v3.8.0.1
Income Taxes
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12 Months Ended |
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| Income Tax Disclosure [Abstract] |
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| Income Taxes |
Income Taxes The provision for federal and foreign income taxes consisted of the following: | | | | | | | | | | | | | (In millions) | 2017 |
| | 2016 |
| | 2015 |
| Current income tax expense (benefit) | | | | | | Federal | $ | 822 |
| | $ | 713 |
| | $ | 757 |
| Foreign | 40 |
| | 38 |
| | 36 |
| State | — |
| | (3 | ) | | (4 | ) | Deferred income tax expense (benefit) | | | | | | Federal | 235 |
| | 118 |
| | (89 | ) | Foreign | 18 |
| | 6 |
| | 45 |
| State | (1 | ) | | 1 |
| | 2 |
| Total | $ | 1,114 |
| | $ | 873 |
| | $ | 747 |
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The expense for income taxes differed from the U.S. statutory rate due to the following: | | | | | | | | | | | 2017 |
| | 2016 |
| | 2015 |
| Statutory tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % | Research and development tax credit | (1.5 | ) | | (1.3 | ) | | (1.2 | ) | Tax settlements and refund claims | — |
| | — |
| | (3.2 | ) | Domestic manufacturing deduction benefit | (2.5 | ) | | (2.7 | ) | | (3.1 | ) | Foreign income tax rate differential | 0.2 |
| | — |
| | (1.4 | ) | Equity compensation | (1.2 | ) | | (1.6 | ) | | — |
| TRS tax-free gain | — |
| | (1.8 | ) | | — |
| Remeasurement of deferred taxes | 3.2 |
| | — |
| | — |
| One-time transition tax on previously undistributed foreign earnings | 2.3 |
| | — |
| | — |
| Other, net | 0.3 |
| | 0.7 |
| | 0.2 |
| Effective tax rate | 35.8 | % | | 28.3 | % | | 26.3 | % |
On December 22, 2017, the President signed the 2017 Act which enacts a wide range of changes to the U.S. corporate income tax system. The 2017 Act reduces the U.S. corporate tax rate to 21% effective in 2018, eliminates the domestic manufacturing deduction benefit and introduces other tax base broadening measures, changes rules for expensing and capitalizing business expenditures, establishes a territorial tax system for foreign earnings as well as a minimum tax on certain foreign earnings, provides for a one-time transition tax on previously undistributed foreign earnings, and introduces new rules for the treatment of certain export sales.
Also on December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118), which provides companies with additional guidance on how to account for the 2017 Act in its financial statements, allowing companies to use a measurement period. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act; however, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. For these items, we recognized provisional amounts totaling $171 million in accordance with SAB 118, which are included as a component of income tax expense from continuing operations. We expect to finalize these provisional estimates before the end of 2018 after completing our reviews and analysis, including reviews and analysis of any interpretations issued during this measurement period.
Deferred tax assets and liabilities—We provisionally remeasured certain deferred tax assets and liabilities, excluding those items that will be included on our 2017 tax return, based on the rates we expect to realize the deferred tax assets and liabilities at in the future, which is generally 21%. However, we are still analyzing certain aspects of the Act, such as the transition rules and the minimum tax on foreign earnings, and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts in the measurement period. The provisional amount recorded related to the remeasurement of our deferred tax balance was $100 million of tax expense.
With the adoption of a minimum tax on foreign earnings, the Company will be subject to tax on global intangible low-taxed income (GILTI) in future years. We are continuing to evaluate this provision and will not make a policy election on how to account for GILTI (as a period expense or as part of our rate on deferred taxes) until we have the necessary information available, including the interpretations of the new rules, to analyze the impacts and complete our analysis. We will make an election before the end of 2018. Because we have not made a policy election, no amounts for GILTI are included in our deferred taxes.
Foreign tax effects—The one-time transition tax is based on our total post-1986 earnings and profits (E&P) for which we have previously deferred U.S. income taxes. We recorded a provisional amount for our one-time transition tax liability, using an estimated applicable tax rate of 15.5%, resulting in an increase in income tax expense of $71 million after accounting for foreign tax credits. We have not yet completed our calculation of the total post-1986 foreign E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. We also expect additional clarifying and interpretative technical guidance to be issued related to the calculation of our one-time transition tax. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax and any additional outside basis difference inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations.
Although we believe the significant impacts from the 2017 Act are those described above, we continue to review and evaluate the other provisions of the 2017 Act. This review could result in changes to the amounts we have provisionally recorded. We expect to complete this review and evaluation before the end of 2018.
In the second quarter of 2016, the Company recorded a tax benefit of approximately $55 million as a result of the tax-free gain from the sale of our equity method investment in TRS SAS as discussed in “Note 5: Thales-Raytheon Systems Co. Ltd. (TRS) Joint Venture.”
