Income Taxes

12 Months Ended

Jan. 01, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

We conduct business globally and, as a result, file numerous consolidated and separate income tax returns within and outside the U.S.  For all of our U.S. subsidiaries, we file a consolidated federal income tax return.  Income from continuing operations before income taxes is as follows:

(In millions)	2021		2020		2019
U.S.	$	699	$	202	$	668
Non-U.S.	174		80		274
Income from continuing operations before income taxes	$	873	$	282	$	942

Income tax expense (benefit) is summarized as follows:

(In millions)	2021		2020		2019
Current expense (benefit):
Federal	$	41	$	(1)	$	(48)
State	15		(76)		16
Non-U.S.	47		57		70
	103		(20)		38
Deferred expense (benefit):
Federal	35		3		112
State	(10)		5		(20)
Non-U.S.	(2)		(15)		(3)
	23		(7)		89
Income tax expense (benefit)	$	126	$	(27)	$	127

The following table reconciles the federal statutory income tax rate to our effective income tax rate:

	2021	2020	2019
U.S. Federal statutory income tax rate	21.0%	21.0%	21.0%
Increase (decrease) resulting from:
Research and development tax credits (a)	(7.0)	(18.2)	(7.6)
State income taxes (net of federal impact)	0.5	(1.2)	0.3
Non-U.S. tax rate differential and foreign tax credits (b)	1.3	10.8	1.4
State income tax audit settlement (net of federal impact)	—	(18.6)	—
Outside basis difference in assets held for sale	—	(2.7)	—
U.S. amended returns tax rate differential	—	—	(1.2)
Other, net	(1.4)	(0.7)	(0.4)
Effective income tax rate	14.4%	(9.6)%	13.5%

(a)In 2020, the benefit of research and development tax credits as a percentage of pre-tax income was higher than prior periods primarily due to lower pre-tax income. In 2019, $61 million in benefits were recognized for additional tax credits related to prior years as a result of the completion of a research and development tax analysis.

(b)In 2020, the effective tax rate was unfavorably impacted by a $55 million inventory charge and special charges in a non-U.S. jurisdiction where tax benefits cannot be realized, along with a $10 million tax expense related to a decision to dividend cash back from select non-U.S. jurisdictions to the U.S., partially offset by a $14 million valuation allowance release.

Unrecognized Tax Benefits

Our unrecognized tax benefits represent tax positions for which reserves have been established, with unrecognized state tax benefits reflected net of applicable federal tax benefits. At the end of 2021, 2020 and 2019, if our unrecognized tax benefits were recognized in future periods, they would favorably impact our effective tax rate. A reconciliation of these unrecognized tax benefits is as follows:

(In millions)	2021		2020		2019
Balance at beginning of year	$	183	$	221	$	141
Additions for tax positions related to current year	21		11		9
Additions for tax positions of prior years	10		21		74
Reductions for settlements and expiration of statute of limitations	(3)		(69)		(1)
Reductions for tax positions of prior years	(4)		(1)		(2)
Balance at end of year	$	207	$	183	$	221

In 2020, certain tax positions related to state tax attributes were reduced by $68 million based on an audit settlement with respect to certain state income tax returns. In 2019, additional tax positions primarily reflect the completion of a research and development tax credit analysis for tax credits related to prior years.

In the normal course of business, we are subject to examination by tax authorities throughout the world. We are generally no longer subject to U.S. federal tax examinations for years before 2014, state and local income tax examinations for years before 2017, and non-U.S. income tax examinations for years before 2011. In 2019, we filed U.S. federal amended returns for 2012 and 2013 for additional research and development tax credits that are subject to examination.

Deferred Taxes

The significant components of our net deferred tax assets/(liabilities) are provided below:

(In millions)	January 1, 2022		January 2, 2021
U.S. operating loss and tax credit carryforwards (a)	$	313	$	320
Accrued liabilities (b)	191		202
Obligation for pension and postretirement benefits	175		287
Deferred compensation	108		100
Operating lease liabilities	103		97
Non-U.S. operating loss and tax credit carryforwards (c)	48		65
Prepaid pension benefits (d)	(269)		(44)
Property, plant and equipment, principally depreciation	(204)		(199)
Amortization of goodwill and other intangibles	(183)		(171)
Valuation allowance on deferred tax assets (e)	(109)		(157)
Operating lease right-of-use assets	(101)		(95)
Other leasing transactions, principally leveraged leases	(73)		(79)
Other, net	20		16
Deferred taxes, net	$	19	$	342

(a)At January 1, 2022, U.S. operating loss and tax credit carryforward benefits of $274 million expire through 2041 if not utilized and $39 million may be carried forward indefinitely.

(b)Accrued liabilities include warranty reserves, self-insured liabilities and interest.

(c)At January 1, 2022, non-U.S. operating loss and tax credit carryforward benefits of $45 million may be carried forward indefinitely.

(d)Prepaid pension benefits increased due to the annual valuation adjustment.

(e)Valuation allowance decreased primarily due to the disposition of TRU Canada.

We believe earnings during the period when the temporary differences become deductible will be sufficient to realize the related future income tax benefits. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not more than likely, a valuation allowance is provided.

The following table presents the breakdown of our deferred taxes:

(In millions)	January 1, 2022		January 2, 2021
Manufacturing group:
Deferred tax assets, net of valuation allowance	$	129	$	423
Deferred tax liabilities	(49)		(19)
Finance group – Deferred tax liabilities	(61)		(62)
Net deferred tax asset	$	19	$	342

Non-U.S. and U.S. state income taxes have not been provided for on basis differences in certain investments, primarily as a result of unremitted earnings in foreign subsidiaries that are indefinitely reinvested, totaling $1.8 billion at January 1, 2022 and $1.7 billion at January 2, 2021. Should these earnings be distributed in the future in the form of dividends or otherwise, we would be subject to withholding and local taxes to various non-U.S. jurisdictions and U.S. states.  Determination of the deferred tax liability associated with indefinitely reinvested earnings is not practicable due to multiple factors, including the complexity of non-U.S. tax laws and tax treaty interpretations, exchange rate fluctuations, and the uncertainty of available credits or exemptions.