Income Taxes

12 Months Ended

Dec. 31, 2019

Income Taxes.

Income Taxes

NOTE 10. Income Taxes

Income Before Income Taxes

(Millions)	2019		2018		2017
United States	$	3,008	$	3,487	$	4,149
International		2,704		3,513		3,399
Total	$	5,712	$	7,000	$	7,548

Provision for Income Taxes

(Millions)	2019		2018		2017
Currently payable
Federal	$	534	$	698	$	1,022
State		59		109		59
International		673		763		722
Tax Cuts and Jobs Act (TCJA) non-current transition tax provision		—		176		623
Deferred
Federal		(32)		(38)		162
State		(26)		(17)		15
International		(78)		(54)		76
Total	$	1,130	$	1,637	$	2,679

Components of Deferred Tax Assets and Liabilities

(Millions)	2019		2018
Deferred tax assets:
Accruals not currently deductible
Employee benefit costs	$	169	$	187
Product and other claims		280		228
Miscellaneous accruals		119		113
Pension costs		824		643
Stock-based compensation		218		203
Net operating/capital loss/tax credit carryforwards		150		71
Foreign tax credits		66		—
Inventory		70		54
Other		113		24
Gross deferred tax assets		2,009		1,523
Valuation allowance		(158)		(67)
Total deferred tax assets	$	1,851	$	1,456
Deferred tax liabilities:
Product and other insurance receivables	$	—	$	(7)
Accelerated depreciation		(580)		(521)
Intangible amortization		(1,021)		(799)
Currency translation		(30)		(35)
Other		—		(8)
Total deferred tax liabilities	$	(1,631)	$	(1,370)
Net deferred tax assets	$	220	$	86

The net deferred tax assets are included as components of Other Assets and Other Liabilities within the Consolidated Balance Sheet. See Note 7 “Supplemental Balance Sheet Information” for further details.

As of December 31, 2019, the Company had tax effected operating losses, capital losses, and tax credit carryovers for federal (approximately $82 million), state (approximately $79 million), and international (approximately $55 million), with all amounts before limitation impacts and valuation allowances. Federal tax attribute carryovers will expire after one to 10 years, the state after one to 11 years, and the international after one year to an indefinite carryover period. As of December 31, 2019, the Company has provided $158 million of valuation allowance against certain of these deferred tax assets based on management’s determination that it is more-likely-than-not that the tax benefits related to these assets will not be realized.

Reconciliation of Effective Income Tax Rate

	2019		2018		2017
Statutory U.S. tax rate	21.0	%	21.0	%	35.0	%
State income taxes - net of federal benefit	0.5		1.0		0.8
International income taxes - net	0.2		0.2		(6.3)
Global Intangible Low Taxed Income (GILTI)	1.8		1.1		—
Foreign Derived Intangible Income (FDII)	(2.9)		(1.3)		—
U.S. TCJA enactment - net impacts	—		2.5		10.1
U.S. research and development credit	(1.7)		(1.5)		(0.7)
Reserves for tax contingencies	2.3		1.2		2.2
Domestic Manufacturer’s deduction	—		—		(1.8)
Employee share-based payments	(1.3)		(1.4)		(3.2)
All other - net	(0.1)		0.6		(0.6)
Effective worldwide tax rate	19.8	%	23.4	%	35.5	%

The effective tax rate for 2019 was 19.8 percent, compared to 23.4 percent in 2018, a decrease of 3.6 percentage points, impacted by several factors. Primary factors that decreased the effective tax rate for 2019 included prior year measurement period adjustments related to 2017 Tax Cuts and Jobs Act (TCJA), prior year resolution of the NRD lawsuit (as described in Note 16), and geographical income mix. These decreases were partially offset by the deconsolidation of the Venezuelan subsidiary, adjustments to uncertain tax positions, and significant litigation-related charges.

The effective tax rate for 2018 was 23.4 percent, compared to 35.5 percent in 2017, a decrease of 12.1 percentage points, impacted by several factors. Primary factors that decreased the Company’s effective tax rate included favorable aspects of the Tax Cuts and Jobs Act (TCJA) including the decrease in the U.S. income tax rate and foreign-derived intangible income (FDII), reduced transitional impact of TCJA related to transition tax and remeasurement of deferred tax assets/liabilities, increased benefits from the R&D tax credit, and favorable adjustment to prior year uncertain tax provisions. These decreases were partially offset by the elimination of the domestic manufacturing deduction, the global intangible low-taxed income (GILTI) provision, and lower excess tax benefits related to employee share-based payments.

