Income Taxes

6 Months Ended

Jun. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company’s effective tax rate was 21.1% and 20.6% for the three months ended June 30, 2023 and 2022, respectively. The Company’s effective tax rate was 19.5% and 19.1% for the six months ended June 30, 2023 and 2022, respectively.

The effective tax rate for the three months ended June 30, 2023 was higher than the statutory tax rate as a result of state income taxes, net of federal benefit. The effective tax rate for the six months ended June 30, 2023 was lower than the statutory tax rate as a result of tax preferred items including incentive compensation and foreign tax credits, partially offset by state income taxes, net of federal benefit.

The effective tax rate for the three months ended June 30, 2022 was lower than the statutory tax rate as a result of tax preferred items including low income housing tax credits and dividend received deductions, partially offset by state income taxes, net of federal benefit. The effective tax rate for the six months ended June 30, 2022 was lower than the statutory tax rate as a result of tax preferred items including incentive compensation, foreign tax credits and low income housing tax credits, partially offset by state income taxes, net of federal benefit.

Included in the Company’s deferred income tax assets are tax benefits related to state net operating losses of $30 million, net of federal benefit, which will expire beginning December 31, 2023 and foreign net operating losses of $35 million.

The Company is required to establish a valuation allowance for any portion of its deferred tax assets that management believes will not be realized. Significant judgment is required in determining if a valuation allowance should be established and the amount of such allowance if required. Factors used in making this determination include estimates relating to the performance of the business. Consideration is given to, among other things in making this determination: (i) future taxable income exclusive of reversing temporary differences and carryforwards; (ii) future reversals of existing taxable temporary differences; (iii) taxable income in prior carryback years; and (iv) tax planning strategies. Based on analysis of the Company’s tax position as of June 30, 2023, management believes it is more likely than not that the Company will not realize certain state net operating losses of $29 million, state deferred tax assets of $2 million and foreign net operating losses of $35 million; therefore, a valuation allowance has been established. The valuation allowance was $66 million and $65 million as of June 30, 2023 and December 31, 2022, respectively.

As of June 30, 2023 and December 31, 2022, the Company had $132 million and $138 million, respectively, of gross unrecognized tax benefits. If recognized, approximately $105 million and $106 million, net of federal tax benefits, of unrecognized tax benefits as of June 30, 2023 and December 31, 2022, respectively, would affect the effective tax rate. During the second quarter of 2023, the Company had additions to its gross unrecognized tax benefits for tax positions of prior years of $71 million and reductions to its gross unrecognized tax benefits of prior years of $80 million.

It is reasonably possible that the total amount of unrecognized tax benefits will change in the next 12 months. The Company estimates that the total amount of gross unrecognized tax benefits may decrease by approximately $18 million in the next 12 months primarily due to expected exam closures and state statutes of limitations expirations.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized a net increase of $7 million and $8 million in interest and penalties for the three and six months ended June 30, 2023, respectively. The Company recognized a net increase of $1 million and $2 million in interest and penalties for the three and six months ended June 30, 2022, respectively. As of June 30, 2023 and December 31, 2022, the Company had a payable of $22 million and $14 million, respectively, related to accrued interest and penalties.

The Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The federal statute of limitations are closed on years through 2015. A previously open item for 2014 and 2015 was resolved in the second quarter of 2023. Also in the second quarter of 2023, the Internal Revenue Service (“IRS”) audit for tax years 2016 through 2018 was finalized. The IRS is currently auditing the Company’s U.S. income tax returns for 2019 and 2020. The Company’s state income tax returns are currently under examination by various jurisdictions for years ranging from 2017 through 2020.

The Company expects to be an applicable corporation required to compute corporate alternative minimum tax (“CAMT”); however, based on current estimates the Company does not expect to be liable for the CAMT in 2023 and therefore a liability has not been recorded.