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Income Taxes | 12 Months Ended
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Dec. 31, 2019
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes Certain assets and liabilities are reported differently for income tax purposes than they are for financial statement purposes. The tax effect of these differences is recorded as deferred taxes. We calculate deferred taxes using currently enacted income tax rates. APS has recorded regulatory assets and regulatory liabilities related to income taxes on its Consolidated Balance Sheets in accordance with accounting guidance for regulated operations. The regulatory assets are for certain temporary differences, primarily the allowance for equity funds used during construction, investment tax credit (“ITC”) basis adjustment and tax expense of Medicare subsidy. The regulatory liabilities primarily relate to the change in income tax rates and deferred taxes resulting from ITCs. The Tax Act reduced the corporate tax rate to 21% effective January 1, 2018. As a result of this rate reduction, the Company recognized a $1.14 billion reduction in its net deferred income tax liabilities as of December 31, 2017. In accordance with accounting for regulated companies, the effect of this rate reduction was substantially offset by a net regulatory liability. Federal income tax laws require the amortization of a majority of the balance over the remaining regulatory life of the related property. As a result of the modifications made to the annual transmission formula rate during the second quarter of 2018, the Company began amortization of FERC jurisdictional net excess deferred tax liabilities in 2018. On March 13, 2019, the ACC approved the Company's proposal to amortize non-depreciation related net excess deferred tax liabilities subject to its jurisdiction over a twelve-month period. As a result, the Company began amortization in March 2019. As of December 31, 2019, the Company has recorded $57 million of income tax benefit related to the amortization of these non-depreciation related net excess deferred tax liabilities. On October 29, 2019, the ACC approved the Company’s proposal to amortize depreciation related net excess deferred tax liabilities subject to its jurisdiction over a 28.5-year period with amortization to retroactively begin as of January 1, 2018. As a result, in the fourth quarter of 2019, the Company has recorded $62 million of income tax benefit related to amortization of these depreciation related liabilities. See Note 4 for more details. In August 2018, U.S. Treasury proposed regulations that clarified bonus depreciation transition rules under the Tax Act for regulated public utility property placed in service after September 27, 2017 and before January 1, 2018. However, these proposed regulations were ambiguous with respect to regulated public utility property placed in service on or after January 1, 2018. In September 2019, U.S. Treasury issued final regulations, which replaced the August 2018 proposed regulations. These final regulations did not materially impact any tax position taken by the Company for property placed in service after September 27, 2017 and before January 1, 2018. Along with the September 2019 final regulations, U.S. Treasury also issued new proposed regulations which clarify bonus depreciation transition rules under the Tax Act for property placed in service by regulated public utilities after December 31, 2017. The proposed regulations provide that certain regulated public utility property which was under construction prior to September 28, 2017 and placed in service between January 1, 2018 and December 31, 2020 would continue to be eligible for bonus depreciation under the rules and bonus depreciation phase-downs in effect prior to enactment of the Tax Act. During the third quarter of 2019, as a result of the clarification provided by these proposed regulations, the Company recorded additional deferred tax liabilities of approximately $56 million related to bonus depreciation benefits claimed on the Company’s 2018 tax return. In accordance with regulatory requirements, APS ITCs are deferred and are amortized over the life of the related property with such amortization applied as a credit to reduce current income tax expense in the statement of income. Net income associated with the Palo Verde sale leaseback VIEs is not subject to tax. As a result, there is no income tax expense associated with the VIEs recorded on the Pinnacle West Consolidated and APS Consolidated Statements of Income. See Note 19 for additional details related to the Palo Verde sale leaseback VIEs. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, at the beginning and end of the year that are included in accrued taxes and unrecognized tax benefits (dollars in thousands):