In December 2015, U.S. legislation was enacted to permanently reinstate the Research and Development tax credit (R&D tax credit) which had expired on December 31, 2014. In 2017, 2016 and 2015 we recorded a full year benefit of approximately $46 million, $41 million and $33 million related to the 2017, 2016 and 2015 R&D tax credits, respectively.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. We have participated in the IRS Compliance Assurance Process (CAP) program since 2011. All IRS examinations of our tax years prior to 2015 are closed. We continue to participate in the CAP program for the 2015, 2016 and 2017 tax years. We are also under audit by multiple state and foreign tax authorities. In December 2017, we received the IRS Revenue Agent’s Report for the 2015 tax year which proposed approximately $41 million in adjustments related to the Forcepoint transaction and a U.K. share redemption transaction. We disagree with the adjustments and will protest the proposed adjustments with the IRS Appeals division.
| | | | | | | | | | | | | (In millions) | 2017 |
| | 2016 |
| | 2015 |
| Domestic income from continuing operations before taxes | $ | 3,027 |
| | $ | 2,964 |
| | $ | 2,523 |
| Foreign income from continuing operations before taxes | 86 |
| | 121 |
| | 318 |
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At December 31, 2017, foreign earnings of approximately $825 million have been taxed due to the one-time transition tax on previously undistributed foreign earnings required by the 2017 Act. For any future foreign earnings, the Company will generally be free of additional U.S. tax consequences due to a dividends received deduction implemented as part of the move to a territorial tax system for foreign subsidiary earnings. No provision has been made for deferred taxes related to any remaining historical outside basis differences in our non-U.S. subsidiaries. The Company continues to assert indefinite reinvestment in these outside basis differences generated on or before December 31, 2017. Determination of the amount of unrecognized deferred tax liability on outside basis differences is not practicable because of the complexity of laws and regulations, the varying tax treatment of alternative repatriation scenarios, and the variation due to multiple potential assumptions relating to the timing of any future repatriation.
We made the following net tax payments during the years ended December 31: | | | | | | | | | | | | | (In millions) | 2017 |
| | 2016 |
| | 2015 |
| Federal | $ | 765 |
| | $ | 710 |
| | $ | 1,008 |
| Foreign | 77 |
| | 47 |
| | 43 |
| State | 36 |
| | 22 |
| | 30 |
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We believe that our income tax reserves are adequate; however, amounts asserted by taxing authorities could be greater or less than amounts accrued and reflected in our consolidated balance sheets. Accordingly, we could record adjustments to the amounts for federal, foreign, and state tax-related liabilities in the future as we revise estimates or we settle or otherwise resolve the underlying matters. In the ordinary course of business, we may take new positions that could increase or decrease our unrecognized tax benefits in future periods. As of December 31, 2017 and 2016, our liabilities associated with unrecognized tax benefits are not material.
With the exception of Forcepoint, we generally defer our state income tax expense to the extent we can recover this expense through the pricing of our products and services to the U.S. government. We include this deferred amount in prepaid expenses and other current assets until allocated to our contracts, which generally occurs upon payment or when otherwise agreed as allocable with the U.S. government. Net state income tax expense allocated to our contracts was $32 million, $26 million and $28 million in 2017, 2016 and 2015, respectively. We include state income tax expense allocated to our contracts in administrative and selling expenses.
Deferred income taxes consisted of the following at December 31: | | | | | | | | | (In millions) | 2017 |
| | 2016 |
| Noncurrent deferred tax assets (liabilities) | | | | Accrued employee compensation and benefits | $ | 202 |
| | $ | 293 |
| Other accrued expenses and reserves | 86 |
| | 126 |
| | (537 | ) | | (887 | ) | Pension benefits | 1,505 |
| | 2,368 |
| Other retiree benefits | 67 |
| | 109 |
| Net operating loss and tax credit carryforwards | 99 |
| | 121 |
| Depreciation and amortization | (858 | ) | | (1,343 | ) | Partnership outside basis difference | (36 | ) | | (90 | ) | Other | 21 |
| | 52 |
| Valuation allowance | (17 | ) | | (38 | ) | Deferred income taxes—noncurrent | $ | 532 |
| | $ | 711 |
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As of December 31, 2017, we had U.S. federal and state net operating loss (NOL) carryforwards related to Forcepoint of approximately $120 million and $182 million, respectively, which expire at various dates through 2036. We believe it is more likely than not that the deferred tax asset will be realized to the extent of existing deferred tax liabilities.
We also had foreign NOL carryforwards of approximately $136 million, with the majority generated in the U.K. where NOLs may be carried forward indefinitely. We believe that we have sufficient taxable income to realize these deferred tax assets.
The tax benefit related to discontinued operations was $1 million in 2017 and 2016 and $14 million in 2015. |
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- DefinitionThe 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.
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