Income Taxes

12 Months Ended

Mar. 31, 2024

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

	Years Ended March 31,
(In millions)	2024		2023		2022
Income from continuing operations before income taxes
U.S.	$	2,597	$	3,308	$	1,944
Foreign	1,192		1,322		(16)
Income from continuing operations before income taxes	$	3,789	$	4,630	$	1,928

Income tax expense related to continuing operations consists of the following:

	Years Ended March 31,
(In millions, except percentages)	2024			2023			2022
Current
Federal	$	867		$	619		$	233
State	231			126			129
Foreign	134			180			240
Total current	1,232			925			602
Deferred
Federal	(360)			(46)			88
State	(133)			36			(16)
Foreign	(110)			(10)			(38)
Total deferred	(603)			(20)			34
Income tax expense	$	629		$	905		$	636
Reported income tax rate	16.6		%	19.5		%	33.0		%

Fluctuations in the Company’s reported income tax rates are primarily due to changes in the mix of earnings between various taxing jurisdictions, other discrete items recognized in each fiscal year, non-cash charges related to remeasuring the value of the E.U. disposal group and U.K. disposal group held for sale to fair value less costs to sell in fiscal 2022, and the impact of opioid-related claims in fiscal 2022.

The reconciliation of income tax expense and the amount computed by applying the statutory federal income tax rate of 21.0% to income before income taxes was as follows:

	Years Ended March 31,
(In millions)	2024		2023		2022
Income tax expense at federal statutory rate	$	796	$	972	$	405
State income taxes, net of federal tax benefit	104		134		85
Tax effect of foreign operations	(16)		(85)		(152)
Foreign-derived intangible income	(67)		(60)		(34)
Unrecognized tax benefits and settlements	116		6		(26)
Opioid-related litigation and claims	—		9		38
Net tax benefit on intellectual property repatriation and sale	(104)		—		—
E.U. disposal transaction loss	4		(8)		345
Valuation allowance release	(157)		—		—
Share-based compensation	(37)		(58)		(10)
Other, net (1)	(10)		(5)		(15)
Income tax expense	$	629	$	905	$	636

(1)The Company’s effective tax rates were impacted by other favorable U.S. federal permanent differences, including research and development credits of $10 million in fiscal 2024, and $4 million in each of fiscal 2023 and fiscal 2022.

During the year ended March 31, 2024, the Company recognized a net discrete tax benefit of $157 million related to the release of a valuation allowance based on management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized.

During the year ended March 31, 2024, the Company also repatriated certain intellectual property between McKesson wholly-owned legal entities that are based in different tax jurisdictions. The transferor entity of the intellectual property was not subject to income tax on this transaction. The recipient entity of the intellectual property is entitled to amortize the fair value of the assets for tax purposes. As a result of this repatriation and in accordance with ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, a net discrete tax benefit of $147 million was recognized in the first quarter of fiscal 2024. In addition, the Company sold certain intellectual property between McKesson wholly-owned legal entities that are based in different tax jurisdictions, where the transferor entity was subject to income tax and the recipient entity is entitled to amortize the fair value of the assets for tax purposes. As a result of this sale, a net discrete tax expense of $43 million was recognized in the fourth quarter of fiscal 2024.

During the year ended March 31, 2023, the Company recognized discrete tax benefits primarily consisting of $115 million related to statute of limitation expirations and tax settlements in various taxing jurisdictions and $58 million related to the tax impact of share-based compensation.

During the year ended March 31, 2022, the Company recorded non-deductible, non-cash pre-tax charges of $438 million primarily to remeasure the E.U. disposal group to fair value less costs to sell, and $1.2 billion to remeasure the U.K. disposal group to fair value less costs to sell, as described in Financial Note 2, “Business Acquisitions and Divestitures.”

The Company’s reported income tax rate for fiscal 2022 was impacted by the charge for opioid-related claims of $274 million, as described in Financial Note 17, “Commitments and Contingent Liabilities.”

