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Income Taxes
 12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The components of earnings before income taxes were:
Years ended December 31,
2018

 
2017

 
2016

U.S.

$11,166

 

$9,660

 

$5,386

Non-U.S.
438

 
447

 
397

Total

$11,604

 

$10,107

 

$5,783


Income tax expense/(benefit) consisted of the following:
Years ended December 31,
2018

 
2017

 
2016

Current tax expense
 
 
 
 
 
U.S. federal

$1,873

 

$1,276

 

$1,193

Non-U.S.
169

 
149

 
133

U.S. state
97

 
23

 
15

Total current
2,139

 
1,448

 
1,341

Deferred tax expense
 
 
 
 
 
U.S. federal
(996
)
 
204

 
(544
)
Non-U.S.
(4
)
 
3

 
(4
)
U.S. state
5

 
(6
)
 
(44
)
Total deferred
(995
)
 
201

 
(592
)
Total income tax expense

$1,144

 

$1,649

 

$749


Net income tax payments were $1,326, $896 and $1,460 in 2018, 2017 and 2016, respectively.
The following is a reconciliation of the U.S. federal statutory tax rate to our effective income tax rates:
Years ended December 31,
2018

 
2017

 
2016

U.S. federal statutory tax
21.0
 %
 
35.0
 %
 
35.0
 %
Foreign derived intangible income(1)
(4.7
)
 


 


Federal audit settlements(2)
(3.6
)
 


 
(3.1
)
Research and development credits
(1.8
)
 
(1.6
)
 
(5.0
)
Excess tax benefits(3)
(1.6
)
 
(2.1
)
 
(1.8
)
Other provision adjustments
1.3

 
(0.2
)
 
(0.3
)
Impact of Tax Cuts and Jobs Act(4)
(1.0
)
 
(12.6
)
 
 
Tax on non-US activities
0.3

 
(0.9
)
 
(0.5
)
Tax basis adjustment(5)


 


 
(7.6
)
U.S. manufacturing activity tax benefit

 
(1.3
)
 
(3.7
)
Effective income tax rate
9.9
 %
 
16.3
 %
 
13.0
 %


(1) 
On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was enacted. The TCJA revised the U.S. corporate income tax by, among other things, lowering the rate from 35% to 21% effective January 1, 2018, implementing a territorial tax system and imposing a one-time tax on deemed repatriated earnings of non-U.S. subsidiaries. The TCJA also enacted provisions which effectively apply a lower U.S. tax rate to intangible income derived from serving non-U.S. markets. In 2018, we recorded a $549 tax benefit related to foreign derived intangible income.
(2) 
In the third quarter of 2018, we recorded a tax benefit of $412 related to the settlement of the 2013-2014
federal tax audit. In the third quarter of 2016, a tax benefit of $177 was recorded related to the settlement of the 2011-2012 federal tax audit.
(3) 
In 2018, 2017 and 2016, we recorded excess tax benefits related to employee share-based payments of $181, $207 and $105.
(4) 
In accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118 (SAB 118), in the fourth quarter of 2017, we recorded provisional tax benefits of $1,430 related to the remeasurement of our net U.S. deferred tax liabilities to reflect the reduction in the corporate tax rate and a provisional tax expense of $159 related to tax on non-U.S. activities resulting from the TCJA. During the fourth quarter of 2018 and in accordance with SAB 118, the Company completed its accounting for the provisional amounts recognized at December 31, 2017 and recorded an incremental benefit related to refinements to these provisional amounts which was not significant.
(5) 
In the third quarter of 2016, we recorded incremental tax benefits of $440 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).
Significant components of our deferred tax (liabilities)/assets at December 31 were as follows:
 
2018

 
2017

Inventory and long-term contract methods of income recognition
(5,422
)
 
(6,459
)
Pension benefits
3,344

 
3,565

Fixed assets, intangibles and goodwill (net of valuation allowance of $16 and $16)
(1,616
)
 
(1,253
)
Retiree health care benefits
1,124

 
1,304

Other employee benefits
873

 
847

Accrued expenses and reserves
411

 
334

Customer and commercial financing
(309
)
 
(369
)
Net operating loss, credit and capital loss carryovers (net of valuation allowance of $77 and $53)(1)
258

 
299

Other
(115
)
 
(135
)
Net deferred tax (liabilities)/assets(2)

($1,452
)
 

($1,867
)

(1)  
Of the deferred tax asset for net operating loss and credit carryovers, $244 expires on or before December 31, 2037 and $14 may be carried over indefinitely.
(2)  
Included in the net deferred tax (liabilities)/assets as of December 31, 2018 and 2017 are deferred tax assets in the amounts of $4,275 and $4,636 related to Accumulated other comprehensive loss.
Net deferred tax (liabilities)/assets at December 31 were as follows:

2018

 
2017

Deferred tax assets

$8,835

 

$8,399

Deferred tax liabilities
(10,194
)
 
(10,197
)
Valuation allowance
(93
)
 
(69
)
Net deferred tax (liabilities)/assets

($1,452
)
 

($1,867
)

The deferred tax assets are 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.
In accordance with U.S. GAAP, the Company has made an accounting policy election to treat Global Intangible Low Tax Income (GILTI) as a current year tax expense in the period in which it is incurred.
Therefore, we have not provided any deferred tax impacts of GILTI in our Consolidated Financial Statements for the year ended December 31, 2018.
The TCJA one-time repatriation tax and GILTI liabilities effectively taxed the undistributed earnings previously deferred from U.S. income taxes. We have not provided for foreign withholding tax on the undistributed earnings from our non-U.S. subsidiaries because such earnings are considered to be indefinitely reinvested. If such earnings were to be distributed, any foreign withholding tax would not be significant.
As of December 31, 2018 and 2017, 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 included in the Consolidated Statements of Operations were not significant for the years ended December 31, 2018, 2017 and 2016.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
 
2018

 
2017

 
2016

Unrecognized tax benefits – January 1

$1,736

 

$1,557

 

$1,617

Gross increases – tax positions in prior periods
87

 
3

 
17

Gross decreases – tax positions in prior periods
(410
)
 
(44
)
 
(348
)
Gross increases – current-period tax positions
1,208

 
220

 
344

Settlements
(206
)
 


 
(73
)
Statute Lapse
(3
)
 


 


Unrecognized tax benefits – December 31

$2,412

 

$1,736

 

$1,557


As of December 31, 2018, 2017 and 2016, the total amount of unrecognized tax benefits was $2,412, $1,736 and $1,557, respectively, of which $1,405, $1,568 and $1,402 would affect the effective tax rate, if recognized. As of December 31, 2018, these amounts are primarily associated with uncertainties in the TCJA and the amount of research tax credits claimed. 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.
Federal income tax audits have been settled for all years prior to 2015. The Internal Revenue Service (IRS) is expected to begin the 2015-2017 federal tax audit in the first quarter of 2019. We are also subject to examination in major state and international jurisdictions for the 2001-2017 tax years. We believe appropriate provisions for all outstanding tax issues have been made for all jurisdictions and all open years.
Audit outcomes and the timing of audit settlements are subject to significant uncertainty. It is reasonably possible that within the next 12 months unrecognized tax benefits related to state matters under audit may decrease by up to $460 based on current estimates.