Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Our provision for federal and foreign income tax expense for continuing operations consisted of the following (in millions):

	2019			2018			2017
Federal income tax expense (benefit):
Current
Operations	$	698		$	975		$	(189	)
One-time charge due to tax legislation (a)	—			(6		)	43
Deferred
Operations	235			(194		)	1,607
One-time charge due to tax legislation (a)	—			(37		)	1,843
Total federal income tax expense	933			738			3,304
Foreign income tax expense (benefit):
Current	91			67			53
Deferred	(13		)	(13		)	(1		)
Total foreign income tax expense	78			54			52
Total income tax expense	$	1,011		$	792		$	3,356

^(a)  Represents one-time charge in 2017 primarily due to the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax rate and a deemed repatriation tax, and true-up to this charge in 2018.

On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently, we wrote down our net deferred tax assets as of December 31, 2017 by $2.0 billion to reflect the estimated impact of the Tax Act. We recorded a corresponding net one-time charge of $2.0 billion ($6.77 per share), substantially all of which was non-cash, primarily related to enactment of the Tax Act, the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax rate, a

deemed repatriation tax, and a reduction in the U.S. manufacturing benefit as a result of our decision to accelerate contributions to our pension fund in 2018 in order to receive a tax deduction in 2017.

We applied the guidance in Staff Accounting Bulletin 118 when accounting for the enactment-date effects of the Tax Act in 2017 and throughout 2018. At December 31, 2017, we had substantially completed our provisional analysis of the income tax effects of the Tax Act and recorded a reasonable estimate in 2017 of such effects. During 2018, we refined our calculations, evaluated changes in interpretations and assumptions that we had made, applied additional guidance issued by the U.S. Government, and evaluated actions and related accounting policy decisions we have made. As of December 22, 2018, we completed our accounting for all of the enactment-date income tax effects of the Tax Act and did not identify any material changes to the provisional, net, one-time charge for the year ended December 31, 2017, related to the Tax Act.

State income taxes are included in our operations as general and administrative costs and, under U.S. Government regulations, are allowable costs in establishing prices for the products and services we sell to the U.S. Government. Therefore, a substantial portion of state income taxes is included in our net sales and cost of sales. As a result, the impact of certain transactions on our operating profit and of other matters presented in these consolidated financial statements is disclosed net of state income taxes. Our total net state income tax expense was $96 million for 2019, $83 million for 2018, and $103 million for 2017.

Our reconciliation of the U.S. federal statutory income tax rate (21% in 2019 and 2018 and 35% in 2017) to actual income tax expense for continuing operations is as follows (dollars in millions):

	2019					2018					2017
	Amount			Rate		Amount			Rate		Amount			Rate
Income tax expense at the U.S. federal statutory tax rate	$	1,521		21.0	%	$	1,226		21.0	%	$	1,836		35.0	%
Research and development tax credit	(148		)	(2.0	)	(138		)	(2.4	)	(115		)	(2.2	)
Foreign derived intangible income deduction	(122		)	(1.7	)	(61		)	(1.0	)	—			—
Excess tax benefits for share-based payment awards	(63		)	(0.9	)	(55		)	(0.9	)	(106		)	(2.0	)
Tax deductible dividends	(62		)	(0.9	)	(59		)	(1.0	)	(94		)	(1.8	)
Tax accounting method change (a)	(15		)	(0.2	)	(61		)	(1.0	)	—			—
Deferred tax write-down and transition tax (b)	—			—		(43		)	(0.7	)	1,886			35.9
U.S. manufacturing deduction benefit (c)	—			—		—			—		(7		)	(0.1	)
Other, net (d)	(100		)	(1.3	)	(17		)	(0.4	)	(44		)	(0.8	)
Income tax expense	$	1,011		14.0	%	$	792		13.6	%	$	3,356		64.0	%

^(a)  Recognized tax benefit of $15 million and $61 million in 2019 and 2018, from our change in a tax accounting method related to restoration of tax basis.

^(b)  Includes a deferred tax re-measurement and transition tax true-up in 2018 and one-time charge in 2017 primarily due to the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax rate and a deemed repatriation tax.

^(c)  Includes a reduction in our 2017 manufacturing benefit as a result of our decision to accelerate contributions to our pension funds in 2018. The Tax Act repealed the manufacturing benefit for years after 2017.

^(d)  Includes additional $98 million deduction for foreign derived intangible income related to prior year recognized in 2019 reflecting proposed tax regulations released on March 4, 2019.

We recognized a tax benefit of $220 million in 2019 and $61 million in 2018 from the deduction for foreign derived intangible income enacted by the Tax Act. The rate for 2019 benefited from $98 million additional tax deductions for the prior year, primarily due to proposed tax regulations released on March 4, 2019. The Tax Act repealed the U.S. manufacturing deduction for years after 2017. Therefore, there was no U.S. manufacturing benefit in 2019 or 2018. Tax benefits from the U.S. manufacturing deduction were not significant in 2017.

We receive a tax deduction for dividends paid on shares of our common stock held by certain of our defined contribution plans with an employee stock ownership plan feature. The benefit of the tax deduction has declined in both 2019 and 2018 from 2017, principally due to the lower tax rate enacted by the Tax Act.

We recognized a tax benefit of $15 million in 2019 and $61 million in 2018 from our change in a tax accounting method reflecting a 2012 Court of Federal Claims decision, which held that the tax basis in certain assets should be increased and realized upon the assets’ disposition.

We participate in the IRS Compliance Assurance Process program. Examinations of the years 2018 and 2019 remain under IRS review. We are also subject to taxation in various states and foreign jurisdictions including Australia, Canada, India, Italy,

Japan, Poland, and the United Kingdom. We are under, or may be subject to, audit or examination and additional assessments by the relevant authorities.

The primary components of our federal and foreign deferred income tax assets and liabilities at December 31 were as follows (in millions):

	2019			2018
Deferred tax assets related to:
Accrued compensation and benefits	$	659		$	584
Pensions	3,057			2,623
Other postretirement benefit obligations	71			148
Contract accounting methods	349			539
Foreign company operating losses and credits	49			38
Other (a)	345			160
Valuation allowance (b)	(28		)	(20		)
Deferred tax assets, net	4,502			4,072
Deferred tax liabilities related to:
Goodwill and purchased intangibles	330			296
Property, plant and equipment	340			296
Exchanged debt securities and other (a)	525			294
Deferred tax liabilities	1,195			886
Net deferred tax assets	$	3,307		$	3,186

^(a)  Includes deferred tax assets and liabilities related to lease liability and ROU asset.

^(b)  A valuation allowance was provided against certain foreign company deferred tax assets arising from carryforwards of unused tax benefits.

As of December 31, 2019, 2018, and 2017, our liabilities associated with unrecognized tax benefits were not material.

We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various foreign jurisdictions. With few exceptions, the statute of limitations for these jurisdictions is no longer open for U.S. federal or non-U.S. income tax examinations for the years before 2015, other than with respect to refunds.

Our federal and foreign income tax payments, net of refunds, were $940 million in 2019 and $1.1 billion in 2017. We received net federal and foreign income tax refunds of $41 million in 2018, primarily due to a 2017 net operating loss carryback arising from our accelerated pension contributions.