| Pinnacle West Consolidated |  | APS Consolidated
| 2019 |  | 2018 |  | 2017 |  | 2019 |  | 2018 |  | 2017
Total unrecognized tax benefits, January 1 | $ | 40,731 |  |  | $ | 41,966 |  |  | $ | 36,075 |  |  | $ | 40,731 |  |  | $ | 41,966 |  |  | $ | 36,075 |
Additions for tax positions of the current year | 3,373 |  |  | 3,436 |  |  | 2,937 |  |  | 3,373 |  |  | 3,436 |  |  | 2,937 |
Additions for tax positions of prior years | 1,843 |  |  | 2,696 |  |  | 4,783 |  |  | 1,843 |  |  | 2,696 |  |  | 4,783 |
Reductions for tax positions of prior years for: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Changes in judgment | (2,078 | ) |  | (1,764 | ) |  | (1,829 | ) |  | (2,078 | ) |  | (1,764 | ) |  | (1,829 | )
Settlements with taxing authorities | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Lapses of applicable statute of limitations | (434 | ) |  | (5,603 | ) |  | — |  |  | (434 | ) |  | (5,603 | ) |  | — |
Total unrecognized tax benefits, December 31 | $ | 43,435 |  |  | $ | 40,731 |  |  | $ | 41,966 |  |  | $ | 43,435 |  |  | $ | 40,731 |  |  | $ | 41,966 |
Included in the balances of unrecognized tax benefits are the following tax positions that, if recognized, would decrease our effective tax rate (dollars in thousands):
| Pinnacle West Consolidated |  | APS Consolidated
| 2019 |  | 2018 |  | 2017 |  | 2019 |  | 2018 |  | 2017
Tax positions, that if recognized, would decrease our effective tax rate | $ | 22,813 |  |  | $ | 19,504 |  |  | $ | 16,373 |  |  | $ | 22,813 |  |  | $ | 19,504 |  |  | $ | 16,373 |
As of the balance sheet date, the tax year ended December 31, 2016 and all subsequent tax years remain subject to examination by the IRS. With a few exceptions, we are no longer subject to state income tax examinations by tax authorities for years before 2015. We reflect interest and penalties, if any, on unrecognized tax benefits in the Pinnacle West Consolidated and APS Consolidated Statements of Income as income tax expense. The amount of interest expense or benefit recognized related to unrecognized tax benefits are as follows (dollars in thousands):
| Pinnacle West Consolidated |  | APS Consolidated
| 2019 |  | 2018 |  | 2017 |  | 2019 |  | 2018 |  | 2017
Unrecognized tax benefit interest expense/(benefit) recognized | $ | 459 |  |  | $ | (780 | ) |  | $ | 577 |  |  | $ | 459 |  |  | $ | (780 | ) |  | $ | 577 |
Following are the total amount of accrued liabilities for interest recognized related to unrecognized benefits that could reverse and decrease our effective tax rate to the extent matters are settled favorably (dollars in thousands):
| Pinnacle West Consolidated |  | APS Consolidated
| 2019 |  | 2018 |  | 2017 |  | 2019 |  | 2018 |  | 2017
Unrecognized tax benefit interest accrued | $ | 1,589 |  |  | $ | 1,130 |  |  | $ | 1,910 |  |  | $ | 1,589 |  |  | $ | 1,130 |  |  | $ | 1,910 |
Additionally, as of December 31, 2019, we have recognized less than $1 million of interest expense to be paid on the underpayment of income taxes for certain adjustments that we have filed, or will file, with the IRS. The components of income tax expense are as follows (dollars in thousands):
| Pinnacle West Consolidated |  | APS Consolidated
| Year Ended December 31, |  | Year Ended December 31,
| 2019 |  | 2018 |  | 2017 |  | 2019 |  | 2018 |  | 2017
Current: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Federal | $ | (13,551 | ) |  | $ | 18,375 |  |  | $ | 11,624 |  |  | $ | (54,697 | ) |  | $ | 88,180 |  |  | $ | 21,512 |
State | 3,195 |  |  | 3,342 |  |  | 3,052 |  |  | 695 |  |  | 1,877 |  |  | 2,778 |
Total current | (10,356 | ) |  | 21,717 |  |  | 14,676 |  |  | (54,002 | ) |  | 90,057 |  |  | 24,290 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Federal | (14,982 | ) |  | 94,721 |  |  | 223,729 |  |  | 29,321 |  |  | 32,436 |  |  | 221,078 |
State | 9,565 |  |  | 17,464 |  |  | 19,867 |  |  | 15,109 |  |  | 22,321 |  |  | 23,800 |
Total deferred | (5,417 | ) |  | 112,185 |  |  | 243,596 |  |  | 44,430 |  |  | 54,757 |  |  | 244,878 |
Income tax expense/(benefit) | $ | (15,773 | ) |  | $ | 133,902 |  |  | $ | 258,272 |  |  | $ | (9,572 | ) |  | $ | 144,814 |  |  | $ | 269,168 |
The following chart compares pretax income at the statutory federal income tax rate of 21% in 2019 and 2018 and 35% in 2017 to income tax expense (dollars in thousands):
| Pinnacle West Consolidated |  | APS Consolidated
| Year Ended December 31, |  | Year Ended December 31,
| 2019 |  | 2018 |  | 2017 |  | 2019 |  | 2018 |  | 2017
