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	2016			2015		2014			2016			2015			2014
(in thousands)
Federal
Current	$	59,873		$	44,343	$	(8,959	)	$	952		$	—		$	1,108
Deferred	43,666			36,664		91,412			70,513			68,757			68,775
Deferred tax credits, net	268			318		—			268			318			—
	103,807			81,325		82,453			71,733			69,075			69,883
State
Current	16,473			2,402		(5,793		)	9,232			(1,048		)	(9,436		)
Deferred	3,452			4,768		12,813			3,873			6,869			14,172
Deferred tax credits, net	(37		)	4,526		6,106			(37		)	4,526			6,106
	19,888			11,696		13,126			13,068			10,347			10,842
Total	$	123,695		$	93,021	$	95,579		$	84,801		$	79,422		$	80,725

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	2016			2015			2014			2016			2015			2014
(in thousands)
Amount at the federal statutory income tax rate	$	130,844		$	89,176		$	92,959		$	80,190		$	75,996		$	77,126
Increase (decrease) resulting from:
State income taxes, net of federal income tax benefit	13,915			8,097			9,073			8,494			6,726			7,047
Other, net	(21,064		)	(4,252		)	(6,453		)	(3,883		)	(3,300		)	(3,448		)
Total	$	123,695		$	93,021		$	95,579		$	84,801		$	79,422		$	80,725
Effective income tax rate	33.1		%	36.5		%	36.0		%	37.0		%	36.6		%	36.6		%

The Company's effective tax rate decreased in 2016 compared to 2015 and 2014 primarily due to the deductibility of previously capitalized merger costs. Additionally, current taxable income provided capacity for the domestic production activities deduction.

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	2016		2015		2016		2015
(in thousands)
Deferred tax assets
Net operating loss¹	$	—	$	—	$	9,158	$	37,283
Allowance for bad debts	24,500		21,781		2,364		1,852
Other	47,201		43,089		18,720		18,386
Total deferred tax assets	71,701		64,870		30,242		57,521
Deferred tax liabilities
Property, plant and equipment related	538,484		492,441		536,885		489,884
Repairs deduction	103,782		104,081		103,782		104,081
Regulatory assets, excluding amounts attributable to property, plant and equipment	35,107		34,261		35,107		34,261
Deferred RAM and RBA revenues	26,053		26,400		26,053		26,400
Retirement benefits	48,400		42,006		51,445		44,991
Other	48,681		46,558		10,629		12,710
Total deferred tax liabilities	800,507		745,747		763,901		712,327
Net deferred income tax liability	$	728,806	$	680,877	$	733,659	$	654,806


¹	The Hawaiian Electric deferred tax asset includes the tax effect of federal net operating loss carryforwards of $9 million expiring in 2034 and federal general business credit carryforwards of $3 million expiring in 2032 through 2036, net of unrecognized federal tax benefits of $3 million due to uncertain tax positions.

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, 2016, the valuation allowance for deferred tax benefits is not significant. In 2016, the net deferred income tax liability continued to increase primarily as a result of accelerated tax deductions taken for bonus depreciation 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, 2016, 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, 2016 has decreased from December 31, 2015 as shown above.

The following is a reconciliation of the Company’s liability for unrecognized tax benefits for 2016, 2015 and 2014.



	HEI consolidated								Hawaiian Electric consolidated
(in millions)	2016			2015		2014			2016			2015		2014
Unrecognized tax benefits, January 1	$	3.6		$	—	$	0.9		$	3.6		$	—	0.5
Reductions based on tax positions taken during the year	(0.1		)	—		—			(0.1		)	—		—
Additions for tax positions of prior years	0.3			3.6		0.1			0.3			3.6		0.1
Settlements						(1.0		)	—			—		(0.6		)
Unrecognized tax benefits, December 31	$	3.8		$	3.6	$	—		$	3.8		$	3.6	$	—

HEI consolidated. The Company recognizes interest accrued related to unrecognized tax benefits in “Interest expense-other than on deposit liabilities and other bank borrowings” and penalties, if any, in operating expenses. In 2016, 2015 and 2014, the Company recognized approximately $0.2 million, $0.1 million and $(1.7) million in interest (income) expense. The credit adjustments to interest expense in 2014 were primarily due to the resolution of tax issues with the Internal Revenue Service (IRS). The Company had $0.3 million and $0.1 million of interest accrued as of December 31, 2016 and 2015, respectively.

Hawaiian Electric consolidated. The Utilities recognize interest accrued related to unrecognized tax benefits in “Interest expense-other than on deposit liabilities and other bank borrowings” and penalties, if any, in operating expenses. In 2016, 2015 and 2014, the Utilities recognized approximately $0.03 million, $0.1 million and $(0.7) million, respectively, in interest (income) expense. Additional interest expense related to the Utilities' unrecognized tax benefits was recognized at HEI Consolidated because of the Utilities NOL position. The credit adjustments to interest expense in 2014 were primarily due to the resolution of tax issues with the IRS. The Utilities had $0.1 million and $0.1 million of interest accrued as of December 31, 2016 and 2015, respectively.

As of December 31, 2016, the disclosures above present the Company’s and the Utilities' accruals for potential tax liabilities. 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 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.

IRS examinations have been completed and settled through the tax year 2011 and the statute of limitations has tolled for tax year 2012, leaving subsequent years subject to IRS examination. The tax years 2011 and subsequent are still subject to examination by the Hawaii Department of Taxation.

Recent tax developments. 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 continues 50% bonus depreciation through 2017, phases down the percentage to 40% in 2018 and 30% in 2019 and then terminates bonus depreciation thereafter. Tax depreciation is expected to increase by approximately $126 million in 2016 and result in increased accumulated deferred tax liabilities.

Additionally, the “Consolidating Appropriations Act, 2016” extended a variety of energy-related credits that were expired or were 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.