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Income Taxes

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

Note 3 – Income Taxes

Income tax expense differs from the amount computed by applying the statutory rate on book income subject to tax for the following reasons:

		(Thousands of Dollars)
		Years Ended December 31,
		2018				2017				2016
Income Tax at Statutory Rate		$	7,009			$	11,868			$	12,007
Tax Effect of:
Utility Plant Related			422				(1,016	)			(1,059	)
Tangible Property Repairs			(7,763	)			—				—
State Income Taxes – Net			1,207				895				770
Tax Act			—				(610	)			—
Other			49				(37	)			17
Total Income Tax Expense		$	924			$	11,100			$	11,735

Income tax expense is comprised of the following:

		(Thousands of Dollars)
		Years Ended December 31,
		2018				2017				2016
Current:
Federal		$	(188	)		$	2,090			$	7,305
State			2,073				1,066				877
Deferred:
Federal			(338	)			7,713				3,325
State			(545	)			310				307
Investment Tax Credits			(78	)			(79	)			(79	)
Total Income Tax Expense		$	924			$	11,100			$	11,735

As part of Middlesex’s March 2018 base water rate settlement with the NJBPU, Middlesex received approval for regulatory accounting treatment of accumulated deferred income tax benefits associated with the adoption of tangible property regulations issued by the IRS as well as immediate recognition of current year tangible property regulations tax benefits (see Note 2 – Rate and Regulatory Matters). This results in significant reductions in the Company’s effective income tax rate, current income tax expense and deferred income tax expense.

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax purposes. The components of the net deferred tax liability are as follows:

		(Thousands of Dollars)
		December 31,
		2018				2017
Utility Plant Related		$	44,777			$	41,259
Customer Advances			(3,702	)			(3,749	)
Employee Benefits			5,490				4,903
Investment Tax Credits (ITC)			596				675
Other			109				72
Total Deferred Tax Liability and ITC		$	47,270			$	43,160

The staff of the United States Securities and Exchange Commission (SEC) recognized the complexity of reflecting the impacts of the Tax Act, and issued guidance in December 2017 which clarified accounting for income taxes if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting. The guidance described three scenarios associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to account for income taxes based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. The one-year analysis period ended in December 2018 and there were no material changes to the Company’s accounting for the Tax Act, which had resulted in the re-measurement of deferred income taxes at the new federal tax rate and decreased deferred income tax expense by $0.6 million for the year ending December 31, 2017 and decreased accumulated deferred income taxes by $24.2 million as of December 31, 2017.

As part of its 2014 Federal income tax return, the Company adopted the final IRS tangible property regulations and changed its accounting method for the tax treatment of expenditures that qualified as deductible repairs. The adoption resulted in a net reduction of $17.6 million in taxes previously remitted to the IRS, for which the Company has already sought and received the tax refunds. A reserve provision against refunded taxes of $2.3 million was recorded in 2015 at the time of filing its change in accounting method based on a possible challenge by the IRS during an audit examination. The Company’s 2014 federal income tax return was subsequently selected for examination by the IRS in 2016. In 2018, the Company received information from the IRS regarding certain aspects of the its adopted accounting method used to calculate qualifying tangible property repair cost deductions and increased its reserve provision to $4.1 million. As the IRS examination continues, and pending its completion, the final tax liability could be different than the recorded reserve provision. For the year ended December 31, 2018, the Company has recorded $0.6 million in interest expense related to this reserve provision.

The statutory review periods for income tax returns for the years prior to 2012 have been closed. Other than the effects of the provision against refundable taxes discussed above, there are no unrecognized tax benefits resulting from prior period tax positions.