Income Taxes

Except to the extent noted below, Note 6 to the consolidated financial statements included in the NSP-Wisconsin Annual Report on Form 10-K for the year ended Dec. 31, 2017, as amended by the NSP-Wisconsin Amendment No. 1 to its Annual Report on Form 10-K/A, filed with the SEC on July 27, 2018, appropriately represents, in all material respects, the current status of other income tax matters, and are incorporated herein by reference.

Total income tax expense from operations differs from the amount computed by applying the statutory federal income tax rate to income before income tax expense. The following reconciles such differences:



	Nine Months Ended Sept. 30
	2018		2017
Federal statutory rate	21.0	%	35.0	%
State tax (net of federal tax effect)	6.2		5.1
Increases (decreases) in tax from:
Regulatory differences - ARAM ^(a)	(4.5	)	(0.1	)
Regulatory differences - ARAM deferral ^(b)	4.4		—
Regulatory difference - reversal of prior quarters' ARAM deferral ^(b)	(0.1	)	—
Regulatory differences - other utility plant items	(1.4	)	(1.3	)
Tax credits (net of federal income tax expense)	(0.8	)	(1.0	)
Other (net)	(0.1	)	(2.2	)
Effective income tax rate	24.7	%	35.5	%


^(a)	The average rate assumption method (ARAM); a method to flow back excess deferred taxes to customers.


^(b)	ARAM has been deferred when regulatory treatment has not been established. As NSP-Wisconsin received direction from its regulatory commissions regarding the return of excess deferred taxes to customers, the ARAM deferral was reversed. This resulted in a reduction to tax expense with a corresponding reduction to revenue.

Federal Audits — NSP-Wisconsin is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. The statute of limitations applicable to Xcel Energy’s federal income tax returns expire as follows:



Tax Year(s)		Expiration
2009 - 2014		October 2019
2015		September 2019
2016		September 2020

In 2012, the Internal Revenue Service (IRS) commenced an examination of tax years 2010 and 2011, including the 2009 carryback claim. In 2017 Xcel Energy and the Office of Appeals (Appeals) reached an agreement and the benefit related to the agreed upon portions was recognized. NSP-Wisconsin did not accrue any income tax benefit related to this adjustment. In the second quarter of 2018, the Joint Committee on Taxation completed its review and took no exception to the agreement. As a result, the remaining unrecognized tax benefit was released and recorded as a payable to the IRS.

In the third quarter of 2015, the IRS commenced an examination of tax years 2012 and 2013. In the third quarter of 2017, the IRS concluded the audit of tax years 2012 and 2013 and proposed an adjustment that would impact Xcel Energy’s net operating loss (NOL) and effective tax rate (ETR). Xcel Energy filed a protest with the IRS. As of Sept. 30, 2018, the case has been forwarded to Appeals and Xcel Energy has recognized its best estimate of income tax expense that will result from a final resolution of this issue; however, the outcome and timing of a resolution is unknown.

State Audits — NSP-Wisconsin is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Sept. 30, 2018, NSP-Wisconsin’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2012. In 2016, the state of Wisconsin began an audit of years 2012 and 2013. The audit concluded in the third quarter of 2018 with no material adjustments. There were no other state income tax audits in progress.

Unrecognized Benefits — The unrecognized tax benefit balance includes permanent tax positions, which if recognized would affect the annual ETR. 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 ETR but would accelerate the payment of cash to the taxing authority to an earlier period.

A reconciliation of the amount of unrecognized tax benefit is as follows:



(Millions of Dollars)	Sept. 30, 2018		Dec. 31, 2017
Unrecognized tax benefit — Permanent tax positions	$	2.0	$	1.4
Unrecognized tax benefit — Temporary tax positions	0.9		1.0
Total unrecognized tax benefit	$	2.9	$	2.4

The unrecognized tax benefit amounts were reduced by the tax benefits associated with NOL and tax credit carryforwards. The amounts of tax benefits associated with NOL and tax credit carryforwards are as follows:



(Millions of Dollars)	Sept. 30, 2018			Dec. 31, 2017
NOL and tax credit carryforwards	$	(2.6	)	$	(1.9	)

It is reasonably possible that NSP-Wisconsin’s amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS Appeals progresses and audit resumes, and state audits resume. As the IRS Appeals progresses and the IRS audit resumes, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $2 million.

Payables for interest related to unrecognized tax benefits were not material and no amounts were accrued for penalties related to unrecognized tax benefits as of Sept. 30, 2018 or Dec. 31, 2017.