Income Taxes

12 Months Ended

Dec. 31, 2020

The components of (Loss)/earnings before income taxes were:


Years ended December 31,	2020	2019	2018
U.S.	($14,882)	($2,792)	$11,166
Non-U.S.	406	533	438
Total	($14,476)	($2,259)	$11,604

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


Years ended December 31,	2020	2019	2018
Current tax (benefit)/expense
U.S. federal	($3,968)	($308)	$1,873
Non-U.S.	148	169	169
U.S. state	21	(161)	97
Total current	(3,799)	(300)	2,139
Deferred tax (benefit)/expense
U.S. federal	652	(953)	(996)
Non-U.S.		(3)	(4)
U.S. state	612	(367)	5
Total deferred	1,264	(1,323)	(995)
Total income tax (benefit)/expense	($2,535)	($1,623)	$1,144

Net income tax payments were $37, $837 and $1,326 in 2020, 2019 and 2018, respectively.

The following is a reconciliation of the U.S. federal statutory tax to actual income tax expense:


Years ended December 31,	2020			2019			2018
	Amount	Rate		Amount	Rate		Amount	Rate
U.S. federal statutory tax	($3,039)	21.0	%	($474)	21.0	%	$2,437	21.0	%
Valuation allowance	2,603	(18.0)		25	(1.1)		22	0.2
Impact of CARES Act (1)	(1,175)	8.1
Audit settlements(2)	(587)	4.1		(371)	16.4		(412)	(3.6)
Research and development credits	(284)	2.0		(382)	16.9		(207)	(1.8)
Other provision adjustments	234	(1.7)		66	(3.0)		91	1.0
State income tax provision, net of effects on U.S. federal tax	(168)	1.2		(45)	2.0		75	0.6
Excess tax benefits(3)	(82)	0.6		(180)	8.0		(181)	(1.6)
Foreign derived intangible income(4)	(31)	0.2		(229)	10.1		(549)	(4.7)
Tax deductible dividends	(13)	0.1		(53)	2.4		(48)	(0.4)
Tax on non-US activities	7	(0.1)		20	(0.9)		27	0.2
Impact of Tax Cuts and Jobs Act(5)							(111)	(1.0)

Income tax (benefit)/expense	($2,535)	17.5	%	($1,623)	71.8	%	$1,144	9.9	%

(1) On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted, which includes a five year net operating loss (NOL) carryback provision which enabled us to benefit from certain losses and re-measure certain deferred tax assets and liabilities at the former federal tax rate of 35%. In 2020, we recorded tax benefits of $1,175 related to the NOL carryback provision.

(2) In the fourth quarter of 2020, we recorded a tax benefit of $587 related to the settlement of the 2015-2017 federal tax audit. In the fourth quarter of 2019, we recorded a tax benefit of $371 related to the settlement of state tax audits spanning 15 tax years. In the third quarter of 2018, we recorded a tax benefit of $412 related to the settlement of the 2013-2014 federal tax audit.

(3) In 2020, 2019 and 2018, we recorded excess tax benefits related to employee share-based payments of $82, $180 and $181, respectively.

(4) In 2020, 2019 and 2018, we recorded tax benefits related to foreign derived intangible income of $31, $229 and $549, respectively which effectively apply a lower U.S. tax rate to intangible income derived from serving non-U.S. markets.

(5) During the fourth quarter of 2018 and in accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 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.

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


	2020	2019
Inventory and long-term contract methods of income recognition	($4,313)	($6,048)
Pension benefits	3,029	3,495
Fixed assets, intangibles and goodwill	(1,645)	(1,544)
737 MAX customer concessions and other considerations	1,253	1,626
Net operating loss, credit and capital loss carryovers(1)	1,182	696
Other postretirement benefit obligations	1,023	1,120
Other employee benefits	957	849
Accrued expenses and reserves	808	628
Customer and commercial financing	(180)	(268)
Other	56	(166)
Gross deferred tax assets/(liabilities) before valuation allowance	$2,170	$388
Valuation allowance	(3,094)	(118)
Net deferred tax assets/(liabilities) after valuation allowance	($924)	$270

(1) Of the deferred tax asset for net operating loss and credit carryovers, $793 expires on or before December 31, 2040 and $389 may be carried over indefinitely.

