INCOME TAXES

The TCJA was signed into law on December 22, 2017, providing several significant changes to U.S. tax law, including a reduction in the corporate tax rate from 35 percent to 21 percent effective for MPC in 2018. As a result of the rate change, MPC was required to calculate the effect of the TCJA on its deferred tax balances as of the enactment date, which was to reduce net deferred tax liabilities by $1.5 billion in 2017.

Income tax provisions (benefits) were:



	2018							2017									2016
(In millions)	Current		Deferred			Total		Current			Deferred			Total			Current			Deferred		Total
Federal	$	715	$	2		$	717	$	681		$	(1,270	)	$	(589	)	$	189		$	336	$	525
State and local	178		61			239		98			33			131			27			57		84
Foreign	22		(16		)	6		(6		)	4			(2		)	(1		)	1		—
Total	$	915	$	47		$	962	$	773		$	(1,233	)	$	(460	)	$	215		$	394	$	609

A reconciliation of the federal statutory income tax rate applied to income before income taxes to the provision for income taxes follows:



	2018		2017		2016
Statutory rate applied to income before income taxes	21	%	35	%	35	%
State and local income taxes, net of federal income tax effects	4		2		3
Domestic manufacturing deduction	—		(1	)	(1	)
Noncontrolling interests	(4	)	(4	)	(1	)
Biodiesel excise tax credit	—		—		(1	)
TCJA legislation	—		(45	)	—
Other	—		(1	)	(2	)
Provision for income taxes	21	%	(14	)%	33	%

Deferred tax assets and liabilities resulted from the following:



	December 31,
(In millions)	2018		2017
Deferred tax assets:
Employee benefits	$	660	$	348
Environmental remediation	111		16
Debt financing	39		—
Net operating loss carryforwards	17		12
Foreign currency	28		13
Tax credit carryforwards	21		—
Other	88		31
Total deferred tax assets	964		420
Deferred tax liabilities:
Property, plant and equipment	2,830		1,603
Inventories	678		473
Investments in subsidiaries and affiliates	2,130		912
Intangibles	97		70
Other	64		3
Total deferred tax liabilities	5,799		3,061
Net deferred tax liabilities	$	4,835	$	2,641

The increase in net deferred tax liabilities is primarily related to the revaluation of MPC’s legacy deferred tax liabilities and the recognition of net deferred tax liabilities both as a result of the Andeavor acquisition.

Net deferred tax liabilities were classified in the consolidated balance sheets as follows:



	December 31,
(In millions)	2018		2017
Assets:
Other noncurrent assets	$	29	$	13
Liabilities:
Deferred income taxes	4,864		2,654
Net deferred tax liabilities	$	4,835	$	2,641

Tax Carryforwards

At December 31, 2018 and 2017, federal operating loss carryforwards were $7 million and $5 million, respectively, which expire in 2022 through 2037. As of December 31, 2018 and 2017, state and local operating loss carryforwards were $10 million and $8 million, respectively, which expire in 2017 through 2037.

Valuation Allowances

As of December 31, 2018 and 2017, $10 million and $11 million of valuation allowances have been recorded against foreign tax credits and state net operating losses due to the expectation that these deferred tax assets are not likely to be realized.

MPC is continuously undergoing examination of its U.S. federal income tax returns by the Internal Revenue Service (“IRS”). Since 2012, we have continued to participate in the Compliance Assurance Process (“CAP”). CAP is a real-time audit of the U.S. Federal income tax return that allows the IRS, working in conjunction with MPC, to determine tax return compliance with the U.S. Federal tax law prior to filing the return. This program provides us with greater certainty about our tax liability for years under examination by the IRS. While Andeavor also undergoes continual IRS examination, it did not participate in the CAP for tax periods prior to the acquisition of Andeavor.

MPC’s IRS audits have been completed through the 2009 tax year. Andeavor and its subsidiaries’ IRS audits have been completed through the 2008 tax year. We believe adequate provision has been established for potential tax in periods not closed to examination. Further, we are routinely involved in U.S. state income tax audits. We believe all other audits will be resolved with the amounts provided for these liabilities. As of December 31, 2018, our income tax returns remain subject to examination in the following major tax jurisdictions for the tax years indicated:



United States Federal	2009	-	2017
States	2006	-	2017

The following table summarizes the activity in unrecognized tax benefits:



(In millions)	2018			2017			2016
January 1 balance	$	19		$	7		$	12
Additions for tax positions of prior years	—			13			6
Reductions for tax positions of prior years	(5		)	—			(10		)
Settlements	—			(1		)	(1		)
Statute of limitations	(12		)	—			—
Acquired from Andeavor	209			—			—
December 31 balance	$	211		$	19		$	7

If the unrecognized tax benefits as of December 31, 2018 were recognized, $201 million would affect our effective income tax rate. There were $15 million of uncertain tax positions as of December 31, 2018 for which it is reasonably possible that the amount of unrecognized tax benefits would significantly decrease during the next twelve months. The unrecognized tax benefits acquired from Andeavor arise primarily from a 2009-2010 refund claim related to the federal income tax effects of receiving an excise tax credit on ethanol blending for those years.

Prior to its spinoff on June 30, 2011, Marathon Petroleum Corporation was included in the Marathon Oil Corporation (“Marathon Oil”) U.S. federal income tax returns for all applicable years. During the third quarter of 2017, Marathon Oil received a notice of Final Partnership Administrative Adjustment (“FPAA”) from the IRS for taxable year 2010, relating to certain partnership transactions. Marathon Oil filed a U.S. Tax Court petition disputing these adjustments during the fourth quarter of 2017. We received an FPAA for taxable years 2011-2014 for items resulting from the Marathon Oil IRS dispute discussed above. We filed a U.S. Tax Court petition in the fourth quarter of 2017 for tax years 2011-2014 to dispute these corollary adjustments. We continue to believe that the issue in dispute is more likely than not to be fully sustained and therefore, no liability has been accrued for this matter.

Pursuant to our tax sharing agreement with Marathon Oil, the unrecognized tax benefits related to pre-spinoff operations for which Marathon Oil was the taxpayer remain the responsibility of Marathon Oil and we have indemnified Marathon Oil accordingly. See Note 25 for indemnification information.

Interest and penalties related to income taxes are recorded as part of the provision for income taxes. Such interest and penalties were net expenses (benefits) of $1 million, $3 million and ($5) million in 2018, 2017 and 2016, respectively. As of December 31, 2018 and 2017, $18 million and $17 million of interest and penalties were accrued related to income taxes.