Income Taxes

12 Months Ended

Dec. 31, 2018

CMS Energy and its subsidiaries file a consolidated U.S. federal income tax return as well as a Michigan Corporate Income Tax return for the unitary business group and various other state unitary group combined income tax returns. Income taxes are allocated based on each company’s separate taxable income in accordance with the CMS Energy tax sharing agreement.

In December 2017, President Trump signed the TCJA, which changed existing federal tax law and included numerous provisions that affect businesses. Provisions significantly impacting CMS Energy and Consumers include:


•	Reduction of the corporate income tax rate from 35 percent to 21 percent


•	Repeal of the alternative minimum tax along with a provision requiring companies to recover alternative minimum tax credit carryforwards over the four-year period ending in 2021


•	Limitation on the use of net operating loss carryforwards arising after December 31, 2017 to 80 percent of a company’s taxable income with an indefinite carryforward


•	A provision allowing companies to expense 100 percent of the cost of certain property when placed in service


•	Limitation on the deduction for net interest expense to 30 percent of adjusted taxable income


•	A requirement to use a normalization method of accounting for excess tax reserves associated with public utility property

As a rate-regulated utility, in taxable years beginning after 2017, Consumers is excluded from certain provisions of the TCJA, including those allowing companies to expense 100 percent of the cost of certain property and those limiting the amount of interest expense companies may deduct.

In November 2018, the IRS issued proposed regulations that allow all interest expense of a consolidated group to be deductible as long as a public utility comprises at least 90 percent of the total consolidated business. Under these proposed regulations, CMS Energy expects to meet the de minimis safe harbor rule in 2018 and therefore, the full amount of CMS Energy’s 2018 consolidated interest expense would be deductible.

Substantially all of the tax law changes enacted by the TCJA were effective for taxable years beginning after December 31, 2017. Under GAAP (ASC 740), companies must recognize the effects of a tax law change in the period of enactment. The staff of the SEC issued guidance in Staff Accounting Bulletin No. 118 that clarified accounting for income taxes under ASC 740 if information is not yet available or complete and provided for up to a one-year period in which to complete the required analyses and accounting. CMS Energy and Consumers made reasonable estimates in measuring and accounting for the effects of the TCJA in the December 31, 2017 financial statements. The measurement period provided by Staff Accounting Bulletin No. 118 is now complete. CMS Energy recorded a $5 million increase to income tax expense, including a $1 million increase at Consumers, representing a true-up of their estimates during the year ended December 31, 2018.

Presented in the following table is the difference between actual income tax expense on continuing operations and income tax expense computed by applying the statutory U.S. federal income tax rate:



In Millions, Except Tax Rate
Years Ended December 31	2018				2017				2016
CMS Energy, including Consumers
Income from continuing operations before income taxes		$	774			$	886			$	826
Income tax expense at statutory rate		163				310				289
Increase (decrease) in income taxes from:
State and local income taxes, net of federal effect¹		46				26				37
Accelerated flow-through of regulatory tax benefits²		(39		)		(39		)		(39		)
TCJA excess deferred taxes³		(26		)		—				—
Production tax credits		(14		)		(8		)		(9		)
Research and development tax credits, net⁴		(11		)		(1		)		(2		)
Impact of the TCJA⁵		(4		)		148				—
Other, net		—				(12		)		(3		)
Income tax expense		$	115			$	424			$	273
Effective tax rate		14.9		%		47.9		%		33.1		%
Consumers
Income from continuing operations before income taxes		$	847			$	971			$	936
Income tax expense at statutory rate		178				340				328
Increase (decrease) in income taxes from:
State and local income taxes, net of federal effect¹		51				30				44
Accelerated flow-through of regulatory tax benefits²		(39		)		(39		)		(39		)
TCJA excess deferred taxes³		(26		)		—				—
Production tax credits		(12		)		(8		)		(9		)
Research and development tax credits, net⁴		(11		)		(1		)		(2		)
Impact of the TCJA⁵		1				33				—
Other, net		—				(16		)		(2		)
Income tax expense		$	142			$	339			$	320
Effective tax rate		16.8		%		34.9		%		34.2		%

In September 2017, CMS Energy completed the evaluation of its methodology for the state apportionment of Consumers’ electricity sales to MISO, taking into account recent state tax law developments in the electric utility sector. To recognize the anticipated refund and the impact of the expected lower effective tax rate on their deferred state tax liabilities, CMS Energy, including Consumers, recorded a $14 million income tax benefit in 2017. These tax benefits were net of reserves for uncertain tax positions and primarily attributable to Consumers. In April 2018, CMS Energy amended its 2013 Michigan Corporate Income Tax return and submitted a refund claim for taxes previously paid. In November 2018, the refund claim was denied by the State of Michigan. CMS Energy has submitted a petition for informal conference.

