6. Income Taxes

Reconciliations of income taxes for the periods ended June 30 are as follows.



(PPL)
	Three Months						Six Months
	2018			2017			2018			2017
Federal income tax on Income Before Income Taxes at statutory tax rate (a)	$	138		$	129		$	257		$	315
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	10			10			25			23
Valuation allowance adjustments	5			—			12			5
Impact of lower U.K. income tax rates relative to U.S. income tax rates (a)	(6		)	(40		)	(13		)	(88		)
U.S. income tax on foreign earnings - net of foreign tax credit (a) (b)	—			(7		)	1			(16		)
Federal and state tax reserve adjustments	3			—			3			—
Impact of the U.K. Finance Acts	(2		)	(6		)	(3		)	(9		)
Depreciation and other items not normalized	(2		)	(2		)	(4		)	(5		)
Amortization of excess deferred income taxes (a)	(9		)	—			(19		)	—
Deferred tax impact of state tax reform (c)	9			—			9			—
Interest benefit on U.K. financing entities	(4		)	(4		)	(9		)	(8		)
Stock-based compensation	—			(4		)	1			(7		)
Other	—			—			(1		)	(5		)
Total increase (decrease)	4			(53		)	2			(110		)
Total income taxes	$	142		$	76		$	259		$	205


(a)	The U.S. federal corporate income tax rate was reduced from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.


(b)	Lower income taxes in 2017 primarily due to the tax benefit of accelerated pension contributions made in the first quarter of 2017. The related tax benefit was recognized over the annual period as a result of utilizing an estimated annual effective tax rate.


(c)	During the second quarter of 2018, LKE recorded deferred income tax expense, primarily associated with LKE's non-regulated entities, due to the Kentucky corporate income tax rate reduction from 6% to 5%, as enacted by HB 487, effective January 1, 2018.



(PPL Electric)
	Three Months						Six Months
	2018			2017			2018			2017
Federal income tax on Income Before Income Taxes at statutory tax rate (a)	$	22		$	44		$	63		$	88
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	8			9			24			17
Depreciation and other items not normalized	(1		)	(2		)	(3		)	(4		)
Amortization of excess deferred income taxes (a)	(3		)	—			(8		)	—
Stock-based compensation	—			(3		)	—			(5		)
Other	1			(1		)	—			(1		)
Total increase (decrease)	5			3			13			7
Total income taxes	$	27		$	47		$	76		$	95


(a)	The U.S. federal corporate income tax rate was reduced from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.



(LKE)
	Three Months						Six Months
	2018			2017			2018			2017
Federal income tax on Income Before Income Taxes at statutory tax rate (a)	$	25		$	49		$	63		$	107
Increase (decrease) due to:
State income taxes, net of federal income tax benefit (b)	3			5			11			11
Deferred tax impact of state tax reform (c)	9			—			9			—
Amortization of excess deferred income taxes (a)	(6		)	—			(11		)	—
Other	—			(1		)	(2		)	(2		)
Total increase (decrease)	6			4			7			9
Total income taxes	$	31		$	53		$	70		$	116


(a)	The U.S. federal corporate income tax rate was reduced from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.


(b)	The Kentucky corporate income tax rate was reduced from 6% to 5%, as enacted by HB 487, effective January 1, 2018.


(c)	During the second quarter of 2018, LKE recorded deferred income tax expense, primarily associated with LKE's non-regulated entities, due to the Kentucky corporate income tax rate reduction from 6% to 5%, as enacted by HB 487, effective January 1, 2018.



(LG&E)
	Three Months					Six Months
	2018			2017		2018			2017
Federal income tax on Income Before Income Taxes at statutory tax rate (a)	$	13		$	24	$	33		$	55
Increase (decrease) due to:
State income taxes, net of federal income tax benefit (b)	2			3		6			6
Amortization of excess deferred income taxes (a)	(3		)	—		(5		)	—
Other	—			—		(1		)	(1		)
Total increase (decrease)	(1		)	3		—			5
Total income taxes	$	12		$	27	$	33		$	60


(a)	The U.S. federal corporate income tax rate was reduced from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.


(b)	The Kentucky corporate income tax rate was reduced from 6% to 5%, as enacted by HB 487, effective January 1, 2018.



(KU)
	Three Months						Six Months
	2018			2017			2018			2017
Federal income tax on Income Before Income Taxes at statutory tax rate (a)	$	16		$	32		$	39		$	67
Increase (decrease) due to:
State income taxes, net of federal income tax benefit (b)	2			3			7			7
Amortization of excess deferred income taxes (a)	(3		)	—			(6		)	—
Other	(1		)	(1		)	(2		)	(1		)
Total increase (decrease)	(2		)	2			(1		)	6
Total income taxes	$	14		$	34		$	38		$	73


(a)	The U.S. federal corporate income tax rate was reduced from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.


(b)	The Kentucky corporate income tax rate was reduced from 6% to 5%, as enacted by HB 487, effective January 1, 2018.

Kentucky State Tax Reform (All Registrants)

HB 487, which became law on April 27, 2018, provides for significant changes to the Kentucky tax code including (1) adopting mandatory combined reporting for corporate members of unitary business groups for taxable years beginning on or after January 1, 2019 (members of a unitary business group may make an eight-year binding election to file consolidated corporate income tax returns with all members of their federal affiliated group) and (2) a reduction in the Kentucky corporate income tax rate from 6% to 5% for taxable years beginning after December 31, 2017. LKE recognized a deferred tax charge of $9 million in the second quarter of 2018 primarily associated with the remeasurement of non-regulated accumulated deferred income tax balances.

As indicated in Note 1 in the Registrants' 2017 Form 10-K, LG&E’s and KU’s accounting for income taxes is impacted by rate regulation. Therefore, reductions in regulated accumulated deferred income tax balances due to the reduction in the Kentucky corporate income tax rate to 5% under the provisions of HB 487 may result in amounts previously collected from utility customers for these deferred taxes to be refundable to such customers in future periods. In the second quarter of 2018, LG&E and KU recorded the impact of the reduced tax rate, related to the remeasurement of deferred income taxes, as an increase in regulatory liabilities of $16 million and $19 million. LG&E and KU continue to evaluate other impacts of Kentucky state tax reform along with the associated regulatory considerations. PPL is evaluating the impact, if any, of unitary or elective consolidated income tax reporting on all its Registrants.

U.S. Tax Reform (All Registrants)

On August 1, 2018, the Department of Treasury and the IRS issued proposed regulations under Internal Revenue Code Section 965 to provide guidance relating to the transition tax upon the mandatory deemed repatriation of certain deferred foreign earnings. On August 3, 2018, the Department of Treasury and the IRS also issued proposed regulations on the new 100 percent depreciation deduction effective for assets placed in service after September 27, 2017. The Registrants are currently reviewing the proposed regulations to determine what, if any, impact the newly issued guidance may have on their financial statements.