Income Taxes

3 Months Ended

Mar. 31, 2020

6. Income Taxes

Note 7 to the financial statements included in SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2019 represents, in all material respects, the current status of other income tax matters except to the extent noted below, and are incorporated herein by reference.

The following table reconciles the difference between the statutory rate and the ETR:



	Three Months Ended March 31,
	2020		2019
Federal statutory rate	21.0	%	21.0	%
State tax (net of federal tax effect)	2.3		2.1
Decreases in tax from:
Wind PTCs	(35.7	)	—
Plant regulatory differences ^(a)	(6.1	)	(4.6	)
Other tax credits, net of NOL & tax credit allowances	(0.7	)	(0.6	)
Other (net)	(0.7	)	(0.7	)
Effective income tax rate	(19.9	)%	17.2	%


^(a)	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.

Federal Audits — SPS 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 Years		Expiration
2009 - 2013		September 2020
2014 - 2016		June 2021

In 2015, the IRS commenced an examination of tax years 2012 and 2013. 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 filed a protest with the IRS. As of March 31, 2020, the case has been forwarded to the 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 2018, the IRS began an audit of tax years 2014 - 2016. As of March 31, 2020 no adjustments have been proposed.

State Audits — SPS is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of March 31, 2020, SPS’ earliest open tax year 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 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, 2020		Dec. 31, 2019
Unrecognized tax benefit — Permanent tax positions	$	3.8	$	3.7
Unrecognized tax benefit — Temporary tax positions	1.5		1.5
Total unrecognized tax benefit	$	5.3	$	5.2

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



(Millions of Dollars)	March 31, 2020			Dec. 31, 2019
NOL and tax credit carryforwards	$	(4.6	)	$	(4.4	)

Net deferred tax liability associated with the unrecognized tax benefit amounts and related NOLs and tax credits carryforwards were $1.6 million and $1.4 million at March 31, 2020 and Dec. 31, 2019, 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 $3.7 million in the next 12 months.

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 March 31, 2020 or Dec. 31, 2019.