Income Taxes

Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 (the Act) was enacted on December 22, 2017 and most provisions are effective January 1, 2018. The Act lowers the U.S. corporate income tax rate from 35% to 21%, implements a territorial tax system in the U.S. and imposes a one-time tax on the unremitted earnings of our foreign subsidiaries payable over eight years beginning in 2018.

The Securities and Exchange Commission recognized the complexity of reflecting the impacts of the Act and, on December 22, 2017, issued guidance in Staff Accounting Bulletin No. 118 (SAB 118) Income Tax Accounting Implications of the Tax Cuts and Jobs Act. SAB 118 clarified the accounting for income taxes related to the Act if information is not yet available or complete, and provides for up to a one year measurement period in which to complete the required income tax analyses and accounting. In accordance with SAB 118, our measurement of the income tax effects of the Act is not complete, but we have made a provisional estimate of the income tax effects of the Act.

As a result of the Act and in accordance with SAB 118, we recorded a net provisional one-time non-cash benefit of $39 million, which is comprised of a provisional $130 million benefit from the remeasurement of net U.S. deferred tax liabilities arising from a lower U.S. tax rate, offset by a provisional $91 million charge related primarily to the U.S. tax on unremitted earnings of our foreign subsidiaries. Our estimates of the impact of the Act are based on current calculations and interpretations, as well as assumptions and expectations relating to the Act, which are subject to adjustment based on further guidance and factual changes during the measurement period.

As a result of the treatment of foreign earnings under the Act, we have reconsidered our permanent investment position and provisionally concluded we will no longer assert indefinite investment with respect to our foreign unremitted earnings as of December 31, 2017.

Income from continuing operations before taxes consisted of the following:



	Years Ended December 31,
	2017		2016		2015
U.S.	$	195,291	$	169,493	$	516,233
International	87,698		76,877		94,592
Total	$	282,989	$	246,370	$	610,825

The provision for income taxes from continuing operations consisted of the following:



	Years Ended December 31,
	2017			2016			2015
U.S. Federal:
Current	$	46,836		$	95,598		$	115,557
Deferred	(48,449		)	(1,559		)	19,941
	(1,613		)	94,039			135,498
U.S. State and Local:
Current	461			9,409			11,243
Deferred	15,460			4,757			16,094
	15,921			14,166			27,337
International:
Current	(1,766		)	22,872			22,794
Deferred	9,107			742			4,149
	7,341			23,614			26,943

Total current	45,531			127,879			149,594
Total deferred	(23,882		)	3,940			40,184
Total provision for income taxes	$	21,649		$	131,819		$	189,778

Effective tax rate	7.7		%	53.5		%	31.1		%

The effective tax rate for 2017 includes provisional tax benefits of $39 million from the Act, and tax benefits of $30 million from the resolution of certain tax examinations.

The effective tax rate for 2016 includes tax benefits of $15 million from the resolution of tax examinations, a $58 million charge associated with the goodwill impairment and a $6 million charge for a valuation allowance on tax attribute carryovers.

The effective tax rate for 2015 includes tax benefits of $20 million from the disposition of Imagitas and $3 million from the retroactive effect of 2015 tax legislation.

A reconciliation of income taxes computed at the federal statutory rate and our provision for income taxes consist of the following:



	Years Ended December 31,
	2017			2016			2015
Federal statutory provision	$	99,045		$	86,229		$	213,789
State and local income taxes	7,327			9,208			17,769
Other impact of foreign operations	(31,573		)	(13,806		)	(6,492		)
Tax incentives/credits/exempt income	(16,292		)	(10,735		)	(12,130		)
Outside basis differences	—			—			(27,110		)
Goodwill impairments	—			58,022			—
Remeasurement of U.S. deferred tax liability	(129,612		)	—			—
U.S. tax on unremitted earnings	90,916			—			—
Other, net	1,838			2,901			3,952
Provision for income taxes	$	21,649		$	131,819		$	189,778

Other impacts of foreign operations include income of foreign affiliates taxed at rates other than the 35% U.S. statutory rate, the accrual or release of tax uncertainty amounts related to foreign operations, the tax impacts of foreign earnings repatriation and the U.S. foreign tax credit impacts of foreign income taxed in the U.S. In 2017, as a result of the Act, the remeasurement of U.S. deferred tax liabilities and the U.S. tax on unremitted earnings were accrued as provisional estimates. The 2016 goodwill impairment significantly increased the 2016 tax rate as nearly all of the goodwill that was impaired had no tax basis.

