12 · Income taxes

The components of income taxes attributable to net income for common stock were as follows:



	HEI consolidated								Hawaiian Electric consolidated
Years ended December 31	2015		2014			2013			2015			2014			2013
(in thousands)
Federal
Current (1)	$	44,343	$	(8,959	)	$	(295	)	$	—		$	1,108		$	1,313
Deferred (1)	36,664		91,412			73,473			68,757			68,775			58,024
Deferred tax credits, net	318		—			224			318			—			224
	81,325		82,453			73,402			69,075			69,883			59,561
State
Current (1)	2,402		(5,793		)	(630		)	(1,048		)	(9,436		)	(3,720		)
Deferred (1)	4,768		12,813			6,672			6,869			14,172			6,483
Deferred tax credits, net	4,526		6,106			6,793			4,526			6,106			6,793
	11,696		13,126			12,835			10,347			10,842			9,556
Total	$	93,021	$	95,579		$	86,237		$	79,422		$	80,725		$	69,117


(1)	HEI Consolidated amounts for 2014 and 2013 have been updated to reflect the first quarter 2015 adoption of ASU No. 2014-01. See Note 1 for a discussion of the adoption of ASU No. 2014-01

A reconciliation of the amount of income taxes computed at the federal statutory rate of 35% to the amount provided in the consolidated statements of income was as follows:



	HEI consolidated									Hawaiian Electric consolidated
Years ended December 31	2015			2014			2013			2015			2014			2013
(in thousands)
Amount at the federal statutory income tax rate (1)	$	89,176		$	92,959		$	87,442		$	75,996		$	77,126		$	67,914
Increase (decrease) resulting from:
State income taxes, net of federal income tax benefit (1)	8,097			9,073			8,667			6,726			7,047			6,211
Other, net (1)	(4,252		)	(6,453		)	(9,872		)	(3,300		)	(3,448		)	(5,008		)
Total	$	93,021		$	95,579		$	86,237		$	79,422		$	80,725		$	69,117
Effective income tax rate	36.5		%	36.0		%	34.5		%	36.6		%	36.6		%	35.6		%


(1)	HEI Consolidated amounts for 2014 and 2013 have been updated to reflect the first quarter 2015 adoption of ASU No. 2014-01. See Note 1 for a discussion of the adoption of ASU No. 2014-01.

The Company's effective tax rate increased in 2015 and 2014 compared to 2013 primarily due to the increase in nondeductible merger costs. The Company's effective tax rate increase in 2014 compared to 2013 was also due to the $2.7 million out-of-period income tax benefits recognized in 2013 (see “Out-of-period income tax benefit” below). The Utilities' effective tax rate increased in 2014 compared to 2013 primarily due to the out-of-period income tax benefits.

The tax effects of book and tax basis differences that give rise to deferred tax assets and liabilities were as follows:



	HEI consolidated				Hawaiian Electric consolidated
December 31	2015		2014		2015		2014
(in thousands)
Deferred tax assets
Net operating loss	$	—	$	—	$	37,283	$	51,936
Other (1)	64,870		56,526		20,238		17,663
Total deferred tax assets	64,870		56,526		57,521		69,599
Deferred tax liabilities
Property, plant and equipment related	492,441		448,723		489,884		446,259
Repairs deduction	104,081		86,408		104,081		86,408
Regulatory assets, excluding amounts attributable to property, plant and equipment	34,261		33,795		34,261		33,795
Deferred RAM and RBA revenues	26,400		32,889		26,400		32,889
Retirement benefits	42,006		25,336		44,991		28,758
Other (1)	46,558		62,945		12,710		14,929
Total deferred tax liabilities	745,747		690,096		712,327		643,038
Net deferred income tax liability	$	680,877	$	633,570	$	654,806	$	573,439


(1)	HEI consolidated and Hawaiian Electric consolidated amounts as of December 31, 2014 have been updated to reflect the Company's adoption of ASU No. 2014-01 and the Utilities' adoption of ASU No. 2015-17, respectively. See Note 1 for a discussion of the Company's adoption of ASU No. 2014-01 and the Utilities’ adoption of ASU No. 2015-17.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. Based upon historical taxable income and projections for future taxable income, management believes it is more likely than not the Company and the Utilities will realize substantially all of the benefits of the deferred tax assets. As of December 31, 2015, the valuation allowance for deferred tax benefits is not significant. In 2015, the net deferred income tax liability continued to increase primarily as a result of accelerated tax deductions taken for bonus depreciation that was retroactively enacted in the Protecting Americans from Tax Hikes (PATH) Act of 2015. The Utilities are included in the consolidated federal and Hawaii income tax returns of HEI and are subject to the provisions of HEI’s tax sharing agreement, which determines each subsidiary’s (or subgroup's) income tax return liabilities and refunds on a standalone basis as if it filed a separate return (or subgroup consolidated return). Consequently, although HEI consolidated does not anticipate any unutilized net operating loss (NOL) as of December 31, 2015, standalone Hawaiian Electric consolidated expects an unutilized NOL for federal tax purposes in accordance with the HEI tax sharing agreement. The Hawaiian Electric deferred tax asset associated with this NOL as of December 31, 2015 has decreased from December 31, 2014 as shown above.

