The following is a reconciliation of the provision for income taxes computed at the federal statutory rate to income taxes computed at the effective rate:



	For the three months ended				For the six months ended
	June 30,				June 30,

	2020		2019		2020		2019

Consolidated tax provision at federal statutory rate	21.0	%	21.0	%	21.0	%	21.0	%
State income tax provisions, net of federal income
tax benefit	11.3		1.5		5.4		1.5
Changes in certain deferred tax balances	(7.8)		(1.5)		(3.9)		(1.9)
Interest expense deduction	19.5		-		10.4		-
Restructuring cost	(6.4)		-		(5.0)		-
Goodwill impairment	-		(10.4)		-		(10.4)
Loss on disposal of Northwest Operations	(13.0)		(1.4)		(8.0)		(1.4)
Tax reserve adjustment	0.8		-		(0.7)		-
Shared-based payments	-		-		(0.3)		(0.1)
Federal research and development tax credit	(1.5)		-		(0.5)		-
All other, net	-		(0.1)		(0.5)		-
Effective tax rate	23.9	%	9.1	%	17.9	%	8.7	%

On July 14, 2020, The Department of The Treasury approved and submitted the final Regulations Sec. 1.163(j) to the Office of the Federal Register for publication. According to the final Regulations Section 1.163(j) – 1(b)(1), if property is sold or otherwise disposed of, the lesser of the amount of gain on the disposition or the amount of depreciation, amortization, or depletion deductions with respect to the property for the taxable years beginning after December 31, 2017 and before January 1, 2022 is subtracted from taxable income to determine ATI under Internal Revenue Code Section 163(j)(8)(B). Frontier is currently evaluating the impact of the final Regulations, which may be material to the Company’s income tax provision.

Under ASC 740 – 270, income tax expense for interim periods is based on annual effective tax rate for the full year with the exclusion of the discrete items. However, in a period when a negative annual effective tax rate occurs, the actual effective tax rate for the year-to-date period may be used as an exception. The actual year-to-date effective tax rate method is used by the Company in Q2 2020.

The CARES Act has a number of beneficial tax provisions (e.g., deferral of the employer portion of social security taxes for the remainder of 2020, the ability to claim additional interest deductions, net operating loss carrybacks, and removal of the 80% usage limitation for post-2017 NOLs for tax years 2018, 2019 and 2020).

Employers can defer payment of the employer’s share of the Social Security tax that they otherwise are responsible for paying on wages. The deferral applies to affected taxes normally required to be paid from March 27, 2020, through December 31, 2020. The deferred tax must be paid over the following two years, with half to be paid by December 31, 2021, and the other half to be paid by December 31, 2022.

The business interest deduction limit under Code Sec. 163(j) is increased to 50 percent of the taxpayer’s adjusted taxable income (ATI) for the 2019 and 2020 tax years. A taxpayer may also elect for the 2020 year only to use 2019 ATI in calculating the limitation. A taxpayer may elect not to have the increased limitation apply in 2019 or 2020.

Net operating losses (NOLs) arising in tax years beginning in 2018, 2019, and 2020 now have a five-year carryback period and an unlimited carryforward period. The provision limiting an NOL deduction attributable to NOLs arising in tax years beginning after 2017 to 80 percent of taxable income does not apply during these years.

As of June 30, 2020 and December 31, 2019, amounts pertaining to expected income tax refunds of $13 million and $1 million are included in “Income taxes and other current assets” in the consolidated balance sheets, respectively.

Frontier considered positive and negative evidence in regard to evaluating certain deferred tax assets during the second quarter of 2020, including the development of recent years of pre-tax book losses. On the basis of this evaluation, a valuation allowance of $61 million ($57 million net of federal benefit) has been recorded for the six months ended June 30, 2020, related to these deferred tax assets and reflected in “Changes in certain deferred tax balances.” The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.

As of June 30, 2020, Frontier had approximately $1.2 billion of federal NOLs, which for U.S. federal income tax purposes can be used to offset future taxable income. In connection with the sale of the Northwest Operations Frontier utilized NOLs of approximately $848 million during the six months ended June 30, 2020.