Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law. The Act significantly changes U.S. tax law. The Act reduces the U.S. corporate income tax rate from a maximum of 35% to 21% for all corporations, effective January 1, 2018, and makes certain changes to U.S. taxation of income earned by foreign subsidiaries, capital expenditures, interest expense and various other items.

As a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, we re-measured our net deferred tax liabilities at December 31, 2017 and recognized a provisional tax benefit of $555 million in our consolidated statement of operations for the year ended December 31, 2017.

On December 22, 2017, the SEC staff addressed the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. We have provisionally recognized the tax impacts related to the re-measurement of deferred tax assets and liabilities in the amount noted above in our consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from our provisional amount due to additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Act. The change from our current provisional estimates will be reflected in our future statements of operations and could be material. We expect to complete the accounting by the time we file our 2017 U.S. corporate income tax return in the fourth quarter of 2018, although we cannot assure you of this.

We are included in the consolidated federal income tax returns and the combined state income tax returns of CenturyLink. CenturyLink treats our consolidated results as if we were a separate taxpayer. The policy requires us to settle our tax liabilities through a change in our general intercompany obligation based upon our separate return taxable income, which is reflected in advances to affiliates on our consolidated balance sheets. Because we are included in the consolidated federal income tax returns and the combined state income tax returns of CenturyLink, any tax audits involving CenturyLink will also involve us. We, or at least one of our subsidiaries, file income tax returns in various states jurisdictions.

With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2008. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carryforwards are available.

As of December 31, 2017 and 2016, we had no liability for interest related to uncertain tax positions. Additionally, we did not record interest expense related to uncertain tax positions for the years ended December 31, 2017, 2016 and 2015. We made no accrual for penalties related to income tax positions.

Income Tax Expense

The components of the income tax expense from continuing operations are as follows:



	Years Ended December 31,
	2017			2016		2015
	(Dollars in millions)
Income tax expense:
Current:
Federal and foreign	$	777		686		734
State and local	130			115		114
Total current	907			801		848
Deferred:
Federal and foreign	(736		)	(103	)	(170	)
State and local	(37		)	(20	)	(19	)
Total deferred	(773		)	(123	)	(189	)
Income tax expense	$	134		678		659

The effective income tax rate for continuing operations differs from the statutory tax rate as follows:



	Years Ended December 31,
	2017		2016		2015
	(in percent)
Effective income tax rate:
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State income taxes-net of federal effect	3.4	%	3.5	%	3.6	%
Tax reform	(31.0	)%	—	%	—	%
Other	0.1	%	—	%	(0.6	)%
Effective income tax rate	7.5	%	38.5	%	38.0	%

The effective tax rate for the year ended December 31, 2017 reflects the benefit of $555 million from the re-measurement of deferred taxes as noted above.

Deferred Tax Assets and Liabilities

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:



	As of December 31,
	2017			2016
	(Dollars in millions)
Deferred tax assets and liabilities:
Deferred tax liabilities:
Property, plant and equipment	$	(933	)	(1,384	)
Intangibles assets	(553		)	(1,088	)
Receivable from an affiliate due to pension plan participation	—			(452	)
Total deferred tax liabilities	(1,486		)	(2,924	)
Deferred tax assets:
Payable to affiliate due to post-retirement benefit plan participation	366			954
Other	127			209
Gross deferred tax assets	493			1,163
Less valuation allowance on deferred tax assets	(8		)	(12	)
Net deferred tax assets	485			1,151
Net deferred tax liabilities	$	(1,001	)	(1,773	)

At December 31, 2017, we have established a valuation allowance of $8 million as it is not more likely than not that this amount of deferred tax assets will be realized. There was a $4 million change to the valuation allowance in 2017, all attributable to tax reform.

Other Income Tax Information

We paid $907 million, $801 million and $848 million to QSC related to income taxes in the years ended December 31, 2017, 2016 and 2015, respectively.