Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The components of income before provision for income taxes are as follows (in millions):

	Year Ended December 31,
	2022		2021		2020
Domestic	$	25,025	$	43,669	$	24,233
Foreign	3,794		3,615		8,947
Income before provision for income taxes	$	28,819	$	47,284	$	33,180

The provision for income taxes consists of the following (in millions):

	Year Ended December 31,
	2022		2021		2020
Current:
Federal	$	6,094	$	4,971	$	3,297
State	874		548		523
Foreign	1,928		1,786		1,211
Total current tax expense	8,896		7,305		5,031
Deferred:
Federal	(2,776)		585		(859)
State	(405)		43		(122)
Foreign	(96)		(19)		(16)
Total deferred tax (benefits)/expense	(3,277)		609		(997)
Provision for income taxes	$	5,619	$	7,914	$	4,034

 

A reconciliation of the U.S. federal statutory income tax rates to our effective tax rate is as follows (in percentages):

	Year Ended December 31,
	2022		2021		2020
U.S. federal statutory income tax rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal benefit	1.0		1.0		0.8
Share-based compensation	2.6		(1.7)		(1.4)
Research and development tax credits	(2.4)		(1.3)		(1.3)
Foreign-derived intangible income deduction	(7.0)		(3.5)		(1.9)
Effect of non-U.S. operations	3.0		0.9		(2.4)
Research and development capitalization	—		—		(3.0)
Other	1.3		0.3		0.4
Effective tax rate	19.5	%	16.7	%	12.2	%

Our deferred tax assets (liabilities) are as follows (in millions):

	December 31,
	2022		2021
Deferred tax assets:
Loss carryforwards	$	234	$	2,443
Tax credit carryforwards	1,576		1,385
Share-based compensation	368		319
Accrued expenses and other liabilities	1,627		1,195
Lease liabilities	3,200		2,597
Capitalized research and development	8,175		1,691
Unrealized losses in securities and investments	489		—
Other	621		449
Total deferred tax assets	16,290		10,079
Less: valuation allowance	(2,493)		(1,586)
Deferred tax assets, net of valuation allowance	13,797		8,493
Deferred tax liabilities:
Depreciation and amortization	(6,296)		(4,425)
Right-of-use assets	(2,555)		(2,339)
Total deferred tax liabilities	(8,851)		(6,764)
Net deferred tax assets	$	4,946	$	1,729

The valuation allowance was approximately $2.49 billion and $1.59 billion as of December 31, 2022 and 2021, respectively, primarily related to U.S. state tax credit carryforwards, U.S. foreign tax credits, unrealized losses in securities and investments, and certain foreign tax attributes for which we do not believe a tax benefit is more likely than not to be realized.

As of December 31, 2022, the U.S. federal and state net operating loss carryforwards were $196 million and $1.40 billion, which will begin to expire in 2035 and 2032, respectively, if not utilized. We have federal tax credit carryforwards of $276 million, which will begin to expire in 2029, if not utilized, and state tax credit carryforwards of $3.72 billion, most of which do not expire.

Utilization of our net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the net operating loss and tax credit carryforwards before their utilization. The events that may cause ownership changes include, but are not limited to, a cumulative stock ownership change of greater than 50% over a three‑year period.

The following table reflects changes in the gross unrecognized tax benefits (in millions):

	Year Ended December 31,
	2022		2021		2020
Gross unrecognized tax benefits ‑ beginning of period	$	9,807	$	8,692	$	7,863
Increases related to prior year tax positions	210		328		356
Decreases related to prior year tax positions	(172)		(86)		(253)
Increases related to current year tax positions	1,166		963		1,045
Decreases related to settlements of prior year tax positions	(254)		(90)		(319)
Gross unrecognized tax benefits ‑ end of period	$	10,757	$	9,807	$	8,692

These unrecognized tax benefits were primarily accrued for the uncertainties related to transfer pricing with our foreign subsidiaries, which include licensing of intellectual property, providing services and other transactions, as well as for the uncertainties with our research tax credits. During all years presented, we recognized interest and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated statements of income. The amount of interest and penalties accrued as of December 31, 2022 and 2021 were $1.07 billion and $960 million, respectively.

If the balance of gross unrecognized tax benefits of $10.76 billion as of December 31, 2022 were realized in a future period, this would result in a tax benefit of $6.49 billion within our provision of income taxes at such time.

We are subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictions in which we are subject to potential examination include the United States and Ireland. We are under examination by the Internal Revenue Service (IRS) for our 2014 through 2019 tax years. Our 2020 and subsequent tax years remain open to examination by the IRS and the Irish Revenue Commissioners.

In July 2016, we received a Statutory Notice of Deficiency (Notice) from the IRS related to transfer pricing with our foreign subsidiaries in conjunction with the examination of the 2010 tax year. While the Notice applies only to the 2010 tax year, the IRS stated that it will also apply its position for tax years subsequent to 2010 and has done so in years covered by the second Notice described below. We do not agree with the position of the IRS and have filed a petition in the Tax Court challenging the Notice. On January 15, 2020, the IRS's amendment to answer was filed stating that it planned to assert at trial an adjustment that is higher than the adjustment stated in the Notice. The first session of the trial was completed in March 2020 and the final trial session was completed in August 2022. We expect the Tax Court to issue an opinion in 2024. Based on the information provided, we believe that, if the IRS prevails in its updated position, this could result in an additional federal tax liability of an estimated, aggregate amount of up to approximately $9.0 billion in excess of the amounts in our originally filed U.S. return, plus interest and any penalties asserted.

In March 2018, we received a second Notice from the IRS in conjunction with the examination of our 2011 through 2013 tax years. The IRS applied its position from the 2010 tax year to each of these years and also proposed new adjustments related to other transfer pricing with our foreign subsidiaries and certain tax credits that we claimed. If the IRS prevails in its position for these new adjustments, this could result in an additional federal tax liability of up to approximately $680 million in excess of the amounts in our originally filed U.S. returns, plus interest and any penalties asserted. We do not agree with the positions of the IRS in the second Notice and have filed a petition in the Tax Court challenging the second Notice.

We have previously accrued an estimated unrecognized tax benefit consistent with the guidance in ASC 740, Income Taxes (ASC 740), that is lower than the potential additional federal tax liability from the positions taken by the IRS in the two Notices and its Pretrial Memorandum. In addition, if the IRS prevails in its positions related to transfer pricing with our foreign subsidiaries, the additional tax that we would owe would be partially offset by a reduction in the tax that we owe under the mandatory transition tax on accumulated foreign earnings from the 2017 Tax Cuts and Jobs Act. As of December 31, 2022, we have not resolved these matters and proceedings continue in the Tax Court.

We believe that adequate amounts have been reserved in accordance with ASC 740 for any adjustments to the provision for income taxes or other tax items that may ultimately result from these examinations. The timing of the resolution, settlement, and closure of any audits is highly uncertain, and it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. Given the number of years remaining that are subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits. If the tax authorities prevail in the assessment of additional tax due, the assessed tax, interest, and penalties, if any, could have a material adverse impact on our financial position, results of operations, and cash flows.