Income Taxes

12 Months Ended

Dec. 31, 2020

Federal Tax Loss Carryback Claims — In 2020, Xcel Energy identified certain expenses related to tax years 2009 - 2011 that qualify for an extended carryback claim. NSP-Wisconsin is not expected to accrue any income tax expense related to this adjustment.

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


Tax Year(s)						Expiration
2014 - 2016						July 2021

Additionally, the statute of limitations related to the federal tax loss carryback claim referenced above has been extended. 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.

In 2017, the IRS concluded the audit of tax years 2012 and 2013 and proposed an adjustment that would impact Xcel Energy’s NOL and ETR. Xcel Energy file a protest with the IRS. In April 2020, Xcel Energy and Appeals reached an agreement and no material adjustments were required.

In 2018, the IRS began an audit of tax years 2014 - 2016. In July 2020, Xcel Energy and the IRS reached an agreement and the related benefit was recognized.

State Audits — NSP-Wisconsin is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Dec. 31, 2020, NSP-Wisconsin’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2014. In 2018, Wisconsin began an audit of tax years 2014 - 2016. As of Dec. 31, 2020 no material adjustments have been proposed.

Unrecognized Tax Benefits — 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 to the taxing authority to an earlier period.

Unrecognized tax benefits — permanent vs. temporary:


(Millions of Dollars)	Dec. 31, 2020		Dec. 31, 2019
Unrecognized tax benefit — Permanent tax positions	$	1	$	2
Unrecognized tax benefit — Temporary tax positions	1		1
Total unrecognized tax benefit	$	2	$	3

Changes in unrecognized tax benefits:


(Millions of Dollars)	2020		2019		2018
Balance at Jan. 1	$	3	$	3	$	2
Additions for tax positions of prior years	1		—		1
Reductions for tax positions of prior years	(2)		—		—
Balance at Dec. 31	$	2	$	3	$	3

Unrecognized tax benefits were reduced by tax benefits associated with NOL and tax credit carryforwards:


(Millions of Dollars)	Dec. 31, 2020		Dec. 31, 2019
NOL and tax credit carryforwards	$	(2)	$	(2)

Net deferred tax liability associated with the unrecognized tax benefit amounts and related NOLs and tax credits carryforwards were $1 million for both Dec. 31, 2020 and Dec. 31, 2019.

As the IRS audits resume and state audits progress, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $1 million in the next 12 months.

Payable for interest related to unrecognized tax benefits is partially offset by the interest benefit associated with NOL and tax credit carryforwards. Payables for interest related to unrecognized tax benefits at Dec. 31, 2020, 2019 and 2018 were not material. No amounts were accrued for penalties related to unrecognized tax benefits as of Dec. 31, 2020, 2019 or 2018.

Other Income Tax Matters — NOL amounts represent the tax loss that is carried forward and tax credits represent the deferred tax asset. NOL and tax credit carryforwards as of Dec. 31 were as follows:


(Millions of Dollars)	2020		2019
Federal tax credit carryforwards	$	7	$	5
State NOL carryforward	2		2

Federal carryforward periods expire between 2031 and 2040 and state carryforward periods expire between 2031 and 2035.

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.

Effective income tax rate for years ended Dec. 31:


	2020		2019 (a)		2018 (a)
Federal statutory rate	21.0	%	21.0	%	21.0	%
State income tax on pretax income, net of federal tax effect	6.2		6.2		6.2
Increases (decreases) in tax from:
Plant regulatory differences (b)	(19.3)		(5.2)		(1.5)
Amortization of excess nonplant deferred taxes	(12.6)		—		—
Other tax credits, net NOL & tax credit allowances	(1.5)		(1.8)		(0.8)
Change in unrecognized tax benefits	(0.8)		0.7		0.4
Reversal of prior regulatory differences	—		(3.6)		—
Other, net	—		(0.5)		(0.7)
Effective income tax rate	(7.0)	%	16.8	%	24.6	%

(a)Prior periods have been reclassified to conform to current year presentation.

(b)Regulatory differences for income tax primarily relate to the credit of excess deferred taxes to customers through the average rate assumption method. Income tax benefits associated with the credit of excess deferred credits are offset by corresponding revenue reductions.

Components of income tax expense for years ended Dec. 31:


(Millions of Dollars)	2020		2019		2018
Current federal tax expense	$	25	$	6	$	8
Current state tax expense	6		5		2
Current change in unrecognized tax (benefit) expense	(1)		1		—
Deferred federal tax (benefit) expense	(37)		3		16
Deferred state tax expense	1		2		7
Deferred ITCs	(1)		(1)		(1)
Total income tax (benefit) expense	$	(7)	$	16	$	32

Components of deferred income tax expense as of Dec. 31:


(Millions of Dollars)	2020		2019		2018
Deferred tax expense excluding items below	$	9	$	17	$	24
Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities	(45)		(12)		(1)
Deferred tax (benefit) expense	$	(36)	$	5	$	23

Components of net deferred tax liability as of Dec. 31:


(Millions of Dollars)	2020		2019 (a)
Deferred tax liabilities:
Difference between book and tax bases of property	$	324	$	304
Regulatory assets	32		50
Pension expense	12		14
Other	9		7
Total deferred tax liabilities	$	377	$	375

Deferred tax assets:
Regulatory liabilities	$	41	$	47
Tax credit carryforward	8		5
Environmental remediation	6		6
Other employee benefits	4		4
Rate refund	4		9
Deferred ITCs	3		3
Other	4		3
Total deferred tax assets	$	70	$	77
Net deferred tax liability	$	307	$	298

(a) Prior periods have been reclassified to conform to current year presentation.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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