INCOME TAX

The following table provides a reconciliation between income taxes calculated at the statutory federal tax rate and the provision for income taxes reflected in the NW Holdings and NW Natural statements of comprehensive income or loss for December 31:



	NW Holdings									NW Natural
Dollars in thousands	2018			2017			2016			2018			2017			2016
Income taxes at federal statutory rate	$	19,222		$	39,578		$	36,901		$	19,434		$	39,624		$	37,137
Increase (decrease):
State income tax, net of federal	4,927			5,066			4,844			4,982			5,072			4,858
Differences required to be flowed-through by regulatory commissions	1,302			2,357			2,357			1,302			2,357			2,357
Effect of the TCJA	—			(3,376		)	—			—			(2,956		)	—
Deferred tax rate differential post-TCJA	(76		)	—			—			(75		)	—			—
Other, net	(1,184		)	(2,617		)	(1,091		)	(1,184		)	(2,619		)	(1,077		)
Total provision for income taxes	$	24,191		$	41,008		$	43,011		$	24,459		$	41,478		$	43,275
Effective tax rate	26.4		%	36.3		%	40.8		%	26.4		%	36.6		%	40.8		%

The NW Holdings and NW Natural effective income tax rates for 2018 compared to 2017 changed primarily as a result of the lower federal corporate income tax rate provided for by the TCJA. The effective tax rates for 2017 compared to 2016 changed primarily as a result of the lower federal corporate income tax rate provided for by the TCJA and NW Natural's increased benefits from the equity portion of AFUDC and excess tax benefits related to stock based compensation.

The provision for current and deferred income taxes consists of the following at December 31:



	NW Holdings						NW Natural
In thousands	2018		2017		2016		2018		2017		2016
Current
Federal	$	8,953	$	19,345	$	10,042	$	9,127	$	19,304	$	10,158
State	3,785		5,963		3,116		3,846		5,956		3,131
	12,738		25,308		13,158		12,973		25,260		13,289
Deferred
Federal	9,001		13,869		25,473		9,025		14,371		25,581
State	2,452		1,831		4,380		2,461		1,847		4,405
	11,453		15,700		29,853		11,486		16,218		29,986
Income tax provision	$	24,191	$	41,008	$	43,011	$	24,459	$	41,478	$	43,275

The following table summarizes the tax effect of significant items comprising NW Holdings and NW Natural's deferred income tax balances recorded at December 31:



	NW Holdings				NW Natural
In thousands	2018		2017⁽¹⁾		2018		2017
Deferred tax liabilities:
Plant and property	$	288,385	$	278,735	$	303,186	$	296,113
Pension and postretirement obligations	27,135		23,352		27,135		23,352
Income tax regulatory asset	21,403		22,209		21,402		22,209
Other	1,061		2,766		537		2,250
Total deferred income tax liabilities	$	337,984	$	327,062	$	352,260	$	343,924
Deferred income tax assets:
Income tax regulatory liability	$	57,469	$	56,470	$	57,469	$	56,470
Alternative minimum tax credit carryforward	52		66		52		66
Total deferred income tax assets	$	57,521	$	56,536	$	57,521	$	56,536
Total net deferred income tax liabilities	$	280,463	$	270,526	$	294,739	$	287,388

⁽¹⁾ Amounts have been reclassified among categories to conform to current period presentation.

At December 31, 2018 and 2017, regulatory income tax assets of $19.1 million and $21.3 million, respectively, were recorded by NW Natural, a portion of which is recorded in current assets. These regulatory income tax assets primarily represent future rate recovery of deferred tax liabilities, resulting from differences in NGD plant financial statement and tax bases and NGD plant removal costs, which were previously flowed through for rate making purposes and to take into account the additional future taxes, which will be generated by that recovery. These deferred tax liabilities, and the associated regulatory income tax assets, are currently being recovered through customer rates. At December 31, 2018 and 2017, regulatory income tax assets of $2.3 million and $0.9 million, respectively, were recorded by NW Natural, representing future recovery of deferred tax liabilities resulting from the equity portion of AFUDC.

At December 31, 2018 and 2017, deferred tax assets of $57.5 million and $56.5 million, respectively, were recorded by NW Natural representing the future income tax benefit associated with the excess deferred income tax regulatory liability recorded as a result of the lower federal corporate income tax rate provided for by the TCJA. At December 31, 2018 and 2017, regulatory liability balances representing the net tax benefit of the change in deferred taxes as a result of the TCJA of $217.1 million and $213.3 million, respectively, were recorded by NW Natural.

NW Natural’s natural gas utility rates include an allowance to provide for the recovery of the anticipated provision for income taxes incurred as a result of providing regulated services. As a result of the 21 percent federal corporate income tax rate enacted in 2017, NW Natural recorded an additional regulatory liability in 2018 reflecting the estimated net reduction in the provision for income taxes. This revenue deferral is based on the estimated net benefit to customers and includes a gross-up for income taxes. As of December 31, 2018, a regulatory liability of $8.2 million, including accrued interest, was recorded to reflect this estimated revenue deferral.

