Income Tax

The components of income tax are as follows:



	Con Edison			CECONY
(Millions of Dollars)	2017	2016	2015	2017	2016	2015
State
Current	$(2)	$(42)	$38	$37	$(1)	$48
Deferred	103	188	93	75	114	82
Federal
Current	(11)	(43)	(86)	73	59	77
Deferred	391	604	569	504	435	372
Amortization of investment tax credits	(9)	(9)	(9)	(4)	(4)	(5)
Total income tax expense	$472	$698	$605	$685	$603	$574

The tax effects of temporary differences, which gave rise to deferred tax assets and liabilities, are as follows:



	Con Edison		CECONY
(Millions of Dollars)	2017	2016	2017	2016
Deferred tax liabilities:
Property basis differences	$6,555	$9,446	$5,968	$8,620
Regulatory assets:
Unrecognized pension and other postretirement costs	697	1,162	656	1,104
Future income tax	—	986	—	940
Environmental remediation costs	219	333	187	287
Deferred storm costs	11	23	—	1
Other regulatory assets	269	371	241	321
Equity investments	263	363	—	—
Total deferred tax liabilities	$8,014	$12,684	$7,052	$11,273
Deferred tax assets:
Accrued pension and other postretirement costs	$264	$581	$187	$467
Regulatory liabilities:
Future income tax	698	—	660	—
Other regulatory liabilities	593	822	524	728
Superfund and other environmental costs	203	304	176	265
Asset retirement obligations	86	99	79	92
Loss carryforwards	95	59	—	—
Tax credits carryforward	658	498	—	—
Valuation allowance	(33)	(16)	—	—
Other	112	303	148	312
Total deferred tax assets	2,676	2,650	1,774	1,864
Net deferred tax liabilities	$5,338	$10,034	$5,278	$9,409
Unamortized investment tax credits	157	171	28	41
Net deferred tax liabilities and unamortized investment tax credits	$5,495	$10,205	$5,306	$9,450

The TCJA includes significant changes affecting the taxation of regulated public utilities, such as CECONY and O&R, and Con Edison’s other businesses. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA reduces the corporate federal income tax rate from 35 percent to 21 percent. The specific provisions related to regulated public utilities in the TCJA generally allow for the continued deductibility of interest expense, do not allow for full expensing for tax purposes of certain property acquired after September 27, 2017, and continue certain rate normalization requirements for accelerated depreciation benefits. For other businesses, TCJA provides for full expensing of property acquired after September 27, 2017 and limits a deduction for interest expense to 30 percent of adjusted taxable income (which resembles earnings before interest, taxes, depreciation and amortization or “EBITDA”).

In accordance with the accounting rules for income taxes (see “Federal Income Tax” in Note A), the tax effects of changes in tax laws are to be recognized in the period in which the law is enacted and deferred tax assets and liabilities are to be re-measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. For CECONY and O&R, in accordance with their New York rate plans and the accounting rules for regulated operations the change in deferred taxes was recorded as either an offset to a regulatory asset or a regulatory liability. See “Accounting Policies” in Note A and “Rate Plans” in Note B. For Con Edison’s other businesses, the change in deferred taxes was reflected as a decrease in income tax expense, which increased Con Edison's net income.

Upon enactment of the TCJA, the Companies re-measured their deferred tax assets and liabilities based upon the TCJA’s 21 percent corporate federal income tax rate. As a result, Con Edison, decreased its net deferred tax liabilities by $5,312 million (including $4,781 million for CECONY), recognized $259 million in net income, decreased its regulatory asset for future income tax by $1,250 million (including $1,182 million for CECONY), decreased the regulatory asset for revenue taxes by $90 million (including $86 million for CECONY), and accrued a regulatory liability for future income tax of $3,713 million (including $3,513 million for CECONY). Since the Companies are in a net regulatory liability position with respect to these income tax matters, the Companies netted the regulatory asset for future income tax against the regulatory liability for future income tax. Under the rate normalization requirements continued by the TCJA, $2,684 million of the net regulatory liability (including $2,542 million for CECONY) related to certain accelerated tax depreciation benefits is to be amortized over the remaining lives of the related assets. The remainder of the net regulatory liability is to be refunded (or credited) to customers as determined by the NYSPSC or NJBPU, as applicable. See “Other Regulatory Matters” in Note B. The amount recognized in net income included $269 million for the Clean Energy Businesses, $11 million for Con Edison Transmission and $(21) million for the parent company. The re-measurement had no impact on the Companies’ cash flows for 2017.

SEC Staff Accounting Bulletin 118 (SAB 118), issued when the TCJA was enacted, clarifies accounting for income taxes if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting. SAB 118 describes three scenarios associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply the accounting rules for income taxes, based on the provisions of the tax laws that were in effect immediately prior to the TCJA being enacted. The Companies have completed the required analysis and accounting for substantially all the effects of the TCJA’s enactment and have made a reasonable estimate as to the other effects, and have reflected the measurement and accounting of the effects in their 2017 consolidated financial statements. The items reflected as provisional amounts include tax depreciation and amortization and other book/tax differences. The Companies have accounted for these items based on its interpretation of the TCJA. Further interpretive guidance on the TCJA from the IRS, U.S. Treasury Department, or the Joint Committee on Taxation may require adjustments to the Companies’ accounting. In accordance with SAB 118, adjustments, if any, will be recorded in 2018. The Companies did not identify any effects of the TCJA for which they were not able to either complete the required analysis or make a reasonable estimate.

