Note 9. Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

Note 9. Income Taxes

The components of the provision (benefit) for income taxes from continuing operations are as follows:

	Year Ended December 31,
	2022		2021		2020
	(in millions)
Current:
Federal:
Effect of CARES Act	$	(0.5)	$	2.1	$	(373.3)
Other	2.1		(3.0)		(142.1)
	1.6		(0.9)		(515.4)
State	3.5		(0.6)		(1.5)
Foreign	7.8		4.3		4.3
Total current	12.9		2.8		(512.6)
Deferred:
Federal:
Effect of CARES Act	—		0.4		192.9
Other	14.5		10.4		31.3
	14.5		10.8		224.2
State	0.4		2.4		4.1
Foreign	(0.2)		(0.1)		10.2
Total deferred	14.7		13.1		238.5
Provision (benefit)	$	27.6	$	15.9	$	(274.1)

The provision for income taxes from continuing operations results in effective tax rates that differ from the statutory rates. The following is a reconciliation between the statutory U.S. federal income tax rate and our effective income tax rate on income before income taxes:

	Year Ended December 31,
	2022		2021		2020
Statutory rate	21.0	%	21.0	%	21.0	%
Foreign branch taxes	2.1		3.0		(0.2)
State taxes	1.7		3.0		1.1
Executive compensation limitations	1.3		1.8		(0.3)
Noncontrolling interest in partially-owned subsidiaries	(2.1)		—		0.1
Equity compensation	(1.1)		(4.0)		—
Changes in valuation allowance and reserves	(0.9)		(4.3)		0.7
Effect of CARES Act	(0.5)		4.5		34.4
Changes in state laws and apportionment	(0.5)		0.3		(1.4)
Foreign rate differential	—		1.4		(0.1)
Nondeductible excise tax	—		1.3		—
Nondeductible compensation	—		1.2		(0.2)
Impairment - noncontrolling interest in partially-owned subsidiaries	—		—		(3.3)
Interest expense limitations from partially-owned subsidiaries	—		—		0.2
Other, net	0.8		(0.4)		0.2
Effective rate	21.8	%	28.8	%	52.2	%

The effective tax rate is based upon the U.S. statutory rate of 21.0% for the years ended December 31, 2022, 2021, and 2020. For the year ended December 31, 2022, the difference between the U.S. statutory rate and the Company's effective tax rate is primarily due to foreign taxes, state income taxes and non-deductible executive compensation, offset by taxes not recorded on our non-controlling interests in partially-owned subsidiaries, reductions in tax reserves for uncertain tax positions, and excess tax benefits associated with equity-based compensation. For the year ended December 31, 2021, the difference between the U.S. statutory rate and effective tax rate is primarily due to an adjustment to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") carryback benefit previously recognized, state taxes, and foreign taxes, partially offset by excess tax benefits associated with equity-based compensation. For the year ended December 31, 2020, the difference between the U.S. statutory rate and effective tax rate is primarily due the impact of the CARES Act partially offset by the portion of the non-cash small cube covered hopper railcar impairment charge that is not tax-effected because it is related to the noncontrolling interest. See Note 5 for a further explanation of activities with respect to our partially-owned leasing subsidiaries.

Due to the enactment of the CARES Act, Trinity filed a carryback claim for the 2018-2020 tax losses to the 2013-2015 tax years, allowing the recovery of taxes previously paid. The income taxes associated with the carryback claims were paid at a federal rate of 35.0%, rather than the current rate of 21.0% in effect beginning with the 2018 tax year. The overall net impact of the CARES Act was a tax benefit of $0.5 million, a tax expense of $2.5 million, and a tax benefit of $180.4 million for the years ended December 31, 2022 2021, and 2020, respectively.

Income (loss) from continuing operations before income taxes for the years ended December 31, 2022, 2021, and 2020 was $127.1 million, $44.6 million, and $(517.2) million, respectively, for U.S. operations, and $(0.6) million, $10.6 million, and $(7.4) million, respectively, for foreign operations, principally Mexico and Canada.

Deferred income taxes represent the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred tax liabilities and assets are as follows:

	December 31,
	2022		2021
	(in millions)
Deferred tax liabilities:
Depreciation, depletion, and amortization	$	1,072.6	$	1,032.2
Partially-owned subsidiaries basis difference	134.3		139.2
Right-of-use assets	20.9		18.7
Equity items	4.8		—
Accrued liabilities and other	3.0		1.9
Total deferred tax liabilities	1,235.6		1,192.0
Deferred tax assets:
Workers compensation, pensions, and other benefits	27.4		28.7
Interest expense	31.3		—
Warranties and reserves	2.8		7.3
Equity items	—		5.9
Tax loss carryforwards and credits	40.4		38.4
Inventory	3.6		6.0
Lease liabilities	25.8		24.4
Total deferred tax assets	131.3		110.7
Net deferred tax liabilities before valuation allowances	1,104.3		1,081.3
Valuation allowances	29.5		24.4
Net deferred tax liabilities before reserve for uncertain tax positions	1,133.8		1,105.7
Deferred tax assets included in reserve for uncertain tax positions	(0.7)		(1.1)
Net deferred tax liability	$	1,133.1	$	1,104.6

At December 31, 2022, we had $0.2 million of federal consolidated net operating loss carryforwards and $21.3 million of tax-effected state loss carryforwards remaining. We have established valuation allowances for federal, state, and foreign tax operating losses and credits that we have estimated may not be realizable.

Taxing authority examinations

Our tax years through 2019 are effectively settled except with respect to carryback claims related to the 2013 through 2015 tax years, which are currently in review. We do not expect any significant changes to the carryback claims. We have state tax returns that are under audit in the normal course of business, and our Mexican subsidiaries' tax returns statutes of limitations remain open for auditing 2017 forward. We believe we are appropriately reserved for any potential matters.

Unrecognized tax benefits

The change in unrecognized tax benefits was as follows:

	Year Ended December 31,
	2022		2021		2020
	(in millions)
Beginning balance	$	2.3	$	2.3	$	2.3
Additions for tax positions related to the current year	1.1		—		—
Additions for tax positions of prior years	1.7		—		—
Reductions for tax positions of prior years	—		—		—
Settlements	—		—		—
Expiration of statute of limitations	(1.3)		—		—
Ending balance	$	3.8	$	2.3	$	2.3

The total amount of unrecognized tax benefits, including interest and penalties, at December 31, 2022 and 2021, that would affect our effective tax rate if recognized, was $2.5 million and $4.3 million, respectively. The additions for tax positions in the current year and prior years are due to foreign positions of an acquired subsidiary that was recorded as part of our purchase accounting. The expiration of statute of limitations relates to a state tax position for which the statute of limitations has lapsed.

The Company accounts for interest expense and penalties related to income tax issues as income tax expense. Accordingly, interest expense and penalties associated with an uncertain tax position are included in the income tax provision. The total amount of accrued interest and penalties from continuing operations as of December 31, 2022 and 2021 was $2.2 million and $3.0 million, respectively. Income tax expense for the years ended December 31, 2022, 2021, and 2020 included a decrease of $(0.8) million, and an increase of $0.1 million, and $0.2 million, respectively, with regard to interest expense and penalties related to uncertain tax positions.