INCOME TAXES

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The income tax expense (benefit) for the years ended December 31, 2023, 2022 and 2021 consists of the following (in millions):

	2023		2022		2021
Current:
U.S. Federal	$	1,012	$	2,006	$	1,388
U.S. State and Local	195		273		194
Non-U.S.	459		467		478
Total Current	1,666		2,746		2,060
Deferred:
U.S. Federal	150		296		1,311
U.S. State and Local	20		136		273
Non-U.S.	29		99		61
Total Deferred	199		531		1,645
Total Income Tax Expense	$	1,865	$	3,277	$	3,705

Income before income taxes includes the following components (in millions):

	2023		2022		2021
United States	$	6,246	$	12,276	$	14,220
Non-U.S.	2,327		2,549		2,375
Total Income Before Income Taxes:	$	8,573	$	14,825	$	16,595

A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended December 31, 2023, 2022 and 2021 consists of the following:

	2023		2022		2021
Statutory U.S. federal income tax rate	21.0	%	21.0	%	21.0	%
U.S. state and local income taxes (net of federal benefit)	1.9		2.0		2.2
Non-U.S. tax rate differential	(0.6)		0.1		—
U.S. federal tax credits	(0.7)		(0.5)		(0.4)
Goodwill and other asset impairments	0.1		—		—
Net uncertain tax positions	(0.5)		0.4		0.6
Other	0.6		(0.9)		(1.1)
Effective income tax rate	21.8	%	22.1	%	22.3	%

Our effective tax rate is affected by recurring factors, such as statutory tax rates in the jurisdictions in which we operate and the relative amounts of taxable income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year, but may not be consistent from year to year.

Our effective tax rate was 21.8% in 2023, compared with 22.1% and 22.3% in 2022 and 2021, respectively, primarily due to the effects of the aforementioned recurring factors and the following discrete tax items.

2023 Discrete Items

We recorded pre-tax Transformation strategy costs of $435 million. As a result, we recorded an additional income tax benefit of $102 million. This income tax benefit was generated at a higher average tax rate than the 2023 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.

We recognized an income tax benefit of $85 million related to pre-tax defined benefit pension and postretirement medical benefit plan losses of $359 million. This income tax benefit was generated at a higher average tax rate than the 2023 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes.

We recorded goodwill and indefinite-lived intangible asset impairment charges of $236 million. As a result, we recorded an additional income tax benefit of $43 million. This income tax benefit was generated at a lower average tax rate than the 2023 U.S. federal statutory tax rate due to certain impairment charges not being deductible for tax purposes.

We recorded a pre-tax expense of $61 million in connection with a one-time compensation payment made during the year. As a result, we recorded an additional income tax benefit of $15 million. This income tax benefit was generated at a higher average tax rate than the 2023 U.S. federal statutory tax rate due to the effect of U.S. state and local taxes.

The recognition of excess tax benefits and deficiencies related to share-based compensation in income tax expense did not impact our effective tax rate for the year ended December 31, 2023.

2022 Discrete Items

We recognized an income tax expense of $255 million related to pre-tax defined benefit pension and postretirement medical plan gains of $1.1 billion. This income tax expense was generated at a higher average tax rate than the 2022 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes.

We recorded pre-tax Transformation strategy costs of $178 million. As a result, we recorded an additional income tax benefit of $36 million. This income tax benefit was generated at a lower average tax rate than the 2022 U.S. federal statutory tax rate due to the effect of foreign taxes.

We recorded pre-tax expenses of $505 million in connection with incentive compensation program design changes. As a result, we recorded an additional income tax benefit of $121 million. This income tax benefit was generated at a higher average tax rate than the 2022 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.

We recorded pre-tax expenses of $76 million as a result of a reduction in estimated residual value for certain aircraft. As a result, we recorded an additional income tax benefit of $18 million. This income tax benefit was generated at a higher average tax rate than the 2022 U.S. federal statutory tax rate due to the effect of U.S. state and local taxes.

The recognition of excess tax benefits and deficiencies related to share-based compensation in income tax expense resulted in a net tax benefit of $95 million and reduced our effective tax rate by 0.6% during the year ended December 31, 2022.

2021 Discrete Items

We recognized an income tax expense of $784 million related to pre-tax defined benefit pension and postretirement medical plan gains of $3.3 billion. This income tax expense was generated at a higher average tax rate than the 2021 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes.

We recorded pre-tax Transformation strategy costs of $380 million. As a result, we recorded an additional income tax benefit of $95 million. This income tax benefit was generated at a higher average tax rate than the 2021 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.

We recorded a pre-tax gain of $46 million related to the divestiture of UPS Freight. As a result, we recorded an additional income tax expense of $11 million. This income tax expense was generated at a higher average tax rate than the 2021 U.S. federal statutory tax rate due to the effect of U.S. state and local taxes.

The recognition of excess tax benefits and deficiencies related to share-based compensation in income tax expense resulted in a net tax benefit of $105 million and reduced our effective tax rate by 0.6% during the year ended December 31, 2021.

Other Items

Beginning in 2012, we were granted a tax incentive for certain of our non-U.S. operations. In 2022, this incentive was renegotiated and extended through December 31, 2026. The tax incentive is conditional upon our meeting specific employment and investment thresholds. The impact of this tax incentive decreased non-U.S. tax expense by $15, $47 and $61 million (increased diluted earnings per share by $0.02, $0.05 and $0.07) for 2023, 2022 and 2021, respectively.