Deferred tax liabilities and assets at December 31, 2017 and 2016 consisted of the following:



	December 31,
	2017			2016
Deferred tax liabilities:
Depreciation	$	(77,415	)	$	(93,475	)
Deferred profit (for tax purposes) on sale to finance subsidiary	(60,340		)	(98,247		)
Lease revenue and related depreciation	(133,908		)	(137,665		)
Intangible assets	(106,488		)	(113,128		)
Other	(22,468		)	(27,340		)
Gross deferred tax liabilities	(400,619		)	(469,855		)

Deferred tax assets:
Nonpension postretirement benefits	48,387			71,101
Pension	66,270			105,564
Inventory and equipment capitalization	11,380			13,318
Restructuring charges	12,476			6,980
Long-term incentives	11,544			17,923
Net operating loss	108,006			97,194
Tax credit carry forwards	82,285			53,181
Tax uncertainties gross-up	9,920			18,273
Other	51,436			79,799
Gross deferred tax assets	401,704			463,333
Less: Valuation allowance	(178,156		)	(127,095		)
Net deferred tax assets	223,548			336,238
Total deferred taxes, net	$	(177,071	)	$	(133,617	)

A valuation allowance is recognized to reduce the total deferred tax assets to an amount that will more-likely-than-not be realized. The valuation allowance relates primarily to certain foreign, state and local net operating loss and tax credit carryforwards that are more-likely-than-not to expire unutilized.

We have net operating loss carryforwards of $287 million as of December 31, 2017, of which, $225 million can be carried forward indefinitely and the remainder expire over the next 15 years. In addition, we have tax credit carryforwards of $82 million, of which $49 million can be carried forward indefinitely and the remainder expire over the next five to 15 years.

Uncertain Tax Positions

A reconciliation of the amount of unrecognized tax benefits is as follows:



	2017			2016			2015
Balance at beginning of year	$	124,728		$	139,249		$	132,495
Increases from prior period positions	528			—			7,637
Decreases from prior period positions	(31,470		)	(21,207		)	(16,753		)
Increases from current period positions	5,951			10,867			23,533
Decreases relating to settlements with tax authorities	(6,953		)	(1,791		)	(3,831		)
Reductions from lapse of applicable statute of limitations	(3,017		)	(2,390		)	(3,832		)
Balance at end of year	$	89,767		$	124,728		$	139,249

The amount of the unrecognized tax benefits at December 31, 2017, 2016 and 2015 that would affect the effective tax rate if recognized was $74 million, $104 million and $117 million, respectively.

On a regular basis, we conclude tax return examinations, statutes of limitations expire, and court decisions interpret tax law. We regularly assess tax uncertainties in light of these developments. As a result, it is reasonably possible that the amount of our unrecognized tax benefits will decrease in the next 12 months, and we expect this change could be up to 25% of our unrecognized tax benefits. We recognize interest and penalties related to uncertain tax positions in our provision for income taxes. We recognized interest and penalties of $(4) million, less than $1 million and $(4) million related to uncertain tax positions in our provision for income taxes for the years ended December 31, 2017, 2016 and 2015 respectively. We had $4 million and $9 million accrued for the payment of interest and penalties at December 31, 2017 and 2016, respectively.

Other Tax Matters

As is the case with other large corporations, our tax returns are examined each year by tax authorities in the U.S. and other global taxing jurisdictions in which we have operations. The IRS examinations of our consolidated U.S. income tax returns for tax years prior to 2013 are closed to audit. Additionally, in the U.S. we are subject to examination on various post-2006 State and Local taxes. In Canada, the examination of our tax filings prior to 2012 are closed to audit, except for the pending application of legal principles to specific issues arising in earlier years. Other significant jurisdictions include France, closed through the end of 2012, Germany, closed through the end of 2012 and the U.K., closed through the end of 2015, except for an item under appeal. We have other less significant tax filings currently subject to examination.

We regularly assess the likelihood of tax adjustments in each of the tax jurisdictions in which we have operations and account for the related financial statement implications. We believe we have established tax reserves that are appropriate given the possibility of tax adjustments. However, determining the appropriate level of tax reserves requires judgment regarding the uncertain application of tax law and the possibility of tax adjustments. Future changes in tax reserve requirements could have a material impact, positive or negative, on our results of operations, financial position and cash flows.