December 2018 provide that depreciation, amortization or depletion expense that is capitalized to inventory is not treated as depreciation, amortization or depletion for the purposes of computing adjustable taxable income. It is reasonably possible that the composition of our deferred tax assets, specifically the amount reported for net operating loss and business interest expense carryforwards, could significantly change when the Internal Revenue Service finalizes and issues regulations. Our carryforwards for business interest expense do not expire.

Deferred Tax Assets and Liabilities

The tax effects of temporary differences resulting in deferred income tax assets and liabilities at December 31, 2019 and 2018 were as follows:



	2019						2018
	Deferred Tax Assets			Deferred Tax Liabilities			Deferred Tax Assets			Deferred Tax Liabilities
	(in millions)
Debt	$	176		$	—		$	253		$	—
Property, plant and equipment	—			(517		)	11			(316		)
Postretirement benefit accruals	40			—			27			—
Deferred compensation and benefits	55			—			56			—
Asset retirement obligations	155			—			129			—
Net operating loss and tax credit carryforwards	457			—			314			—
Business interest expense carryforward	194			—			82			—
Investment in partnerships	110			—			93			—
Other	36			(60		)	17			(41		)
Subtotal	1,223			(577		)	982			(357		)
Valuation allowance	(646		)	—			(625		)	—
Total deferred taxes	$	577		$	(577	)	$	357		$	(357	)

Components of accumulated other comprehensive income (loss) (AOCI) are presented net of tax. We use the portfolio approach to clear remaining taxes recorded to AOCI when our pension plans are terminated.

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of existing deferred tax assets. A significant piece of evidence evaluated is a history of operating losses. Such evidence limits our ability to consider other evidence such as projections for growth. As of December 31, 2019, we concluded that we could not realize, on a more-likely-than-not basis, any of our deferred tax assets and there is not sufficient evidence to support the reversal of all or any portion of this allowance. Given our recent and anticipated future earnings trends, we do not believe any of the valuation allowance as of December 31, 2019 will be released within the next 12 months. Changes in assumptions or changes in tax laws and regulations could materially affect the recognized amounts of valuation allowance.

Other

As of December 31, 2019, we had U.S. federal net operating loss carryforwards of approximately $1 billion, which begin to expire in 2037, and tax credit carryforwards of $57 million, which begin to expire in 2037.

As of December 31, 2019, we had California net operating loss carryforwards of approximately $2 billion, which begin to expire in 2026, and $20 million of tax credit carryforwards, which begin to expire in 2037.

Unrecognized Tax Benefits

The following is a reconciliation of unrecognized tax benefits:



	For the years ended December 31,
	2019		2018		2017
	(in millions)
Unrecognized tax benefits – January 1	$	25	$	25	$	25
Gross increases – tax positions in prior year	44		—		—
Gross increases – tax positions in current year	32		—		—
Unrecognized tax benefits – December 31	$	101	$	25	$	25

The unrecognized tax benefit is reported against deferred taxes on our consolidated balance sheets. If recognized, the amount of unrecognized tax benefit that would affect our effective tax rate is $25 million.

It is reasonably possible that the amount of unrecognized tax benefit with respect to some of our uncertain tax positions could significantly decrease in the next 12 months.