Deferred income tax assets and liabilities are comprised of the following as of December 31, 2023 and 2022 (in millions):

	2023		2022
Fixed assets and capitalized software	$	(5,974)	$	(5,819)
Operating lease right-of-use assets	(1,017)		(893)
Other	(605)		(708)
Deferred tax liabilities	(7,596)		(7,420)
Pension and postretirement benefits	1,304		637
Loss and credit carryforwards	232		242
Insurance reserves	626		603
Stock compensation	158		315
Accrued employee compensation	354		304
Operating lease liabilities	1,073		948
Other	322		331
Deferred tax assets	4,069		3,380
Deferred tax assets valuation allowance	(119)		(123)
Deferred tax asset (net of valuation allowance)	3,950		3,257
Net deferred tax asset (liability)	$	(3,646)	$	(4,163)
Amounts recognized in our consolidated balance sheets:
Deferred tax assets	$	126	$	139
Deferred tax liabilities	(3,772)		(4,302)
Net deferred tax asset (liability)	$	(3,646)	$	(4,163)

The valuation allowance decreased by $4 million and increased by $1 and $34 million during the years ended December 31, 2023, 2022 and 2021, respectively.

We have a U.S. federal capital loss carryforward of $200 million as of December 31, 2023, less than $1 million of which expires on December 31, 2025, $150 million of which expires on December 31, 2026 and the remainder of which expires on December 31, 2027.

Further, we have U.S. state and local operating loss and credit carryforwards as follows (in millions):

	2023		2022
U.S. state and local operating loss carryforwards	$	762	$	653
U.S. state and local credit carryforwards	$	48	$	46

The U.S. state and local operating loss carryforwards and credits can be carried forward for periods ranging from three years to indefinitely. We also have non-U.S. loss carryforwards of $432 million as of December 31, 2023, the majority of which may be carried forward indefinitely. As indicated in the table above, we have established a valuation allowance for certain U.S. federal, state and non-U.S. carryforwards due to the uncertainty resulting from a lack of previous taxable income within the applicable tax jurisdictions and other limitations.

Undistributed earnings and profits ("E&P") of our foreign subsidiaries amounted to $5.4 billion as of December 31, 2023. Currently, $493 million of the undistributed E&P of our foreign subsidiaries is considered to be indefinitely reinvested and, accordingly, no deferred income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. state and local taxes and withholding taxes payable in various jurisdictions. Determination of the amount of unrecognized deferred income tax liability is not practicable because of the complexities associated with its hypothetical calculation.

In December 2017, the United States enacted into law the Tax Cuts and Jobs Act (the "Tax Act"), requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. We elected to pay the tax over eight years based on an installment schedule outlined in the Tax Act. The remaining liability of $105 million is reflected in current and non-current liabilities in our consolidated balance sheets based on the timing of payment. This balance will be paid between 2024 and 2026.

Additionally, the Organization for Economic Co-operation and Development ("OECD") has introduced a framework to implement a global minimum corporate tax of 15%, referred to as Pillar Two or the minimum tax directive. Many aspects of the minimum tax directive will be effective beginning in 2024, with certain remaining impacts to be effective beginning in 2025. While it is uncertain whether the U.S. will enact legislation to adopt the minimum tax directive, certain countries in which we operate have adopted legislation, and other countries are in the process of introducing legislation, to implement the minimum tax directive. While we do not currently expect the minimum tax directive to have a material impact on our effective tax rate, our analysis is ongoing as the OECD continues to release additional guidance and countries implement legislation. To the extent additional changes take place in the countries in which we operate, it is possible that these legislative changes and efforts may increase uncertainty and have an adverse impact on our effective tax rates or operations.

The following table summarizes the activity related to our uncertain tax positions (in millions):

	Tax		Interest		Penalties
Balance as of January 1, 2021	$	333	$	61	$	4
Additions for tax positions of the current year	85		—		—
Additions for tax positions of prior years	107		23		—
Reductions for tax positions of prior years for:
Changes based on facts and circumstances	(42)		(4)		(2)
Settlements during the period	(3)		(2)		—
Lapses of applicable statute of limitations	—		—		—
Balance as of December 31, 2021	480		78		2
Additions for tax positions of the current year	56		—		—
Additions for tax positions of prior years	25		30		2
Reductions for tax positions of prior years for:
Changes based on facts and circumstances	(9)		(1)		—
Settlements during the period	(10)		(1)		—
Lapses of applicable statute of limitations	(9)		(2)		—
Balance as of December 31, 2022	533		104		4
Additions for tax positions of the current year	26		—		—
Additions for tax positions of prior years	147		37		1
Reductions for tax positions of prior years for:
Changes based on facts and circumstances	(164)		(24)		(1)
Settlements during the period	(47)		(9)		—
Lapses of applicable statute of limitations	(3)		—		—
Balance as of December 31, 2023	$	492	$	108	$	4

The total amount of gross uncertain tax positions as of December 31, 2023, 2022, and 2021 that, if recognized, would affect the effective tax rate was $492, $533, and $479 million, respectively. Our continuing policy is to recognize interest and penalties associated with income tax matters as a component of income tax expense.

We file income tax returns in the U.S. federal jurisdiction, most U.S. state and local jurisdictions, and many non-U.S. jurisdictions. We have substantially resolved all U.S. federal income tax matters for tax years prior to 2016.

A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the liability for uncertain tax positions could significantly increase or decrease within the next twelve months. Items that may cause changes to unrecognized tax benefits include the allowance or disallowance of deductions, the timing of deductions and the allocation of income and expense between tax jurisdictions. These changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the expiration of the statute of limitations, or other unforeseen circumstances. At this time, an estimate of the range of the reasonably possible change cannot be made.