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Income Taxes | 12 Months Ended
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Dec. 31, 2018
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes Tax Cuts and Jobs Act (the “Act”) On December 22, 2017, the Act was signed into law resulting in significant changes from previous tax law. Some of the more meaningful provisions which will affect us are:
• | a reduction in the U.S. federal corporate tax rate from 35% to 21%;
• | limitation on the deduction of certain interest expense;
• | full expense deduction for certain business capital expenditures;
• | limitation on the utilization of NOLs arising after December 31, 2017; and
• | a system of taxing foreign-sourced income from multinational corporations.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118 “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” which allows a company up to one year to finalize and record the tax effects of the Act. We finalized the tax effect of the transition tax as of December 31, 2017 which did not have a material effect on our financial condition, results of operations or cash flows. During the year ended December 31, 2018, we finalized and recorded the remaining tax effects of the Act which did not have a material effect on our financial condition, results of operations or cash flows. Income Tax Expense (Benefit) The jurisdictional components of income from continuing operations before income tax expense (benefit), attributable to Calpine, for the years ended December 31, 2018, 2017 and 2016, are as follows (in millions):
| 2018 |  | 2017 |  | 2016
U.S. | $ | 47 |  |  | $ | (358 | ) |  | $ | 116 |
International | 27 |  |  | 27 |  |  | 24 |
Total | $ | 74 |  |  | $ | (331 | ) |  | $ | 140 |
The components of income tax expense from continuing operations for the years ended December 31, 2018, 2017 and 2016, consisted of the following (in millions):
| 2018 |  | 2017 |  | 2016
Current: |  |  |  |  |
Federal | $ | — |  |  | $ | (10 | ) |  | $ | (10 | )
State | 20 |  |  | 18 |  |  | 14 |
Foreign | (3 | ) |  | (14 | ) |  | 1 |
Total current | 17 |  |  | (6 | ) |  | 5 |
Deferred: |  |  |  |  |
Federal | (1 | ) |  | 5 |  |  | 10 |
State | (6 | ) |  | 6 |  |  | 27 |
Foreign | 54 |  |  | 3 |  |  | 6 |
Total deferred | 47 |  |  | 14 |  |  | 43 |
Total income tax expense | $ | 64 |  |  | $ | 8 |  |  | $ | 48 |
For the years ended December 31, 2018, 2017 and 2016, our income tax rates did not bear a customary relationship to statutory income tax rates, primarily as a result of the effect of our NOLs, valuation allowances and state income taxes. A reconciliation of the federal statutory rate of 21% and, prior to 2018, 35% to our effective rate from continuing operations for the years ended December 31, 2018, 2017 and 2016, is as follows:
| 2018 |  | 2017 |  | 2016
Federal statutory tax rate | 21.0 | % |  | 35.0 | % |  | 35.0 | %
State tax expense, net of federal benefit | 17.0 |  |  | (6.0 | ) |  | 19.4 |
Change in tax rate of net deferred tax asset | — |  |  | (168.8 | ) |  | — |
Valuation allowances offsetting tax rate change | — |  |  | 168.8 |  |  | — |
Valuation allowances against future tax benefits | (31.7 | ) |  | (33.0 | ) |  | (25.0 | )
Valuation allowance related to foreign taxes | (138.3 | ) |  | 0.5 |  |  | (0.1 | )
Decrease in foreign NOL due to change in ownership | 202.3 |  |  | — |  |  | — |
Distributions from foreign affiliates and foreign taxes | 6.6 |  |  | (2.0 | ) |  | (0.6 | )
Change in unrecognized tax benefits | (8.0 | ) |  | 5.1 |  |  | (0.1 | )
Disallowed compensation | 7.7 |  |  | (0.6 | ) |  | 0.9 |
Stock-based compensation | (1.5 | ) |  | (0.9 | ) |  | 2.2 |
Equity earnings | 1.4 |  |  | (0.8 | ) |  | 2.0 |
Merger Related Fees/Expenses | 12.7 |  |  | — |  |  | — |
Depletion in excess of basis | (4.0 | ) |  | — |  |  | — |
Other differences | 1.3 |  |  | 0.3 |  |  | 0.6 |
Effective income tax rate | 86.5 | % |  | (2.4 | )% |  | 34.3 | %
Deferred Tax Assets and Liabilities The components of deferred income taxes as of December 31, 2018 and 2017, are as follows (in millions):
| 2018 |  | 2017
Deferred tax assets: |  |  |
NOL and credit carryforwards | $ | 1,595 |  |  | $ | 1,810 |
Taxes related to risk management activities and derivatives | 7 |  |  | 20 |
Reorganization items and impairments | 166 |  |  | 146 |
Other differences | 101 |  |  | 28 |
Deferred tax assets before valuation allowance | 1,869 |  |  | 2,004 |
Valuation allowance | (1,000 | ) |  | (1,168 | )
Total deferred tax assets | 869 |  |  | 836 |
Deferred tax liabilities: |  |  |
Property, plant and equipment | (890 | ) |  | (805 | )
Total deferred tax liabilities | (890 | ) |  | (805 | )
Net deferred tax asset (liability) | (21 | ) |  | 31 |
Less: Non-current deferred tax liability | (22 | ) |  | (28 | )
Deferred income tax asset, non-current | $ | 1 |  |  | $ | 59 |
