On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the Act) was signed into law. The Act includes several business provisions including deferral in employer payroll taxes and an employee retention payroll tax credit. On December 27, 2020, the Consolidated Appropriations Act, 2021 (the 2021 Act) was signed into law. The 2021 Act provides for modifications and expansion of the employee retention payroll tax credit enacted under the CARES Act. The 2021 Act also extends the solar ITC for two years. These Acts did not have a material impact to TEC’s financial statements.

On September 12, 2019, the state of Florida issued a corporate tax rate reduction from 5.5% to 4.46% effective January 1, 2019 through December 31, 2021. The impact to TEC earnings and revaluation of TEC state deferred income tax balance was not material.

TEC is included in a consolidated U.S. federal income tax return with EUSHI and its subsidiaries. TEC’s income tax expense is based upon a separate return method, modified for the benefits-for-loss allocation in accordance with respective tax sharing agreements of TECO Energy and EUSHI. To the extent that TEC’s cash tax positions are settled differently than the amount reported as realized under the tax sharing agreement, the difference is accounted for as either a capital contribution or a distribution.

In 2020, 2019 and 2018, TEC recorded net tax provisions of $82 million, $77 million and $81 million, respectively.

(millions)
For the year ended December 31,	2020			2019			2018
Current income taxes
Federal	$	35		$	56		$	72
State		(7	)		6			10
Deferred income taxes
Federal		32			7			(13	)
State		29			13			13
Investment tax credits amortization		(7	)		(5	)		(1	)
Total income tax expense	$	82		$	77		$	81

For the three years presented, the overall effective tax rate differs from the U.S. federal statutory rate as presented below:

(millions)
For the year ended December 31,	2020			2019			2018
Income before provision for income taxes	$	506		$	447		$	422
Federal statutory income tax rates		21	%		21	%		21	%
Income taxes, at statutory income tax rate		106			94			89
Increase (decrease) due to
State income tax, net of federal income tax		17			15			19
Excess deferred tax amortization		(26	)		(25	)		(24	)
ITC amortization		(7	)		(5	)		(1	)
AFUDC-equity		(6	)		(2	)		(2	)
Tax credits		(8	)		(1	)		(2	)
Other		6			1			2
Total income tax expense on consolidated statements of income	$	82		$	77		$	81
Income tax expense as a percent of income before income taxes		16.2	%		17.2	%		19.2	%

Deferred taxes result from temporary differences in the recognition of certain liabilities or assets for tax and financial reporting purposes. The principal components of TEC’s deferred tax assets and liabilities recognized in the balance sheet are as follows:

(millions)
As of December 31,	2020		2019
Deferred tax liabilities ⁽¹⁾
Property related	$	1,121	$	1,036
Pension and postretirement benefits		116		111
Total deferred tax liabilities		1,237		1,147
Deferred tax assets ⁽¹⁾
Loss and credit carryforwards ⁽²⁾		301		243
Medical benefits		27		27
Insurance reserves		16		16
Pension and postretirement benefits		66		63
Capitalized energy conservation assistance costs		18		17
Other		26		23
Total deferred tax assets		454		389
Total deferred tax liability, net	$	783	$	758

(1)

Certain property related assets and liabilities have been netted.

(2)

Deferred tax assets for net operating loss and tax credit carryforwards have been reduced by unrecognized tax benefits of $9 million.

At December 31, 2020, TEC had cumulative unused federal and Florida NOLs for income tax purposes of $340 million and $88 million, respectively, expiring between 2032 and 2037. TEC has unused general business credits of $242 million expiring between 2027 and 2040, of which $222 million relate to ITCs expiring between 2034 and 2040. As a result of the Merger with Emera, TECs NOLs and credits will be utilized by EUSHI, in accordance with the benefits-for-loss allocation which provide that tax attributes are utilized by the consolidated tax return group of EUSHI.

TEC accounts for uncertain tax positions as required by U.S. GAAP. This guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Authoritative guidance related to accounting for uncertainty in income taxes requires an enterprise to recognize in its financial statements the best estimate of the impact of a tax position by determining if the weight of the available evidence indicates that it is more likely than not, based solely on the technical merits, that the position will be sustained upon examination, including resolution of any related appeals and litigation processes.

The following table provides details of the change in unrecognized tax benefits as follows:

(millions)	2020			2019		2018
Balance at January 1,	$	9		$	8	$	8
Decreases due to tax positions related to prior year		(2	)	0		0
Increases due to tax positions related to prior year	1			1		0
Increases due to tax positions related to current year	1			0		0
Balance at December 31,	$	9		$	9	$	8

As of December 31, 2020 and 2019, TEC’s uncertain tax positions for federal R&D tax credits were $9 million, all of which was recorded as a reduction of deferred income tax assets for tax credit carryforwards. TEC’s unrecognized federal tax benefits decreased in the fourth quarter of 2020 by approximately $2 million due to an adjustment related to its 2016 federal R&D credits issue with IRS Appeals. The recognition of these tax benefits decreased the effective tax rate resulting in an income tax benefit of approximately $2 million. TEC expects to be effectively settled with this issue early 2021. TEC had $9 million of unrecognized tax benefits at December 31, 2020 and 2019 that, if recognized, would reduce TEC’s effective tax rate.

TEC recognizes interest accruals related to uncertain tax positions in “Other income” or “Interest expense”, as applicable, and penalties in “Operation and maintenance expense” in the Consolidated Statements of Income. In 2020, 2019 and 2018, TEC did not recognize any pre-tax charges (benefits) for interest. Additionally, TEC did not have any accrued interest or amounts recorded for penalties at December 31, 2020, 2019 and 2018.

The short tax year ending June 30, 2016 is currently under examination by the IRS under its Compliance Assurance Program (CAP). EUSHI’s 2016 consolidated federal income tax return, which includes TEC’s short tax year ending December 31, 2016, is also currently under examination by the IRS. The U.S. federal statute of limitations remains open for the year 2016 and forward. Florida’s statute of limitations is three years from the filing of an income tax return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Years still open to examination by Florida’s tax authorities include 2005 and forward as a result of TECO Energy’s consolidated Florida net operating loss still being utilized.