Note 8 — Income Taxes

Effective Tax Rates

The following tables summarize the effective income tax rates for Cleco and Cleco Power for the three and nine months ended September 30, 2018, and 2017:



Cleco
	FOR THE THREE MONTHS ENDED SEPT. 30,				FOR THE NINE MONTHS ENDED SEPT. 30,
	2018		2017		2018		2017
Effective tax rate	19.4	%	33.7	%	20.7	%	35.5	%



Cleco Power
	FOR THE THREE MONTHS ENDED SEPT. 30,				FOR THE NINE MONTHS ENDED SEPT. 30,
	2018		2017		2018		2017
Effective tax rate	22.1	%	35.4	%	23.1	%	36.8	%

For the three and nine months ended September 30, 2018, and 2017, the effective income tax rates for both Cleco and Cleco Power were different than the federal statutory rate primarily due to permanent tax differences; the flowthrough of state tax benefits, including AFUDC equity; tax returns filed in 2017; and state tax expense.

Uncertain Tax Positions

Cleco classifies all interest related to uncertain tax positions as a component of interest payable and interest expense. At September 30, 2018, and December 31, 2017, Cleco and Cleco Power had no interest payable related to uncertain tax positions. For the nine months ended September 30, 2018, and 2017, Cleco and Cleco Power had no interest expense related to uncertain tax positions.

At September 30, 2018, Cleco had no liability for uncertain tax positions. Cleco estimates that it is reasonably possible that the balance of unrecognized tax benefits as of September 30, 2018, for Cleco and Cleco Power would be unchanged in the next 12 months. The settlement of open tax years could involve the payment of additional taxes, and/or the recognition of tax benefits, which may have an effect on Cleco’s effective tax rate.

The federal income tax years that remain subject to examination by the IRS are 2015, 2016, and 2017.

Beginning with the 2013 tax year, Cleco entered into the IRS’s Compliance Assurance Process which allows taxpayers to work collaboratively with an IRS team to identify and resolve potential tax issues before the federal tax return is filed each year. Cleco must apply for admission to the program each year. Cleco has been approved for the Compliance Assurance Process through the 2018 tax year.

The state income tax years that remain subject to examination by the Louisiana Department of Revenue are 2014, 2015, and 2016.

Cleco classifies income tax penalties as a component of other expense. For the nine months ended September 30, 2018, and 2017, no penalties were recognized.

2017 Tax Reform

On December 22, 2017, the President signed into law the TCJA. The TCJA includes significant changes to the Internal Revenue Code, as amended, including amendments which significantly change the taxation of business entities and includes specific provisions related to rate regulated activities, including Cleco Power. The most significant change that impacts Cleco is the reduction of the corporate federal income tax rate from 35% to 21%.

The SEC Staff recognized the complexity of reflecting the impacts of the TCJA and issued guidance which clarifies accounting for income taxes if information is not yet available or complete. The SEC provides up to one year to complete the required analysis and accounting (the measurement period).

The Registrants made a reasonable estimate for the measurement and accounting of certain effects of the TCJA, which were reflected in the December 31, 2017, financial statements. The accounting for these provisional items decreased deferred income tax expense for Cleco and Cleco Power by $46.3 million and $14.3 million, respectively, for the year ended December 31, 2017. The impacts of the TCJA also decreased the ADIT liability for Cleco and Cleco Power by $394.9 million and $362.9 million, respectively, at December 31, 2017. The impacts of the TCJA, including the effects on income tax expense, regulatory liabilities, and effects on future periods, are provisional and subject to change. Due to the timing and complexity of the TCJA, further regulatory guidance and additional analysis is required to finalize the accounting treatment of ADIT. For the nine months ended September 30, 2018, there were no adjustments in the ADIT liability related to the TCJA for Cleco or Cleco Power. Cleco expects that any final adjustments to the provisional amounts will be recorded in the fourth quarter of 2018, which could have a material effect on the results of operations of Cleco. For more information on the regulatory treatment, see Note 10 — “Regulation and Rates — TCJA.”