Federal income tax expense at statutory rate | $ | 113,828 |  |  | $ | 139,533 |  |  | $ | 268,177 |  |  | $ | 120,790 |  |  | $ | 154,260 |  |  | $ | 277,540 |
Increases (reductions) in tax expense resulting from: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State income tax net of federal income tax benefit | 18,599 |  |  | 23,115 |  |  | 21,380 |  |  | 19,267 |  |  | 24,531 |  |  | 22,329 |
State income tax credits net of federal income tax benefit | (8,519 | ) |  | (6,704 | ) |  | (6,483 | ) |  | (6,781 | ) |  | (5,440 | ) |  | (5,053 | )
Nondeductible expenditures associated with ballot initiative | — |  |  | 7,879 |  |  | — |  |  | — |  |  | — |  |  | — |
Stock compensation | (2,252 | ) |  | (1,804 | ) |  | (6,659 | ) |  | (1,054 | ) |  | (780 | ) |  | (3,489 | )
Excess deferred income taxes - Tax Cuts and Jobs Act | (124,082 | ) |  | (6,725 | ) |  | 9,348 |  |  | (124,082 | ) |  | (4,715 | ) |  | 9,431 |
Allowance for equity funds used during construction (see Note 1) | (2,476 | ) |  | (7,231 | ) |  | (12,937 | ) |  | (2,476 | ) |  | (7,231 | ) |  | (12,937 | )
Palo Verde VIE noncontrolling interest (see Note 19) | (4,094 | ) |  | (4,094 | ) |  | (6,823 | ) |  | (4,094 | ) |  | (4,094 | ) |  | (6,823 | )
Investment tax credit amortization | (6,851 | ) |  | (6,742 | ) |  | (6,715 | ) |  | (6,851 | ) |  | (6,742 | ) |  | (6,715 | )
Other | 74 |  |  | (3,325 | ) |  | (1,016 | ) |  | (4,291 | ) |  | (4,975 | ) |  | (5,115 | )
Income tax expense/(benefit) | $ | (15,773 | ) |  | $ | 133,902 |  |  | $ | 258,272 |  |  | $ | (9,572 | ) |  | $ | 144,814 |  |  | $ | 269,168 |
The components of the net deferred income tax liability were as follows (dollars in thousands):
| Pinnacle West Consolidated |  | APS Consolidated
| December 31, |  | December 31,
| 2019 |  | 2018 |  | 2019 |  | 2018
DEFERRED TAX ASSETS |  |  |  |  |  |  |  |  |
Risk management activities | $ | 17,552 |  |  | $ | 15,785 |  |  | $ | 17,552 |  |  | $ | 15,785 |
Regulatory liabilities: |  |  |  |  |  |  |  |  |  |
Excess deferred income taxes - Tax Cuts and Jobs Act | 335,877 |  |  | 376,869 |  |  | 335,877 |  |  | 376,869 |
Asset retirement obligation and removal costs | 143,011 |  |  | 117,201 |  |  | 143,011 |  |  | 117,201 |
Unamortized investment tax credits | 52,236 |  |  | 53,284 |  |  | 52,236 |  |  | 53,284 |
Other postretirement benefits | 43,841 |  |  | 40,532 |  |  | 43,841 |  |  | 40,532 |
Other | 52,382 |  |  | 40,380 |  |  | 52,382 |  |  | 40,380 |
Pension liabilities | 73,210 |  |  | 112,019 |  |  | 67,976 |  |  | 107,009 |
Coal reclamation liabilities | 40,837 |  |  | 47,508 |  |  | 40,837 |  |  | 47,508 |
Renewable energy incentives | 28,066 |  |  | 30,779 |  |  | 28,066 |  |  | 30,779 |
Credit and loss carryforwards | 54,795 |  |  | 1,755 |  |  | 10,992 |  |  | — |
Other | 63,102 |  |  | 58,820 |  |  | 70,948 |  |  | 59,919 |
Total deferred tax assets | 904,909 |  |  | 894,932 |  |  | 863,718 |  |  | 889,266 |
DEFERRED TAX LIABILITIES |  |  |  |  |  |  |  |  |  |
Plant-related | (2,448,458 | ) |  | (2,277,724 | ) |  | (2,448,458 | ) |  | (2,277,724 | )
Risk management activities | (27 | ) |  | (237 | ) |  | (27 | ) |  | (237 | )
Other postretirement assets and other special use funds | (66,399 | ) |  | (57,697 | ) |  | (65,965 | ) |  | (57,274 | )
Regulatory assets: |  |  |  |  |  |  |  |  |  |
Allowance for equity funds used during construction | (40,023 | ) |  | (39,086 | ) |  | (40,023 | ) |  | (39,086 | )
Deferred fuel and purchased power | (35,162 | ) |  | (23,086 | ) |  | (35,162 | ) |  | (23,086 | )
Pension benefits | (163,339 | ) |  | (181,504 | ) |  | (163,339 | ) |  | (181,504 | )
Retired power plant costs (see Note 4) | (42,228 | ) |  | (48,348 | ) |  | (42,228 | ) |  | (48,348 | )
Other | (82,722 | ) |  | (72,096 | ) |  | (82,722 | ) |  | (72,096 | )
Other | (18,890 | ) |  | (2,575 | ) |  | (18,890 | ) |  | (2,575 | )
Total deferred tax liabilities | (2,897,248 | ) |  | (2,702,353 | ) |  | (2,896,814 | ) |  | (2,701,930 | )
Deferred income taxes — net | $ | (1,992,339 | ) |  | $ | (1,807,421 | ) |  | $ | (2,033,096 | ) |  | $ | (1,812,664 | )
As of December 31, 2019, the deferred tax assets for credit and loss carryforwards relate to federal general business credits of approximately $62 million, which first begin to expire in 2036, state credit carryforwards net of federal benefit of $23 million, which first begin to expire in 2023, and other federal carryforwards of $9 million. The credit and loss carryforwards amount above has been reduced by $39 million of unrecognized tax benefits.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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