NW Holdings and NW Natural assess the available positive and negative evidence to estimate if sufficient taxable income will be generated to utilize their respective existing deferred tax assets. Based upon this assessment, NW Holdings and NW Natural determined that it is more likely than not that all of their respective deferred tax assets recorded as of December 31, 2018 will be realized.

Uncertain tax positions are accounted for in accordance with accounting standards that require an assessment of the anticipated settlement outcome of material uncertain tax positions taken in a prior year, or planned to be taken in the current year. Until such positions are sustained, the uncertain tax benefits resulting from such positions would not be recognized. No reserves for uncertain tax positions were recorded as of December 31, 2018, 2017, or 2016.

NW Holdings files a consolidated U.S. federal income tax return that includes NW Natural. Income tax expense is allocated on a separate company basis.

The federal income tax returns for tax years 2014 and earlier are closed by statute. The IRS Compliance Assurance Process (CAP) examination of the 2015, and 2016 tax years have been completed. There were no material changes to these returns as filed. The 2017 and 2018 tax years are currently under IRS CAP examination. Our 2019 CAP application has been accepted by the IRS. Under the CAP program, NW Holdings and NW Natural work with the IRS to identify and resolve material tax matters before the tax return is filed each year.

As of December 31, 2018, income tax years 2015 through 2018 remain open for state examination. The State of Oregon is currently examining the Oregon corporate income tax returns for tax years 2015, 2016, and 2017. No material changes are anticipated as a result of this examination.

U.S. Federal TCJA Matters

On December 22, 2017, the TCJA was enacted and lowered the U.S. federal corporate income tax rate to 21% from the existing maximum rate of 35%, effective for the tax year beginning January 1, 2018. The TCJA included specific provisions related to regulated public utilities that provided for the continued deductibility of interest expense and the elimination of bonus tax depreciation for property both acquired and placed in service on or after January 1, 2018.

Under pre-TCJA law, business interest was generally deductible in the determination of taxable income. The TCJA imposed a new limitation on the deductibility of net business interest expense in excess of approximately 30 percent of adjusted taxable income. Taxpayers operating in the trade or business of a regulated utility are excluded from these new interest expense limitations. Proposed U.S. Treasury Regulations were published in November of 2018 which provide a de minimis rule whereby if 90 percent or more of a taxpayer's adjusted asset basis is allocable to regulated utility activities, then all of the business interest expense of that taxpayer is deemed to be excepted business interest of the regulated utility activity and is thereby not limited under the TCJA. As a result of the de minimis rule, NW Holdings and NW Natural anticipate that business interest expense will not be limited under the TCJA.

The TCJA generally provides for immediate full expensing for qualified property both acquired and placed in service after September 27, 2017 and before January 1, 2023. This would generally provide for accelerated cost recovery for capital investments. However, the definition of qualified property excludes property used in the trade or business of a regulated utility. Proposed U.S. Treasury Regulations were published in August of 2018 which indicated that bonus tax depreciation would not be available for regulated utility activity assets acquired and placed in service by NW Holdings or NW Natural on or after January 1, 2018, but bonus tax depreciation would be available for regulated utility activity assets acquired and placed in service by NW Holdings or NW Natural before January 1, 2018.

The SEC staff previously issued Staff Accounting Bulletin 118, which provided guidance on accounting for the tax effects of the TCJA. SAB 118 provided a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting for the TCJA under ASC 740. To the extent that a company’s accounting for certain income tax effects of the TCJA was incomplete but a reasonable estimate could be made, a company would record a provisional estimate in the financial statements. NW Natural previously disclosed that due to uncertainties with respect to the availability of bonus tax depreciation for regulated utility activity assets under the TCJA that the effects of bonus tax depreciation for assets placed in service after September 27, 2017 but before January 1, 2018 had not been recorded. The determination to exclude all assets placed in service after September 27, 2017 but before January 1, 2018 from bonus tax depreciation was provisional as provided for under SAB 118.

As a result of the Proposed Regulations on bonus tax depreciation published in August of 2018, NW Natural revised the provisional estimate of deferred taxes and income taxes payable to reflect the effects of bonus tax depreciation for assets placed in service after September 27, 2017 but before January 1, 2018. In the third quarter, NW Natural recognized increases to prepaid income tax of $7.4 million, deferred income tax liability of $4.1 million, and regulatory liability of $3.3 million. In the fourth quarter, NW Natural recognized additional increases to prepaid income tax of $0.5 million, deferred income tax liability of $0.3 million, and regulatory liability of $0.2 million. The accounting for income tax effects of the TCJA is now complete.