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


	2020	2019
Deferred tax assets	$11,600	$10,722
Deferred tax liabilities	(9,430)	(10,334)
Valuation allowance	(3,094)	(118)
Net deferred tax assets/(liabilities)	($924)	$270

The Company’s deferred income tax assets of $11,600 can be used in future years to offset taxable income and reduce income taxes payable. The Company’s deferred income tax liabilities of $9,430 will partially offset deferred income tax assets and result in higher taxable income in future years and increase income taxes payable. Tax law determines whether future reversals of temporary differences will result in taxable and deductible amounts that offset each other in future years. The particular years in which temporary differences result in taxable or deductible amounts generally are determined by the timing of the recovery of the related asset or settlement of the related liability. The deferred income tax assets and liabilities relate primarily to U.S. federal and state tax jurisdictions. From a U.S. federal tax perspective the Company does not have any significant net operating loss carryforwards nor does it have any significant federal tax credits that are at risk of expiring. The Company generated taxable income in 2018 and 2019 and expects to have a tax net operating loss in 2020 that will be carried back to prior years when the tax rate was 35% due to the CARES Act benefit as described above.

During 2019 and 2020 the Company generated significant pre-tax losses and in the fourth quarter of 2020 the Company reached a three-year cumulative pre-tax loss position. We also normalized earnings and other comprehensive income for certain non-recurring items including certain 737 MAX expenses, an agreement with the Department of Justice, severance costs and remeasurement gains and losses from the annual remeasurement of pension and other postretirement benefit obligations. On a normalized basis the Company expects to reach a three-year cumulative loss position in 2021 as record earnings in 2018 are replaced by 2021 results. For purposes of assessing the recoverability of deferred

tax assets, the Company determined that it could not include future projected earnings in the analysis due to recent history of losses.

As of December 31, 2020 the Company has recorded valuation allowances of $3,094 primarily for certain federal deferred tax assets, state net operating loss carryforwards, and state tax credits. To measure the valuation allowance, the Company estimated in what year each of its deferred tax assets and liabilities would reverse using systematic and logical methods to determine the reversal patterns. Based on these methods, deferred tax liabilities are assumed to reverse and generate taxable income over the next 5 to 10 years while deferred tax assets related to pension and other postretirement benefit obligations are assumed to reverse and generate tax deductions over the next 15 to 20 years. The valuation allowance primarily results from not having sufficient income from deferred tax liability reversals in the appropriate future periods to support the realization of deferred tax assets. Because the pension and other postretirement benefit obligations are recorded to both continuing operations and other comprehensive income (OCI), the Company recorded a portion of the fourth quarter increase in the valuation allowance to income tax expense in continuing operations ($2,513) and a portion to OCI ($196). If the Company continues to generate losses and negative normalized earnings in future periods, additional valuation allowances may have to be recorded with corresponding adverse impacts on earnings and/or OCI. When income generation returns to more normal levels we can expect to see the allowance reverse and increase reported earnings and/or OCI.

The TCJA one-time repatriation tax and Global Intangible Low Tax Income 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, 2020 and 2019, 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, 2020, 2019 and 2018.

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


	2020	2019	2018
Unrecognized tax benefits – January 1	$1,476	$2,412	$1,736
Gross increases – tax positions in prior periods	44	100	87
Gross decreases – tax positions in prior periods	(581)	(1,418)	(410)
Gross increases – current period tax positions	136	344	1,208
Gross decreases – current period tax positions		(1)
Settlements	(109)	39	(206)
Statute Lapse			(3)
Unrecognized tax benefits – December 31	$966	$1,476	$2,412

As of December 31, 2020, 2019 and 2018, the total amount of unrecognized tax benefits was $966, $1,476 and $2,412, respectively, of which $734, $1,287 and $1,405 would affect the effective tax rate, if recognized. As of December 31, 2020, these amounts are primarily associated with the amount of research tax credits claimed and uncertainties in the TCJA.

Federal income tax audits have been settled for all years prior to 2018. The Internal Revenue Service (IRS) is expected to begin the 2018-2019 federal tax audit in the first quarter of 2021. We are also subject to examination in major state and international jurisdictions for the 2007-2019 tax years. We

believe appropriate provisions for all outstanding tax issues have been made for all jurisdictions and all open years.

- Definition

The 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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