Reconciliation of the difference between income tax expense and the amount computed by applying the prevailing statutory income tax rate to income before income taxes is as follows:



	Con Edison						CECONY
(% of Pre-tax income)	2017		2016		2015		2017		2016		2015
STATUTORY TAX RATE
Federal	35	%	35	%	35	%	35	%	35	%	35	%
Changes in computed taxes resulting from:
State income tax	4		4		5		4		4		5
Cost of removal	1		(1	)	(5	)	1		(1	)	(5	)
Other plant-related items	(1	)	—		—		(1	)	(1	)	—
TCJA tax rate reduction	(13	)	—		—		—		—		—
Renewable energy credits	(1	)	(1	)	(1	)	—		—		—
Research and development credits	—		(1	)	—		—		(1	)	—
Other	(2	)	—		—		(1	)	—		—
Effective tax rate	23	%	36	%	34	%	38	%	36	%	35	%

In 2017, Con Edison had a federal net operating loss of approximately $121 million, due primarily to bonus depreciation. Con Edison expects to carryback approximately $53 million of its 2017 net operating loss to 2007, which will result in recovery of $19 million of income tax. The remaining 2017 federal net operating loss of $68 million will be carried forward to future years and will not expire until 2037. General business tax credits that were generated in 2017 ($176 million) will be carried forward to future years. Con Edison has $658 million in general business tax credit (primarily renewable energy tax credits), which if unused will begin to expire in 2032. A deferred tax asset for these tax attribute carryforwards was recorded, and no valuation allowance has been provided, as it is more likely than not that the deferred tax asset will be realized.

For New York State income tax purposes, Con Edison has a net operating loss carryforward available from 2017 of $137 million, primarily as a result of accelerated tax deductions on renewable energy projects. A deferred tax asset has been recognized for this New York State net operating loss that will not expire until 2037. A valuation allowance has not been provided; as it is more likely than not that the deferred tax asset will be realized.

Con Edison recorded a full valuation allowance of $3 million in 2015 against its charitable contribution carryforward from 2011. Due to the expiration of this charitable contribution carryforward in 2016, Con Edison wrote off the deferred tax asset and corresponding valuation allowance. Charitable contributions carryforward of $5 million, $5 million and $4 million for 2015, 2016 and 2017, respectively, that will expire in 2020, 2021 and 2022, respectively, were recorded as a deferred tax asset and no valuation allowance has been provided, as it is more likely than not that the deferred tax asset will be realized. In addition, a $21 million valuation allowance for New York City net operating loss carryforward and a $12 million valuation allowance for state net operating losses carryforward has been provided; as it is not more likely than not that the deferred tax asset will be realized.

The Protecting Americans from Tax Hikes Act of 2015 extended bonus depreciation for property acquired and placed in service during 2015 through 2019. The bonus depreciation percentage is 50 percent for property placed in service during 2015, 2016 and 2017 and phases down to 40 percent in 2018, and 30 percent in 2019. As a result of the extension of bonus depreciation to 2015, Con Edison, in February 2016, received a refund of 2015 estimated taxes paid in the amount of $160 million ($143 million for CECONY). The TCJA does not allow bonus depreciation for property acquired and placed into service by regulated public utilities after September 27, 2017, but provides for full expensing for Con Edison's other businesses.

Uncertain Tax Positions

Under the accounting rules for income taxes, the Companies are not permitted to recognize the tax benefit attributable to a tax position unless such position is more likely than not to be sustained upon examination by taxing authorities, including resolution of any related appeals and litigation processes, based solely on the technical merits of the position.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits for Con Edison and CECONY follows:



	Con Edison			CECONY
(Millions of Dollars)	2017	2016	2015	2017	2016	2015
Balance at January 1,	$42	$34	$34	$21	$2	$2
Additions based on tax positions related to the current year	1	2	—	1	2	—
Additions based on tax positions of prior years	1	19	1	1	19	—
Reductions for tax positions of prior years	(24)	(13)	—	(18)	(2)	—
Reductions from expiration of statute of limitations	(2)	—	(1)	—	—	—
Settlements	(6)	—	—	—	—	—
Balance at December 31,	$12	$42	$34	$5	$21	$2

In 2017, Con Edison reached a settlement with New York State on tax years 2006 through 2009 and on two significant items through 2015 and reversed $30 million in uncertain tax positions. Of this amount, $6 million ($4 million, net of federal taxes) reduced Con Edison’s effective tax rate. The amount related to CECONY was $18 million ($12 million, net of federal taxes), all of which reduced CECONY’s unamortized state investment tax credits. Current and prior year additions in 2017 are for tax credits.

As of December 31, 2017, Con Edison reasonably expects to resolve within the next twelve months approximately $8 million ($7 million, net of federal taxes) of various federal and state uncertainties due to the expected completion of ongoing tax examinations and expiration of statute of limitations, of which the entire amount, if recognized, would reduce Con Edison’s effective tax rate. The amount related to CECONY is approximately $4 million, of which the entire amount, if recognized, would reduce CECONY’s effective tax rate.

The Companies recognize interest on liabilities for uncertain tax positions in interest expense and would recognize penalties, if any, in operating expenses in the Companies’ consolidated income statements. In 2017, 2016 and 2015, the Companies recognized an immaterial amount of interest and no penalties for uncertain tax positions in their consolidated income statements. At December 31, 2017 and 2016, the Companies reflected an immaterial amount of interest and no penalties in their consolidated balance sheets.

At December 31, 2017, the total amount of unrecognized tax benefits that, if recognized, would reduce the Companies’ effective tax rate is $12 million ($11 million, net of federal taxes) with $5 million attributable to CECONY.

Federal tax returns for 2012 through 2016 remain under examination, with tax refunds for tax years 2012 through 2015 waiting for approval by the Joint Committee on Taxation. State income tax returns remain open for examination in New York for tax years 2010 through 2016 and in New Jersey for tax years 2008 through 2016.