The TCJA was enacted in December 2017, after which the SEC staff issued Staff Accounting Bulletin (SAB) 118, which provided a measurement period of up to one year from the TCJA’s enactment date for companies to complete their accounting under ASC 740. In connection with the enactment of the TCJA, the Company recorded a net tax expense of $762 million in the fourth quarter of 2017 and additional net charges of $176 million as measurement period adjustments in 2018, which are comprised of both a transition tax in addition to a remeasurement of deferred tax assets/liabilities and other impacts.

The TCJA’s transition tax is payable over eight years beginning in 2018. As of December 31, 2019 and December 31, 2018, 3M reflected $653 million and $649 million, respectively, in accrued income taxes – long-term portion and $33 million payable within one year associated with the transition tax.

The Company adopted ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, as described in Note 1, on January 1, 2019. The purpose of this ASU was to allow a reclassification to retained earnings of one-time income tax effects stranded in accumulated other comprehensive income (AOCI) arising from the change in the U.S. federal corporate tax rate as a result of TCJA. The effect of this adoption resulted in a reclassification between retained earnings and AOCI, which

increased retained earnings by approximately $0.9 billion, with an offsetting increase to accumulated other comprehensive loss for the same amount.

The IRS has completed its field examination of the Company’s U.S. federal income tax returns for 2005 through 2015, but the years have not closed as the Company is in the process of resolving issues identified during those examinations. The Company is under examination or in appeals for 2015 through 2018. In addition to the U.S. federal examination, there is also audit activity in several U.S. state and foreign jurisdictions. As of December 31, 2019, no taxing authority proposed significant adjustments to the Company’s tax positions for which the Company is not adequately reserved.

It is reasonably possible that the amount of unrecognized tax benefits could significantly change within the next 12 months. The Company has ongoing federal, state and international income tax audits in various jurisdictions and evaluates uncertain tax positions that may be challenged by local tax authorities and not fully sustained. These uncertain tax positions are reviewed on an ongoing basis and adjusted in light of facts and circumstances including progression of tax audits, developments in case law and closing of statutes of limitation. At this time, the Company expects approximately $50 million of unrecognized tax benefits to be recognized within the next 12 months.

The Company recognizes the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (UTB) is as follows:

Federal, State and Foreign Tax

(Millions)	2019		2018		2017
Gross UTB Balance at January 1	$	647	$	530	$	319
Additions based on tax positions related to the current year		76		129		119
Additions for tax positions of prior years		132		146		149
Additions related to recent acquisitions		396		—		—
Reductions for tax positions of prior years		(56)		(123)		(38)
Settlements		(4)		(17)		(3)
Reductions due to lapse of applicable statute of limitations		(24)		(18)		(16)
Gross UTB Balance at December 31	$	1,167	$	647	$	530
Net UTB impacting the effective tax rate at December 31	$	1,178	$	655	$	526

The total amount of UTB, if recognized, would affect the effective tax rate by $1,178 million as of December 31, 2019, $655 million as of December 31, 2018, and $526 million as of December 31, 2017. The ending net UTB results from adjusting the gross balance for deferred items, interest and penalties, and deductible taxes. The net UTB is included as components of Other Assets, Accrued Income Taxes, and Other Liabilities within the Consolidated Balance Sheet.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company recognized in the consolidated statement of income on a gross basis approximately $33 million of expense, $12 million of expense, and $20 million of expense in 2019, 2018, and 2017, respectively. The amount of interest and penalties recognized may be an expense or benefit due to new or remeasured unrecognized tax benefit accruals. At December 31, 2019, and December 31, 2018, accrued interest and penalties in the consolidated balance sheet on a gross basis were $102 million and $69 million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

As a result of certain employment commitments and capital investments made by 3M, income from certain manufacturing activities in the following countries is subject to reduced tax rates or, in some cases, is exempt from tax for years through the following: China (2019), Korea (2019), Switzerland (2023), Singapore (2025), and Brazil (2028). The income tax benefits attributable to the tax status of these subsidiaries are estimated to be $127 million (22 cents per diluted share) in 2019, $227 million (38 cents per diluted share) in 2018, and $228 million (37 cents per diluted share) in 2017.

The Company has not provided deferred taxes on approximately $14 billion of undistributed earnings from non-U.S. subsidiaries as of December 31, 2019 which are indefinitely reinvested in operations. Because of the multiple avenues in which to repatriate the earnings to minimize tax cost, and because a large portion of these earnings are not liquid, it is not practical to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.