Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The components of the income tax expense are as follows:

	Years Ended December 31,
	2021		2020	2019
	(Dollars in millions)
Income tax expense:
Federal
Current	$	5	5	7
Deferred	514		338	376
State
Current	42		50	15
Deferred	72		55	81
Foreign
Current	23		29	35
Deferred	12		(27)	(11)
Total income tax expense	$	668	450	503

	Years Ended December 31,
	2021		2020	2019
	(Dollars in millions)
Income tax expense was allocated as follows:
Income tax expense in the consolidated statements of operations:
Attributable to income	$	668	450	503
Stockholders' equity:
Tax effect of the change in accumulated other comprehensive loss	$	222	17	(62)

The following is a reconciliation from the statutory federal income tax rate to our effective income tax rate:

	Years Ended December 31,
	2021		2020		2019
	(Percentage of pre-tax income (loss))
Statutory federal income tax rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal income tax benefit	3.3	%	(10.8)	%	(1.6)	%
Goodwill impairment	—	%	(71.0)	%	(28.6)	%
Change in liability for unrecognized tax position	0.1	%	(0.6)	%	(0.2)	%
Legislative changes to GILTI	—	%	1.8	%	—	%
Nondeductible executive stock compensation	0.2	%	(1.6)	%	(0.1)	%
Change in valuation allowance	—	%	2.6	%	—	%
Net foreign income taxes	0.6	%	(0.6)	%	(0.5)	%
Research and development credits	(0.5)	%	1.6	%	0.1	%
Other, net	—	%	0.1	%	(0.7)	%
Effective income tax rate	24.7	%	(57.5)	%	(10.6)	%

The effective tax rate for the year ended December 31, 2020 includes a $555 million unfavorable impact of non-deductible goodwill impairments, a $14 million favorable impact in tax regulations passed in 2020 allowing a high tax exception related to our tax exposure of Global Intangible Low-Taxed Income ("GILTI"), as well as a $20 million benefit related to the release of previously established valuation allowances against capital losses. The effective tax rate for the year ended December 31, 2019 reflects a $1.4 billion unfavorable impact of non-deductible goodwill impairments.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:

	As of December 31,
	2021		2020
	(Dollars in millions)
Deferred tax assets
Post-retirement and pension benefit costs	$	978	1,164
Net operating loss carryforwards	2,463		3,138
Other employee benefits	96		119
Other	554		604
Gross deferred tax assets	4,091		5,025
Less valuation allowance	(1,566)		(1,538)
Net deferred tax assets	2,525		3,487
Deferred tax liabilities
Property, plant and equipment, primarily due to depreciation differences	(3,941)		(3,882)
Goodwill and other intangible assets	(2,473)		(2,755)
Gross deferred tax liabilities	(6,414)		(6,637)
Net deferred tax liability	$	(3,889)	(3,150)

Of the $3.9 billion and $3.2 billion net deferred tax liability at December 31, 2021 and 2020, respectively, $4.0 billion and $3.3 billion is reflected as a long-term liability and $160 million and $191 million is reflected as a net noncurrent deferred tax asset, in other, net on our consolidated balance sheets at December 31, 2021 and 2020, respectively.

At December 31, 2021, we had federal NOLs of $2.9 billion, net of limitations of Section 382 of the Internal Revenue Code ("Section 382") and uncertain tax positions, for U.S. federal income tax purposes. If unused, the NOLs will expire between 2026 and 2037. The U.S. federal net operating loss carryforwards expire as follows:

Expiring	Amount
December 31,	(Dollars in millions)
2026	$	741
2027	375
2028	637
2029	645
2030	668
2031	733
2032	348
2033	238
2037	2,976
NOLs per return	7,361
Uncertain tax positions	(4,457)
Financial NOLs	$	2,904

We expect to use substantially all of these tax attributes to reduce our future federal tax liabilities, although the timing of that use will depend upon our future earnings and future tax circumstances.

At December 31, 2021 we had state net operating loss carryforwards of $16 billion (net of uncertain tax positions). We also had foreign NOL carryforwards of $6 billion. Our acquisitions of Level 3, Qwest and SAVVIS, Inc. caused "ownership changes" within the meaning of Section 382 for the acquired companies. As a result, our ability to use these NOLs and tax credits are subject to annual limits imposed by Section 382.

We establish valuation allowances when necessary to reduce the deferred tax assets to amounts we expect to realize. As of December 31, 2021, a valuation allowance of $1.6 billion was established as it is more likely than not that this amount of net operating loss, capital loss and tax credit carryforwards will not be utilized prior to expiration. Our valuation allowance at December 31, 2021 and 2020 is primarily related to foreign and state NOL carryforwards. This valuation allowance increased by $28 million during 2021, primarily due to the impact of adjustments related to the planned divestiture of our Latin American business.

A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from January 1 to December 31 for 2021 and 2020 is as follows:

	2021		2020
	(Dollars in millions)
Unrecognized tax benefits at beginning of year	$	1,474	1,538
Increase in tax positions of the current year netted against deferred tax assets	1		18
Increase in tax positions of prior periods netted against deferred tax assets	—		5
Decrease in tax positions of the current year netted against deferred tax assets	(101)		(86)
Decrease in tax positions of prior periods netted against deferred tax assets	(1)		(5)
Increase in tax positions taken in the current year	4		4
Increase in tax positions taken in the prior year	2		1
Decrease due to payments/settlements	(3)		(1)
Decrease from the lapse of statute of limitations	(1)		—
Unrecognized tax benefits at end of year	$	1,375	1,474

The total amount (including both interest and any related federal benefit) of unrecognized tax benefits that, if recognized, would impact the effective income tax rate was $273 million and $267 million at December 31, 2021 and 2020, respectively.

Our policy is to reflect interest expense associated with unrecognized tax benefits in income tax expense. We had accrued interest (presented before related tax benefits) of approximately $24 million and $23 million at December 31, 2021 and 2020, respectively.

We, or at least one of our subsidiaries, file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carryforwards are available.

Based on our current assessment of various factors, including (i) the potential outcomes of these ongoing examinations, (ii) the expiration of statute of limitations for specific jurisdictions, (iii) the negotiated settlement of certain disputed issues, and (iv) the administrative practices of applicable taxing jurisdictions, it is reasonably possible that the related unrecognized tax benefits for uncertain tax positions previously taken may decrease by up to $3 million within the next 12 months. The actual amount of such decrease, if any, will depend on several future developments and events, many of which are outside our control.