
(10)	Income Taxes

MidAmerican Energy's income tax benefit consists of the following for the years ended December 31 (in millions):



	2013			2012			2011
Current:
Federal	$	(196	)	$	(256	)	$	(474	)
State	(10		)	(21		)	(6		)
	(206		)	(277		)	(480		)
Deferred:
Federal	101			200			453
State	3			(20		)	11
	104			180			464

Investment tax credits	(1		)	(2		)	(1		)
Total	$	(103	)	$	(99	)	$	(17	)

A reconciliation of the federal statutory income tax rate to MidAmerican Energy's effective income tax rate applicable to income before income tax benefit is as follows for the years ended December 31:



	2013		2012		2011

Federal statutory income tax rate	35	%	35	%	35	%
Income tax credits	(70	)	(56	)	(32	)
State income tax, net of federal income tax benefit	(2	)	(10	)	1
Income tax method changes	—		(6	)	(10	)
Effects of ratemaking	(3	)	—		—
Other, net	(2	)	(2	)	—
Effective income tax rate	(42	)%	(39	)%	(6	)%

Income tax credits relate primarily to production tax credits earned by MidAmerican Energy's wind-powered generating facilities. Federal renewable electricity production tax credits are earned as energy from qualifying wind-powered generating facilities is produced and sold and are based on a per-kilowatt hour rate pursuant to the applicable federal income tax law. Wind-powered generating facilities are eligible for the credits for 10 years from the date the qualifying generating facilities are placed in service.

MidAmerican Energy's income tax benefit for the year ended December 31, 2012, reflects $16 million of federal income tax benefits recognized in connection with an income tax method change for income tax years prior to 2012 related to repair costs for its regulated utility electric transmission and distribution assets based on guidance published by the Internal Revenue Service. MidAmerican Energy's income tax benefit for the year ended December 31, 2011, reflects $35 million of federal income tax benefits in conjunction with the partial resolution of certain tax issues related to tax positions taken for income tax method changes in 2009 and 2010 associated with the determination of current income tax deductions for repair costs and administrative and general costs related to certain of MidAmerican Energy's regulated utility assets.

The income tax method changes result in current deductibility for applicable repair and administrative and general costs, which are capitalized for book purposes. MidAmerican Energy retroactively applied the method changes and deducted amounts related to prior years' costs on the tax return that includes the year of change. State utility rate regulation in Iowa requires that the tax effect of certain temporary differences be flowed through immediately to customers. Therefore, certain deferred amounts that would otherwise have been recognized in income tax expense have been included as changes in regulatory assets in recognition of MidAmerican Energy's ability to recover increased tax expense when such temporary differences reverse. This treatment of such temporary differences impacts income tax expense and effective income tax rates from year to year.

MidAmerican Energy's net deferred income tax liability consists of the following as of December 31 (in millions):



	2013			2012
Deferred income tax assets:
Regulatory liabilities	$	351		$	311
Employee benefits	61			83
Derivative contracts	9			32
Asset retirement obligations	172			132
Other	60			76
Total deferred income tax assets	653			634

Deferred income tax liabilities:
Depreciable property	(2,599		)	(2,422		)
Regulatory assets	(304		)	(353		)
Other	(40		)	(26		)
Total deferred income tax liabilities	(2,943		)	(2,801		)

Net deferred income tax liability	$	(2,290	)	$	(2,167	)

Reflected as:
Current assets - other	$	4		$	—
Current liabilities - other	—			(3		)
Deferred income taxes	(2,294		)	(2,164		)
	$	(2,290	)	$	(2,167	)

As of December 31, 2013, MidAmerican Energy has available $20 million of state carryforwards, principally related to $426 million of net operating losses, that expire at various intervals between 2014 and 2032.

The United States Internal Revenue Service has effectively settled its examination of MEHC's income tax returns through December 2009, including components related to MidAmerican Energy. In addition, state jurisdictions have closed their examinations of MidAmerican Energy's income tax returns through at least February 9, 2006, including Iowa and Illinois, which are closed through December 31, 2012, and December 31, 2008, respectively.

A reconciliation of the beginning and ending balances of MidAmerican Energy's net unrecognized tax benefits is as follows for the years ended December 31 (in millions):



	2013			2012

Beginning balance	$	36		$	46
Additions based on tax positions related to the current year	10			10
Additions for tax positions of prior years	3			25
Reductions based on tax positions related to the current year	(10		)	(16		)
Reductions for tax positions of prior years	(8		)	(23		)
Statute of limitations	(2		)	(3		)
Settlements	—			(2		)
Interest and penalties	—			(1		)
Ending balance	$	29		$	36

As of December 31, 2013 and 2012, substantially all of MidAmerican Energy's unrecognized tax benefits of $29 million and $36 million, respectively, if recognized, would have an impact on the effective tax rate. The unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain but for which there is uncertainty as to the timing of such deductibility.