HEI consolidated. In 2014 and 2013, credit adjustments to interest expense on income taxes was reflected in “Interest expense – other than on deposit liabilities and other bank borrowings” in the amount of $1.7 million and $0.3 million, respectively. The credit adjustments to interest expense were primarily due to the resolution of tax issues with the Internal Revenue Service (IRS). As of December 31, 2015 and 2014, the total amount of accrued interest related to uncertain tax positions and recognized on the balance sheet in “Interest and dividends payable” was $0.1 million and nil, respectively. As of December 31, 2015, the total amount of liability for uncertain tax positions was $3.6 million.

Hawaiian Electric consolidated. In 2014 and 2013, credit adjustments to interest expense on income taxes was reflected in “Interest and other charges” in the amount of $0.7 million and $0.3 million, respectively. The credit adjustments to interest expense were primarily due to the resolution of tax issues with the IRS. As of December 31, 2015 and 2014, the total amount of accrued interest related to uncertain tax positions was $0.1 million. As of December 31, 2015, the total amount of liability for uncertain tax positions was $3.6 million.

The changes in total unrecognized tax benefits were as follows:



	HEI consolidated								Hawaiian Electric consolidated
(in millions)	2015		2014			2013			2015		2014			2013
Unrecognized tax benefits, January 1	$	—	$	0.9		$	0.8		$	—	$	0.5		0.4
Additions based on tax positions taken during the year	—		—			—			—		—			—
Reductions based on tax positions taken during the year	—		—			—			—		—			—
Additions for tax positions of prior years	3.6		0.1			0.5			3.6		0.1			0.5
Reductions for tax positions of prior years	—		—			(0.4		)	—		—			(0.4		)
Settlements			(1.0		)	—			—		(0.6		)	—
Lapses of statute of limitations	—		—			—			—		—			—
Unrecognized tax benefits, December 31	$	3.6	$	—		$	0.9		$	3.6	$	—		$	0.5

As of December 31, 2015, the disclosures above present the Company’s and the Utilities' accruals for potential tax liabilities and related interest. Based on information currently available, the Company and the Utilities believe these accruals have adequately provided for potential income tax issues with federal and state tax authorities and related interest, and that the ultimate resolution of tax issues for all open tax periods will not have a material adverse effect on its results of operations, financial condition or liquidity.

In 2014, the IRS completed its examination of the Company’s federal income tax returns for tax years 2010 and 2011. In October 2014, the Company and the IRS reached an agreement on all adjustments, primarily related to depreciation , resulting in no material impacts to the income statement. Tax years 2011 through 2014 remain subject to examination by the Department of Taxation of the State of Hawaii.

Out-of-period income tax benefit. During 2013, the Company recorded a $3.1 million (including $2.7 million related to the Utilities) out-of-period income tax benefit, resulting primarily from the reversal of deferred tax liabilities due to errors in the amount of book over tax basis differences in plant and equipment. Management concluded that this out-of-period adjustment was not material to either the current or any prior period financial statements.

Recent tax developments. The Utilities adopted the safe harbor guidelines with respect to network (transmission and distribution) assets in 2011 and, in June 2013, the IRS released a revenue procedure relating to deductions for repairs of generation property, which provides some guidance (that is elective) for taxpayers that own steam or electric generation property. This guidance defines the relevant components of generation property to be used in determining whether such component expenditures should be deducted as repairs or capitalized and depreciated by taxpayers. The revenue procedure also provides an extrapolation methodology that could be used by taxpayers in determining deductions for prior years’ repairs without going back to the specific documentation of those years. The guidance does not provide specific methods for determining the repairs amount. Management has adopted a method believed to be consistent with this guidance in its 2014 tax return filed in September 2015.

On December 18, 2015, Congress passed, and President Obama signed into law, the “Protecting Americans from Tax Hikes (PATH) Act of 2015” and the “Consolidating Appropriations Act, 2016,” providing government funding and a number of significant tax changes.

The provision with the greatest impact on the Company is the extension of bonus depreciation. The PATH Act retroactively extended 50% bonus depreciation for qualified property acquired and placed in service in 2015 and continues 50% bonus depreciation through 2017. The bonus depreciation percentage decreases to 40% in 2018 and 30% in 2019 and terminates thereafter. The extension of bonus depreciation is expected to result in an increase in 2015 tax depreciation of approximately $117 million, primarily attributable to the Utilities. The PATH Act also made the research credit permanent, providing a 20% credit on the amount that the cost of qualified research expenditures for the tax year exceeds an amount based on prior expenditures.

Additionally, the “Consolidating Appropriations Act, 2016” extended a variety of energy-related credits that were expired or soon to expire. These credits include the production credit for wind facilities and the 30% investment credit for qualified solar energy property, with various phase-out dates through 2021.