In 2013, the MPSC issued an order authorizing Consumers to accelerate the flow-through to electric and gas customers of certain income tax benefits associated primarily with the cost of removal of plant placed in service before 1993. Consumers implemented this regulatory treatment beginning in 2014. This change, which also accelerates Consumers’ recognition of the income tax benefits, reduced Consumers’ income tax expense by $39 million for each of the years ended December 31, 2018, 2017, and 2016.

In December 2017, Consumers remeasured its deferred tax assets and liabilities at the new federal tax rate enacted by the TCJA and recorded a $1.8 billion regulatory liability. This regulatory liability relates to the excess deferred taxes arising from accelerated tax depreciation on assets in rate base that are governed by normalization provisions of the Internal Revenue Code. The normalization provisions require that the excess deferred taxes be refunded to customers over the remaining average service life of the associated assets. In January 2018, Consumers began to reduce this regulatory liability by crediting income tax expense. Consumers has fully reserved for the eventual refund of these excess deferred taxes that it has credited to income tax expense in a separate regulatory liability established by reducing revenue, and will continue to do so until these benefits are passed on to customers in accordance with an MPSC order, expected to be issued in 2019. At December 31, 2018, this reserve for refund of these excess deferred taxes totaled $35 million.


⁴	In March 2018, Consumers finalized a study of research and development tax credits for the tax years 2012 through 2016. As a result, Consumers recognized an $8 million increase in the credit, net of reserves for uncertain tax positions.


⁵	In December 2017, CMS Energy and Consumers recorded a reasonable estimate to measure and account for the impact of the TCJA. The 2018 amount includes the true-up of their estimate and elimination of $9 million valuation allowance on the sequestration of alternative minimum tax credits.

Presented in the following table are the significant components of income tax expense on continuing operations:



In Millions
Years Ended December 31	2018				2017			2016
CMS Energy, including Consumers
Current income taxes
Federal		$	(67	)		$	—		$	—
State and local		—				6			9
		$	(67	)		$	6		$	9
Deferred income taxes
Federal		$	112			$	368		$	200
State and local		58				36			47
		$	170			$	404		$	247
Deferred income tax credit		12				14			17
Tax expense		$	115			$	424		$	273
Consumers
Current income taxes
Federal		$	6			$	159		$	9
State and local		13				17			22
		$	19			$	176		$	31
Deferred income taxes
Federal		$	60			$	120		$	227
State and local		51				29			45
		$	111			$	149		$	272
Deferred income tax credit		12				14			17
Tax expense		$	142			$	339		$	320

For the year ended December 31, 2017, the impact of the TCJA was a $148 million increase in deferred income tax expense at CMS Energy, including Consumers, and a $33 million increase in deferred income tax expense at Consumers. The TCJA had no impact on current income tax expense in 2017.

Presented in the following table are the principal components of deferred income tax assets (liabilities) recognized:



In Millions
December 31	2018				2017
CMS Energy, including Consumers
Deferred income tax assets
Tax loss and credit carryforwards		$	385			$	453
Net regulatory tax liability		395				411
Reserves and accruals		39				40
Total deferred income tax assets		$	819			$	904
Valuation allowance		(8		)		(15		)
Total deferred income tax assets, net of valuation allowance		$	811			$	889
Deferred income tax liabilities
Plant, property, and equipment		$	(1,955	)		$	(1,891	)
Employee benefits		(165		)		(96		)
Securitized costs		(65		)		(71		)
Gas inventory		(35		)		(37		)
Other		(78		)		(63		)
Total deferred income tax liabilities		$	(2,298	)		$	(2,158	)
Total net deferred income tax liabilities		$	(1,487	)		$	(1,269	)
Consumers
Deferred income tax assets
Net regulatory tax liability		$	395			$	411
Tax loss and credit carryforwards		64				101
Reserves and accruals		21				21
Total deferred income tax assets		$	480			$	533
Deferred income tax liabilities
Plant, property, and equipment		$	(1,943	)		$	(1,901	)
Employee benefits		(172		)		(105		)
Securitized costs		(65		)		(71		)
Gas inventory		(35		)		(37		)
Other		(74		)		(59		)
Total deferred income tax liabilities		$	(2,289	)		$	(2,173	)
Total net deferred income tax liabilities		$	(1,809	)		$	(1,640	)

Deferred tax assets and liabilities are recognized for the estimated future tax effect of temporary differences between the tax basis of assets or liabilities and the reported amounts on CMS Energy’s and Consumers’ consolidated financial statements. At December 31, 2017, CMS Energy and Consumers remeasured their deferred tax assets and liabilities and related valuation allowances using the 21 percent federal tax rate enacted in the TCJA. To reflect the lower income tax rate, Consumers reduced its net deferred tax liabilities associated with its utility book-tax temporary differences by $1.6 billion for the year ended December 31, 2017. Of this amount, Consumers recognized deferred tax expense of $33 million related to nonrecoverable net deferred tax assets, with the remaining amount being recorded as a net regulatory tax liability. For further details on Consumers’ net regulatory tax liability, see Note 3, Regulatory Matters.

