
Income Tax Expense
Year Ended December 31	2020	2019	2018
Millions
Current Income Tax Expense (a)
Federal	—	—	—
State	—	$0.1	$0.3
Total Current Income Tax Expense	—	$0.1	$0.3
Deferred Income Tax Expense (Benefit)
Federal (b)	$(48.8)	$(27.8)	$(26.2)

State	9.8	21.7	11.0

Investment Tax Credit Amortization	(0.5)	(0.6)	(0.6)
Total Deferred Income Tax Expense (Benefit)	$(39.5)	$(6.7)	$(15.8)
Total Income Tax Expense (Benefit)	$(39.5)	$(6.6)	$(15.5)

(a)For the years ended December 31, 2020, 2019 and 2018, the federal and state current tax expense was minimal due to NOLs which resulted from the bonus depreciation provisions of the Protecting Americans from Tax Hikes Act of 2015, the Tax Increase Prevention Act of 2014 and the American Taxpayer Relief Act of 2012. Federal and state NOLs are being carried forward to offset current and future taxable income.


Reconciliation of Taxes from Federal Statutory
Rate to Total Income Tax Expense
Year Ended December 31	2020		2019		2018
Millions
Income Before Non-Controlling Interest and Income Taxes	$122.1		$178.9		$158.6
Statutory Federal Income Tax Rate	21	%	21	%	21	%
Income Taxes Computed at Statutory Federal Rate	$25.6		$37.6		$33.3
Increase (Decrease) in Tax Due to:
State Income Taxes – Net of Federal Income Tax Benefit	7.7		17.2		8.9


Production Tax Credits	(62.7)		(50.7)		(45.0)
Regulatory Differences – Excess Deferred Tax Benefit (a)	(9.9)		(8.8)		(8.2)
U.S. Water Services Sale of Stock Basis Difference	—		1.7		—
Change in Fair Value of Contingent Consideration	—		—		(0.4)
Non-Controlling Interest	2.7		—		—
Other	(2.9)		(3.6)		(4.1)
Total Income Tax Expense (Benefit)	$(39.5)		$(6.6)		$(15.5)

(a)Excess deferred income taxes are being returned to customers under both the Average Rate Assumption Method and amortization periods as approved by regulators. (See Note 4. Regulatory Matters.)

The effective tax rate was a benefit of 32.4 percent for 2020 (benefit of 3.7 percent for 2019; benefit of 9.8 percent for 2018). The 2020 effective tax rate was primarily impacted by production tax credits. The 2019 effective tax rate was primarily impacted by production tax credits and the gain on sale of U.S. Water Services. The 2018 effective tax rate was primarily impacted by production tax credits.


Deferred Income Tax Assets and Liabilities
As of December 31	2020	2019
Millions
Deferred Income Tax Assets
Employee Benefits and Compensation	$67.6	$49.9
Property-Related	61.4	76.9
NOL Carryforwards	60.7	63.2
Tax Credit Carryforwards	455.7	395.5
Power Sales Agreements	20.1	23.7
Regulatory Liabilities	107.7	116.9
Other	22.4	23.4
Gross Deferred Income Tax Assets	795.6	749.5
Deferred Income Tax Asset Valuation Allowance	(69.9)	(70.0)
Total Deferred Income Tax Assets	$725.7	$679.5
Deferred Income Tax Liabilities
Property-Related	$691.5	$713.4
Regulatory Asset for Benefit Obligations	71.5	54.5
Unamortized Investment Tax Credits	31.1	31.6
Partnership Basis Differences	86.7	49.4
Regulatory Assets	32.6	35.4
Other	8.0	8.0
Total Deferred Income Tax Liabilities	$921.4	$892.3
Net Deferred Income Taxes (a)	$195.7	$212.8


NOL and Tax Credit Carryforwards
As of December 31	2020	2019
Millions
Federal NOL Carryforwards (a)	$197.5	$211.3
Federal Tax Credit Carryforwards	$362.9	$302.5
State NOL Carryforwards (a)	$270.1	$274.8
State Tax Credit Carryforwards (b)	$23.4	$23.4

The federal NOL and tax credit carryforward periods expire between 2029 and 2040. We expect to fully utilize the federal NOL and federal tax credit carryforwards; therefore, no federal valuation allowance has been recognized as of December 31, 2020. The state NOL and tax credit carryforward periods expire between 2024 and 2045. We have established a valuation allowance against certain state NOL and tax credits that we do not expect to utilize before their expiration.


Gross Unrecognized Income Tax Benefits	2020	2019	2018
Millions
Balance at January 1	$1.4	$1.6	$1.7
Additions for Tax Positions Related to the Current Year	0.1	0.1	0.1
Additions for Tax Positions Related to Prior Years	—	0.1	0.1
Reductions for Tax Positions Related to Prior Years	(0.1)	(0.4)	(0.2)

Lapse of Statute	—	—	(0.1)
Balance as of December 31	$1.4	$1.4	$1.6

Unrecognized tax benefits are the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the “more-likely-than-not” criteria. The unrecognized tax benefit balance includes permanent tax positions which, if recognized would affect the annual effective income tax rate. In addition, the unrecognized tax benefit balance includes temporary tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. A change in the period of deductibility would not affect the effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. The gross unrecognized tax benefits as of December 31, 2020, included $0.6 million of net unrecognized tax benefits which, if recognized, would affect the annual effective income tax rate.

As of December 31, 2020, we had no accrued interest (none as of December 31, 2019, and 2018) related to unrecognized tax benefits included on the Consolidated Balance Sheet due to our NOL carryforwards. We classify interest related to unrecognized tax benefits as interest expense and tax-related penalties in operating expenses on the Consolidated Statement of Income. Interest expense related to unrecognized tax benefits on the Consolidated Statement of Income was immaterial in 2020, 2019 and 2018. There were no penalties recognized in 2020, 2019 or 2018. The unrecognized tax benefit amounts have been presented as reductions to the tax benefits associated with NOL and tax credit carryforwards on the Consolidated Balance Sheet.

ALLETE and its subsidiaries file a consolidated federal income tax return as well as combined and separate state income tax returns in various jurisdictions. ALLETE has no open federal or state audits, and is no longer subject to federal examination for years before 2017 or state examination for years before 2016.