Note 16. 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)		2018		2017		2016
U.S.	$	557	$	428	$	652
Non-U.S.		827		334		224

Income from continuing operations before income taxes	$	1,384	$	762	$	876

Income tax expense for continuing operations is summarized as follows:

(In millions)		2018		2017		2016
Current expense (benefit):
Federal	$	3	$	29	$	(74)
State		9		(9)		18
Non-U.S.		101		79		41

		113		99		(15)

Deferred expense (benefit):
Federal		60		358		47
State		(5)		(14)		(7)
Non-U.S.		(6)		13		8

		49		357		48

Income tax expense	$	162	$	456	$	33

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

	2018	2017	2016
U.S. Federal statutory income tax rate	21.0%	35.0%	35.0%
Increase (decrease) resulting from:
U.S. tax reform enactment impact	(1.0)	34.9	—
Federal tax settlement of 1998 to 2008	—	—	(23.5)
State income taxes (net of federal impact)	(0.1)	(1.9)	0.8
Non-U.S. tax rate differential and foreign tax credits	1.3	(2.9)	(2.7)
Domestic manufacturing deduction	—	(1.1)	(1.6)
Research credit*	(2.9)	(2.6)	(3.2)
Gain on business disposition, primarily in non-U.S. jurisdictions	(5.0)	—	—
Other, net	(1.6)	(1.6)	(1.0)

Effective income tax rate	11.7%	59.8%	3.8%

*Includes a favorable impact of (1.8)% in 2018 for the reassessment of reserves for uncertain tax positions.

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. Among other things, the Tax Act reduced the U.S. federal corporate tax rate from 35% to 21% and required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. We reasonably estimated the effects of the Tax Act and recorded provisional amounts in the fourth quarter of 2017 totaling $266 million. Our provisional estimate included a $154 million charge to remeasure our U.S. federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. In addition, the provisional estimate included $112 million in expense for the one-time transition tax. This tax was based on approximately $1.6 billion of our post-1986 earnings and profits that were previously deferred from U.S. income taxes, and on the amount of those earnings held in cash and other specified net assets. In 2018, we finalized the 2017 impacts of the Tax Act, specifically the remeasurement of our U.S. Federal deferred tax assets and liabilities and the post-1986 earnings and profits transition tax, which resulted in a $14 million benefit.

For 2016, the provision for income taxes included a benefit of $319 million to reflect the settlement with the U.S. Internal Revenue Service Office of Appeals for our 1998 to 2008 tax years, which resulted in a $206 million benefit attributable to continuing operations and $113 million attributable to discontinued operations.

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 tax benefits. A reconciliation of our unrecognized tax benefits is as follows:

(In millions)		December 29, 2018		December 30, 2017		December 31, 2016
Balance at beginning of year	$	182	$	186	$	401
Additions for tax positions related to current year		5		12		12
Additions for tax positions of prior years		13		16		—
Reductions for settlements and expiration of statute of limitations		(22)		(17)		(219)
Reductions for tax positions of prior years*		(37)		(15)		(8)

Balance at end of year	$	141	$	182	$	186

*In 2018, certain tax positions related to research credits were reduced by $25 million based on new information, including interactions with the tax authorities and recent audit settlements.

At the end of 2018, 2017 and 2016, if these unrecognized tax benefits were recognized in future periods, they would favorably impact our effective tax rate.

In the normal course of business, we are subject to examination by tax authorities throughout the world. We are no longer subject to U.S. federal tax examinations for years before 2014, state and local income tax examinations for years before 2009, and non-U.S. income tax examinations for years before 2011.

Deferred Taxes

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

(In millions)		December 29, 2018		December 30, 2017
Obligation for pension and postretirement benefits	$	272	$	247
Accrued expenses (a)		236		260
Deferred compensation		96		103
U.S. operating loss and tax credit carryforwards (b)		212		208
Non-U.S. operating loss and tax credit carryforwards (c)		69		72
Valuation allowance on deferred tax assets		(157)		(148)
Property, plant and equipment, principally depreciation		(142)		(125)
Amortization of goodwill and other intangibles		(143)		(154)
Leasing transactions		(77)		(81)
Prepaid pension benefits		(21)		(21)
Other, net		(23)		(13)

Deferred taxes, net	$	322	$	348

(a)

Accrued expenses included warranty reserves, self-insured liabilities and interest.

(b)

At December 29, 2018, U.S. operating loss and tax credit carryforward benefits of $186 million expire through 2038 if not utilized and $26 million may be carried forward indefinitely.

(c)

At December 29, 2018, non-U.S. operating loss and tax credit carryforward benefits of $16 million expire through 2038 if not utilized and $53 million may be carried forward indefinitely.

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 29, 2018		December 30, 2017
Manufacturing group:
Deferred tax assets, net of valuation allowance	$	397	$	430
Deferred tax liabilities		(5)		(7)
Finance group – Deferred tax liabilities		(70)		(75)

Net deferred tax asset	$	322	$	348

At December 29, 2018 and December 30, 2017, 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 $1.6 billion of unremitted earnings in foreign subsidiaries which are indefinitely reinvested. Should these earnings be distributed in the future in the form of dividends or otherwise, we would be subject to withholding and income taxes payable 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 under U.S. federal and state tax laws.