Intraperiod Tax Allocation — In accordance with U.S. GAAP, intraperiod tax allocation provisions require allocation of a tax expense (benefit) to continuing operations due to current OCI gains (losses) with an offsetting amount recognized in OCI. The intraperiod tax allocation included in continuing operations is $1 million, $6 million and nil for the years ended December 31, 2018, 2017 and 2016. NOL Carryforwards — As of December 31, 2018, our NOL carryforwards consisted primarily of federal NOL carryforwards of approximately $6.4 billion, which expire between 2024 and 2037, and NOL carryforwards in 26 states and the District of Columbia totaling approximately $3.3 billion, which expire between 2019 and 2038. Substantially all of the federal and state NOLs are offset with a full valuation allowance. Certain of the state NOL carryforwards may be subject to limitations on their annual usage. As a result of the ownership change associated with the Merger, our ability to utilize the NOL carryforwards will be limited. Additionally, our state NOLs available to offset future state income could materially decrease which would be offset by an equal and offsetting adjustment to the existing valuation allowance. Given the offsetting adjustments to the existing valuation allowance, the ownership change is not expected to have material adverse effect on our Consolidated Financial Statements. As a result of the Merger, our Canadian NOLs, which comprised all of our foreign NOLs, are no longer available to us. This resulted in a decrease of approximately $58 million in the deferred tax asset and a related charge to deferred tax expense during the year ended December 31, 2018. Income Tax Audits — We remain subject to periodic audits and reviews by taxing authorities; however, we do not expect these audits will have a material effect on our tax provision. Any NOLs we claim in future years to reduce taxable income could be subject to IRS examination regardless of when the NOLs were generated. Any adjustment of state or federal returns could result in a reduction of deferred tax assets rather than a cash payment of income taxes in tax jurisdictions where we have NOLs. We have concluded our U.S. federal income tax examination for the year ended December 31, 2015 with no adjustments. We are currently under various state income tax audits for various periods. Our Canadian subsidiaries are currently under examination by the Canada Revenue Agency for the years ended December 31, 2013 through 2016. Valuation Allowance — U.S. GAAP requires that we consider all available evidence, both positive and negative, and tax planning strategies to determine whether, based on the weight of that evidence, a valuation allowance is needed to reduce the value of deferred tax assets. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward periods available under the tax law. Due to our history of losses, we were unable to assume future profits; however, we are able to consider available tax planning strategies. As of December 31, 2018, we have provided a valuation allowance of approximately $1.0 billion on certain federal and state tax jurisdiction deferred tax assets to reduce the amount of these assets to the extent necessary to result in an amount that is more likely than not to be realized. The net change in our valuation allowance was a decrease of $168 million for the year ended December 31, 2018, primarily related to the loss of utilization of our foreign NOLs as a result of the Merger and to income generated in 2018. We had a reduction in our valuation allowance of $413 million and $56 million for the years ended December 31, 2017 and 2016, respectively, primarily related to income generated in these periods. Deductions on Business Interest Expense — On November 26, 2018, the U.S. Treasury Department released proposed regulations which limit business interest expense deductions. The proposed regulations would be applicable for taxable years ending after the date on which the regulations become final. Companies have the discretion to apply the proposed regulations retroactively to taxable years beginning after December 31, 2017, but must apply all such rules on a consistent basis. We have not elected to apply the proposed regulations for the year ended December 31, 2018 and do not expect the application of the final regulations to have a material effect on our Consolidated Financial Statements. Unrecognized Tax Benefits At December 31, 2018, we had unrecognized tax benefits of $28 million. If recognized, $16 million of our unrecognized tax benefits could affect the annual effective tax rate and $12 million, related to deferred tax assets, could be offset against the recorded valuation allowance resulting in no effect to our effective tax rate. We had accrued interest and penalties of $2 million and $4 million for income tax matters at December 31, 2018 and 2017, respectively. We recognize interest and penalties related to unrecognized tax benefits in income tax expense (benefit) on our Consolidated Statements of Operations and recorded $(2) million, $(8) million and nil for the years ended December 31, 2018, 2017 and 2016, respectively. We believe that it is reasonably possible that a decrease within the range of nil and $1 million in unrecognized tax benefits could occur within the next twelve months primarily related to federal tax issues. A reconciliation of the beginning and ending amounts of our unrecognized tax benefits for the years ended December 31, 2018, 2017 and 2016, is as follows (in millions):
| 2018 |  | 2017 |  | 2016
Balance, beginning of period | $ | (38 | ) |  | $ | (59 | ) |  | $ | (58 | )
Increases related to prior year tax positions | (7 | ) |  | — |  |  | — |
Decreases related to prior year tax positions | 17 |  |  | 11 |  |  | 1 |
Increases related to current year tax positions | — |  |  | (2 | ) |  | (2 | )
Decreases related to change in tax rate of net deferred tax asset | — |  |  | 12 |  |  | — |
Balance, end of period | $ | (28 | ) |  | $ | (38 | ) |  | $ | (59 | )

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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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