Income Taxes

The components of earnings before income taxes were:



Years ended December 31,	2016		2015		2014
U.S.		$5,175		$6,828		$6,829
Non-U.S.	393		327		308
Total		$5,568		$7,155		$7,137

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



Years ended December 31,	2016			2015			2014
Current tax expense
U.S. federal		$1,193			$2,102			$676
Non-U.S.	133			122			91
U.S. state	15			21			69
Total current	1,341			2,245			836
Deferred tax expense
U.S. federal	(618		)	(297		)	828
Non-U.S.	(4		)	4			34
U.S. state	(46		)	27			(7		)
Total deferred	(668		)	(266		)	855
Total income tax expense		$673			$1,979			$1,691

Net income tax payments were $1,460, $1,490 and $355 in 2016, 2015 and 2014, 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,	2016		2015		2014
U.S. federal statutory tax	35.0	%	35.0	%	35.0	%
Research and development credits	(5.2	)	(3.4	)	(2.9	)
Tax basis adjustment ⁽¹⁾	(7.9	)			(3.6	)
U.S. manufacturing activity tax benefit	(3.8	)	(2.9	)	(1.2	)
Tax on international activities	(0.5	)	(0.6	)	(0.2	)
Excess tax benefits ⁽²⁾	(1.9	)
Federal audit settlements⁽³⁾	(3.2	)			(3.6	)
Other provision adjustments	(0.4	)	(0.4	)	0.2
Effective income tax rate	12.1	%	27.7	%	23.7	%


⁽¹⁾	In the third quarter of 2016 and the second quarter of 2014, we recorded incremental tax benefits of $440 and $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 (tax basis adjustment).


⁽²⁾	Throughout 2016, we recorded tax benefits of $105 as a result of the adoption of ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting” which required excess tax benefits related to employee share-based payments to be recorded through tax expense.


⁽³⁾	In the third quarter of 2016, a tax benefit of $177 was recorded as a result of the settlement of the 2011-2012 federal tax audit. 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.

Federal income tax audits have been settled for all years prior to 2013. The Internal Revenue Service (IRS) began the 2013-2014 federal tax audit in the fourth quarter of 2016. We are also subject to examination in major state and international jurisdictions for the 2001-2016 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:



	2016			2015
Inventory and long-term contract methods of income recognition	(9,954		)	(10,401		)
Pension benefits	7,385			6,303
Retiree health care benefits	2,268			2,513
Fixed assets, intangibles and goodwill (net of valuation allowance $16 and $16)	(2,007		)	(1,837		)
Other employee benefits	1,225			1,339
Customer and commercial financing	(730		)	(777		)
Accrued expenses and reserves	587			609
Net operating loss, credit and capital loss carryovers (net of valuation allowance of $79 and $89)⁽¹⁾	277			216
Other	(57		)	(92		)
Net deferred tax (liabilities)/assets⁽²⁾		($1,006	)		($2,127	)


⁽¹⁾	Of the deferred tax asset for net operating loss and credit carryovers, $262 expires on or before December 31, 2036 and $15 may be carried over indefinitely.


⁽²⁾	Included in the net deferred tax (liabilities)/assets as of December 31, 2016 and 2015 are deferred tax assets in the amounts of $7,701 and $7,277 related to Accumulated other comprehensive loss.

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



	2016			2015
Deferred tax assets		$13,591			$13,128
Deferred tax liabilities	(14,502		)	(15,150		)
Valuation allowance	(95		)	(105		)
Net deferred tax (liabilities)/assets		($1,006	)		($2,127	)

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 $32 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 $850 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, 2016 and 2015, the amounts accrued for the payment of income tax-related interest and penalties included in the Consolidated Statements of Financial Position were not significant. The amounts of interest benefit included in the Consolidated Statements of Operations were not significant for the years ended December 31, 2016, 2015 and 2014.

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



	2016			2015			2014
Unrecognized tax benefits – January 1		$1,617			$1,312			$1,141
Gross increases – tax positions in prior periods	17			38			403
Gross decreases – tax positions in prior periods	(348		)	(25		)	(251		)
Gross increases – current-period tax positions	344			292			217
Settlements	(73		)				(197		)
Lapse of statute of limitations							(1		)
Unrecognized tax benefits – December 31		$1,557			$1,617			$1,312

As of December 31, 2016, 2015 and 2014, the total amount of unrecognized tax benefits was $1,557, $1,617 and $1,312, respectively, of which $1,402, $1,479 and $1,180 would affect the effective tax rate, if recognized. As of December 31, 2016, these amounts are primarily associated with U.S. federal tax issues such as the amount of research tax credits claimed, the U.S. manufacturing activity tax benefit, 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.