Deferred tax balances consisted of the following:

	March 31,
(In millions)	2024		2023
Assets
Receivable allowances	$	244	$	51
Opioid-related litigation and claims	680		699
Compensation and benefit-related accruals	277		265
Net operating loss and credit carryforwards	751		760
Lease obligations	438		427
Capitalized research and development cost	60		35
Intangibles	5		—
Other	147		127
Subtotal	2,602		2,364
Less: valuation allowance	(653)		(696)
Total assets	1,949		1,668
Liabilities
Inventory valuation and other assets	(2,092)		(2,079)
Fixed assets	(16)		(67)
Intangibles	—		(267)
Lease right-of-use assets	(431)		(412)
Other	(10)		(19)
Total liabilities	(2,549)		(2,844)
Net deferred tax liability	$	(600)	$	(1,176)
Long-term deferred tax asset	$	317	$	211
Long-term deferred tax liability	(917)		(1,387)
Net deferred tax liability	$	(600)	$	(1,176)

The Company assesses the available positive and negative evidence to determine whether deferred tax assets are more likely than not to be realized. As a result of this assessment, valuation allowances have been recorded on certain deferred tax assets in various tax jurisdictions. The valuation allowances were approximately $653 million and $696 million in fiscal 2024 and fiscal 2023, respectively, and primarily relate to net operating and capital losses. The decrease in the valuation allowance of $43 million from fiscal 2023 to fiscal 2024 relates primarily to the release of a valuation allowance based on management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized, partially offset by the net operating losses incurred in certain tax jurisdictions for which no tax benefit was recognized.

The Company has federal, state, and foreign net operating loss carryforwards of $45 million, $3.6 billion, and $1.7 billion at March 31, 2024, respectively. Federal and state net operating losses will expire at various dates from 2025 through 2044. Substantially all its foreign net operating losses have indefinite lives. In addition, the Company has foreign capital loss carryforwards of $717 million with indefinite lives.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits for the last three fiscal years:

	Years Ended March 31,
(In millions)	2024		2023		2022
Unrecognized tax benefits at beginning of period	$	1,399	$	1,523	$	1,754
Additions based on tax positions related to prior years	10		—		14
Reductions based on tax positions related to prior years	(2)		(26)		(131)
Additions based on tax positions related to current year	64		21		14
Reductions based on settlements	(8)		(96)		(20)
Reductions based on the lapse of the applicable statutes of limitations	(2)		(16)		(102)
Exchange rate fluctuations	2		(7)		(6)
Unrecognized tax benefits at end of period	$	1,463	$	1,399	$	1,523

As of March 31, 2024, the Company had $1.5 billion of unrecognized tax benefits, of which $1.4 billion would reduce income tax expense and the effective tax rate, if recognized. The increase in unrecognized tax benefits in fiscal 2024 primarily relates to additions related to recurring items and the decrease in fiscal 2023 is primarily attributable to statute of limitation expirations in various taxing jurisdictions.

During the next twelve months, the Company does not anticipate any material reduction in its unrecognized tax benefits based on the information currently available. However, this may change as the Company continues to have ongoing discussions with various taxing authorities throughout the year.

During the fourth quarter of fiscal 2023, the Internal Revenue Service (“IRS”) communicated proposed adjustments to taxable income reported in the Company’s fiscal 2018 and fiscal 2019 U.S. Federal Corporate Income Tax returns. The adjustments would increase the Company’s federal income tax liability in the range of $600 million to $700 million. The Company disagrees with the proposed adjustments and is pursuing resolution through the administrative process with the IRS Independent Office of Appeals and, if necessary, through judicial remedies. During the first quarter of fiscal 2024, the Company filed a formal protest with the IRS. The Company does not anticipate a final resolution of these matters in the next twelve months. Although the final resolution of these matters is uncertain, the Company believes in the merits of its tax positions and believes that it has adequately reserved for any adjustments to the provision of income taxes that may ultimately result. However, if the IRS prevails in these matters, the assessed tax and interest could have a material adverse effect on the Company’s financial position, results of operations, and cash flows in future periods.

The Company reports interest and penalties on income taxes as income tax expense. It recognized income tax expense of $84 million, $31 million, and $8 million in fiscal 2024, fiscal 2023, and fiscal 2022, respectively, representing interest and penalties, in its Consolidated Statements of Operations. As of March 31, 2024 and 2023, the Company accrued cumulatively $222 million and $138 million, respectively, in interest and penalties on unrecognized tax benefits in its Consolidated Balance Sheets.

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, and various foreign jurisdictions. The Company is generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal 2016 through the current fiscal year.

Undistributed earnings of the Company’s foreign operations of approximately $4.3 billion were considered indefinitely reinvested at March 31, 2024. Following the enactment of the 2017 Tax Act, the repatriation of cash to the U.S. is generally no longer taxable for federal income tax purposes. However, the repatriation of cash held outside the U.S. could be subject to applicable foreign withholding taxes and state income taxes. The Company may remit foreign earnings to the U.S. to the extent it is tax efficient to do so. It does not expect the tax impact from remitting these earnings to be material.