Income Taxes

Except to the extent noted below, Note 8 to the consolidated financial statements included in PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 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:



	Three Months Ended March 31
	2019		2018
Federal statutory rate	21.0	%	21.0	%
State tax (net of federal tax effect)	3.7		3.7
Increases (decreases) in tax from:
Wind PTCs	(7.5	)	—
Regulatory differences ^(a)	(3.9	)	(1.5	)
Other tax credits and allowances (net)	(1.2	)	(1.0	)
Other (net)	—		0.4
Effective income tax rate	12.1	%	22.6	%

^(a)

Regulatory differences for income tax purposes primarily include the ARAM, ARAM deferral and AFUDC - Equity. ARAM is a method to flow back excess deferred taxes to customers. ARAM has been deferred when regulatory treatment has not been established. As Xcel Energy 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 — PSCO 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 federal income tax returns expire as follows:



Tax Year(s)		Expiration
2009 - 2013		October 2019
2014 - 2016		September 2020
2017		September 2021

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 NOL and ETR. Xcel Energy filed a protest with the IRS. As of March 31, 2019, the case has been forwarded to Office of 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.

In the fourth quarter of 2018, the IRS began an audit of tax years 2014 - 2016. As of March 31, 2019 no adjustments have been proposed.

State Audits — PSCo is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of March 31, 2019, PSCo’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2009. There are currently no state income tax audits in progress.

Unrecognized 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)	March 31, 2019		Dec. 31, 2018
Unrecognized tax benefit — Permanent tax positions	$	5.7	$	5.4
Unrecognized tax benefit — Temporary tax positions	4.8		4.9
Total unrecognized tax benefit	$	10.5	$	10.3

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



(Millions of Dollars)	March 31, 2019			Dec. 31, 2018
NOL and tax credit carryforwards	$	(6.5	)	$	(5.6	)

Net deferred tax liability associated with the unrecognized tax benefit amounts and related NOLs and tax credits carryforwards were $3.0 million and $2.0 million for March 31, 2019 and Dec. 31, 2018, respectively.

As the IRS Appeals and federal audit progress and state audits resume, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $8.7 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.

Interest payable related to unrecognized tax benefits:



(Millions of Dollars)	March 31, 2019			Dec. 31, 2018
Payable for interest related to unrecognized tax benefits at beginning of period	$	(0.7	)	$	(0.3	)
Interest expense related to unrecognized tax benefits	(0.1		)	(0.4		)
Payable for interest related to unrecognized tax benefits at end of period	$	(0.8	)	$	(0.7	)

No amounts were accrued for penalties related to unrecognized tax benefits as of March 31, 2019 or Dec. 31, 2018.