Income Taxes

The components of earnings before income taxes were:



Years ended December 31,	2014		2013		2012
U.S.		$6,829		$5,946		$5,647
Non-U.S.	308		286		263
Total		$7,137		$6,232		$5,910

Income tax expense/(benefit) consisted of the following:



Years ended December 31,	2014			2013			2012
Current tax expense
U.S. federal		$676			($82	)		$657
Non-U.S.	91			76			52
U.S. state	69			11			19
Total current	836			5			728
Deferred tax expense
U.S. federal	828			1,531			1,209
Non-U.S.	34			41			(13		)
U.S. state	(7		)	69			83
Total deferred	855			1,641			1,279
Total income tax expense		$1,691			$1,646			$2,007

Net income tax payments were $355, $209 and $410 in 2014, 2013 and 2012, respectively.

The following is a reconciliation of the U.S. federal statutory tax rate of 35% to our effective income tax rates:



Years ended December 31,	2014		2013		2012
U.S. federal statutory tax	35.0	%	35.0	%	35.0	%
Research and development credits ⁽¹⁾	(2.9	)	(4.9	)	0.8
Amendments to the R&E regulations ⁽²⁾			(3.4	)
Tax basis adjustment ⁽³⁾	(3.6	)
Tax on international activities	(0.2	)	(0.1	)	(1.2	)
Tax deductible dividends	(0.7	)	(0.6	)	(0.7	)
State income tax provision, net of effect on U.S. federal tax	0.7		0.4		0.8
Federal audit settlements⁽⁴⁾	(3.6	)
Other provision adjustments	(1.0	)			(0.7	)
Effective income tax rate	23.7	%	26.4	%	34.0	%


⁽¹⁾	In the fourth quarter of 2014, we recorded tax benefits of $188 related to the reinstatement of the research tax credit for 2014. Research tax credits for the 2013 and 2012 tax years were both recorded in 2013.


⁽²⁾	In 2013, we recorded $212 for the issuance of favorable regulations related to research and experimental (R&E) expenditures.


⁽³⁾	In the second quarter of 2014 we recorded an incremental tax benefit of $265 related to the application of a 2012 Federal Court of Claims decision which held that the tax basis in certain assets could be increased and realized upon the assets' disposition (tax basis adjustment).


⁽⁴⁾	In the second quarter of 2014, tax benefits of $116 and $143 were recorded as a result of the 2007-2008 and 2009-2010 federal tax audit settlements.

The research tax credit expired on December 31, 2014. If the research tax credit is not extended there would be an unfavorable impact to our 2015 effective income tax rate.

Federal income tax audits have been settled for all years prior to 2011. The years 2011-2012 are currently being examined by the IRS. We are also subject to examination in major state and international jurisdictions for the 2001-2014 tax years. We believe appropriate provisions for all outstanding tax issues have been made for all jurisdictions and all open years.

Significant components of our deferred tax (liabilities)/assets at December 31 were as follows:



	2014			2013
Inventory and long-term contract methods of income recognition, fixed assets and other (net of valuation allowance of $18 and $20)		($11,589	)		($9,948	)
Pension benefits	6,145			3,099
Retiree health care benefits	2,572			2,458
Other employee benefits	1,477			1,773
Customer and commercial financing	(853		)	(990		)
Net operating loss, credit and capital loss carryovers (net of valuation allowance of $63 and $105)⁽¹⁾	266			362
Other net unrealized losses	110			26
Unremitted earnings of non-U.S. subsidiaries	(37		)	(44		)
In-process research and development related to acquisitions	10			23
Partnerships and joint ventures	9			(62		)
Net deferred tax (liabilities)/assets⁽²⁾		($1,890	)		($3,303	)


⁽¹⁾	Of the deferred tax asset for net operating loss and credit carryovers, $252 expires in years ending from December 31, 2015 through December 31, 2034 and $14 may be carried over indefinitely.


⁽²⁾	Included in the net deferred tax (liabilities)/assets as of December 31, 2014 and 2013 are deferred tax assets in the amounts of $8,007 and $5,818 related to Accumulated other comprehensive loss.

Net deferred tax (liabilities)/assets at December 31 were as follows:



	2014			2013
Deferred tax assets		$14,219			$12,486
Deferred tax liabilities	(16,028		)	(15,664		)
Valuation allowance	(81		)	(125		)
Net deferred tax (liabilities)/assets		($1,890	)		($3,303	)

The measurement of deferred tax assets is reduced by a valuation allowance if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

We have provided for U.S. deferred income taxes and foreign withholding tax in the amount of $37 on undistributed earnings not considered indefinitely reinvested in our non-U.S. subsidiaries. We have not provided for U.S. deferred income taxes or foreign withholding tax on the remainder of undistributed earnings from our non-U.S. subsidiaries of approximately $800 because such earnings are considered to be indefinitely reinvested and it is not practicable to estimate the amount of tax that may be payable upon distribution.

As of December 31, 2014 and 2013, the amounts accrued for the payment of income tax-related interest and penalties included in the Consolidated Statements of Financial Position were as follows: interest of $17 and $12 and penalties of $5 and $8. The amounts of interest benefit included in the Consolidated Statements of Operations were $17, $4, and $43 for the years ended December 31, 2014, 2013 and 2012, respectively. The interest benefit recorded during 2012 was primarily related to the settlement of non-US audits.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2014			2013			2012
Unrecognized tax benefits – January 1		$1,141			$1,055			$939
Gross increases – tax positions in prior periods	403			10			55
Gross decreases – tax positions in prior periods	(251		)	(125		)	(20		)
Gross increases – current-period tax positions	217			202			83
Gross decreases – current-period tax positions				(1		)	(1		)
Settlements	(197		)				(1		)
Lapse of statute of limitations	(1		)
Unrecognized tax benefits – December 31		$1,312			$1,141			$1,055

As of December 31, 2014, 2013 and 2012, the total amount of unrecognized tax benefits was $1,312, $1,141 and $1,055, respectively, of which $1,180, $1,018 and $945 would affect the effective tax rate, if recognized. As of December 31, 2014, these amounts are primarily associated with U.S. federal tax issues such as the amount of research tax credits claimed, the domestic production activities deductions claimed, tax basis adjustments and U.S. taxation of foreign earnings. Also included in these amounts are accruals for domestic state tax issues such as the allocation of income among various state tax jurisdictions and the amount of state tax credits claimed.