In addition to the amounts recorded at Consumers at December 31, 2017, CMS Energy reduced its net deferred tax assets associated with its non‑utility book-tax temporary differences by $239 million. In total, CMS Energy, including Consumers, reduced its net deferred tax liabilities by $1.3 billion for the year ended December 31, 2017.

Presented in the following table are the tax loss and credit carryforwards at December 31, 2018:



In Millions
	Gross Amount			Tax Attribute			Expiration
CMS Energy, including Consumers
Federal net operating loss carryforward		$	603		$	126	2034 – 2036
Local net operating loss carryforwards		406			4		2023 – 2036
General business credits		184			184		2018 – 2038
Alternative minimum tax credits		68			68		Not applicable
Federal capital loss carryover		12			2		2023
State capital loss carryover		10			1		2023
Total tax attributes					$	385
Consumers
Federal net operating loss carryforward		$	222		$	47	2034 – 2036
General business credits		17			17		2032 – 2038
Total tax attributes					$	64

CMS Energy has provided a valuation allowance of $2 million for the local tax loss carryforward, $3 million for federal and state capital loss carryforward, and $3 million for general business credits. The TCJA repealed the corporate alternative minimum tax and requires companies to recover (through offsets of regular tax and through cash refunds) all alternative minimum tax credits over the four-year period ending in 2021. In December 2018, the Office of Management and Budget announced such recovery will not be subject to sequestration for taxable years beginning after December 31, 2017. As a result, CMS Energy eliminated a valuation allowance of $9 million for sequestration of cash refunds of alternative minimum tax credits at December 31, 2018. Additionally, CMS Energy reclassified $68 million of alternative minimum tax credits to a current receivable.

CMS Energy and Consumers expect to utilize fully their tax loss and credit carryforwards for which no valuation allowance has been provided. It is reasonably possible that further adjustments will be made to the valuation allowances within one year.

Presented in the following table is a reconciliation of the beginning and ending amount of uncertain tax benefits:



In Millions
Years Ended December 31	2018			2017				2016
CMS Energy, including Consumers
Balance at beginning of period		$	14		$	5			$	6
Additions for current-year tax positions		1			10				—
Additions for prior-year tax positions		4			—				—
Reductions for prior-year tax positions		—			(1		)		—
Settlements		—			—				(1		)
Balance at end of period		$	19		$	14			$	5
Consumers
Balance at beginning of period		$	21		$	5			$	6
Additions for current-year tax positions		2			17				—
Additions for prior-year tax positions		5			—				—
Reductions for prior-year tax positions		—			(1		)		—
Settlements		—			—				(1		)
Balance at end of period		$	28		$	21			$	5

If recognized, all of these uncertain tax benefits would affect CMS Energy’s and Consumers’ annual effective tax rates in future years.

CMS Energy and Consumers recognize accrued interest and penalties, where applicable, as part of income tax expense. CMS Energy, including Consumers, recognized no interest or penalties for the years ended December 31, 2018, 2017, or 2016.

In 2018, the Michigan Department of Treasury completed its audit of the Michigan business tax returns of CMS Energy and its subsidiaries for 2008 through 2011. The audit resulted in a $1 million refund of tax.

The amount of income taxes paid is subject to ongoing audits by federal, state, local, and foreign tax authorities, which can result in proposed assessments. CMS Energy’s federal income tax returns for 2015 and subsequent years remain subject to examination by the IRS. CMS Energy’s Michigan Corporate Income Tax returns for 2013 and subsequent years remain subject to examination by the State of Michigan. CMS Energy’s and Consumers’ estimate of the potential outcome for any uncertain tax issue is highly judgmental. CMS Energy and Consumers believe that their accrued tax liabilities at December 31, 2018 were adequate for all years.

Consumers Energy Company

Income Taxes [Line Items]

Income Taxes


•	Reduction of the corporate income tax rate from 35 percent to 21 percent


•	Repeal of the alternative minimum tax along with a provision requiring companies to recover alternative minimum tax credit carryforwards over the four-year period ending in 2021


•	Limitation on the use of net operating loss carryforwards arising after December 31, 2017 to 80 percent of a company’s taxable income with an indefinite carryforward


•	A provision allowing companies to expense 100 percent of the cost of certain property when placed in service


•	Limitation on the deduction for net interest expense to 30 percent of adjusted taxable income


•	A requirement to use a normalization method of accounting for excess tax reserves associated with public utility property