Income Taxes

12 Months Ended

Dec. 31, 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)	2022		2021		2020
U.S.	$	810	$	699	$	202
Non-U.S.	206		174		80
Income from continuing operations before income taxes	$	1,016	$	873	$	282

Income tax expense (benefit) is summarized as follows:

(In millions)	2022		2021		2020
Current expense (benefit):
Federal	$	272	$	41	$	(1)
State	33		15		(76)
Non-U.S.	69		47		57
	374		103		(20)
Deferred expense (benefit):
Federal	(182)		35		3
State	(29)		(10)		5
Non-U.S.	(9)		(2)		(15)
	(220)		23		(7)
Income tax expense (benefit)	$	154	$	126	$	(27)

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

	2022	2021	2020
U.S. Federal statutory income tax rate	21.0%	21.0%	21.0%
Increase (decrease) resulting from:
Research and development tax credits (a)	(5.0)	(7.0)	(18.2)
Foreign-derived intangible income deduction (b)	(2.5)	—	—
State income taxes (net of federal impact)	0.3	0.5	(1.2)
Non-U.S. tax rate differential and foreign tax credits (c)	1.8	1.3	10.8
State income tax audit settlement (net of federal impact)	—	—	(18.6)
Outside basis difference in assets held for sale	—	—	(2.7)
Other, net	(0.4)	(1.4)	(0.7)
Effective income tax rate	15.2%	14.4%	(9.6)%

(a)In 2020, the benefit of research and development tax credits as a percentage of pre-tax income was higher than other periods primarily due to lower pre-tax income.

(b)In 2022, the foreign-derived intangible income deduction is primarily due to the impact of capitalizing research and development expenditures for tax-purposes effective on January 1, 2022 as part of the Tax Cuts and Jobs Act of 2017.

(c)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 back cash 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 2022, 2021 and 2020, 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)	2022		2021		2020
Balance at beginning of year	$	207	$	183	$	221
Additions for tax positions related to current year	24		21		11
Additions for tax positions of prior years	—		10		21
Reductions for settlements and expiration of statute of limitations (a)	—		(3)		(69)
Reductions for tax positions of prior years	—		(4)		(1)
Balance at end of year	$	231	$	207	$	183

(a)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 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)	December 31, 2022		January 1, 2022
Capitalized research and development expenditures (a)	$	319	$	—
U.S. operating loss and tax credit carryforwards (b)	257		313
Accrued liabilities (c)	209		191
Obligation for pension and postretirement benefits	117		175
Deferred compensation	108		108
Operating lease liabilities	102		103
Non-U.S. operating loss and tax credit carryforwards (d)	53		48
Prepaid pension benefits (e)	(348)		(269)
Property, plant and equipment, principally depreciation	(222)		(204)
Amortization of goodwill and other intangibles	(194)		(183)
Valuation allowance on deferred tax assets	(99)		(109)
Operating lease right-of-use assets	(99)		(101)
Other leasing transactions, principally leveraged leases	(53)		(73)
Other, net	(22)		20
Deferred taxes, net	$	128	$	19

(a)Effective for tax years beginning after December 31, 2021, research and development expenditures must be capitalized and amortized for tax-purposes as part of the Tax Cuts and Jobs Act of 2017.

(b)At December 31, 2022, U.S. operating loss and tax credit carryforward benefits of $218 million expire through 2042 if not utilized and $39 million may be carried forward indefinitely.

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

(d)At December 31, 2022, non-U.S. operating loss and tax credit carryforward benefits of $50 million may be carried forward indefinitely.

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

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)	December 31, 2022		January 1, 2022
Manufacturing group:
Deferred tax assets, net of valuation allowance	$	223	$	129
Deferred tax liabilities	(52)		(49)
Finance group – Deferred tax liabilities	(43)		(61)
Net deferred tax asset	$	128	$	19

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 $1.6 billion at December 31, 2022 and $1.8 billion at January 1, 2022. 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.