INCOME TAXES
Income Tax Provision. We calculate our provision for federal, state and international income taxes based on current tax law. The Tax Cuts and Jobs Act (tax reform) was enacted on December 22, 2017, and has several key provisions impacting accounting for and reporting of income taxes. The most significant provision reduces the U.S. corporate statutory tax rate from 35% to 21% beginning on January 1, 2018. Although most provisions of tax reform are not effective until 2018, we are required to record the effect of a change in tax law in the period of enactment (2017).
The provision for income taxes and effective tax rate in 2017 included a $119 unfavorable impact from the change in tax law. The impact is due primarily to the remeasurement of our U.S. federal deferred tax assets and liabilities at the tax rate expected to apply when the temporary differences are realized/settled (remeasured at a rate of 21% versus 35% for the majority of our deferred tax assets and liabilities). The other key provision that requires recognition in the period of enactment is the one-time toll charge resulting from the mandatory deemed repatriation of undistributed foreign taxable income. As it relates to our operations, there was no impact in 2017 from the mandatory deemed repatriation as we had no net undistributed foreign taxable income subject to the toll charge.
We have obtained and analyzed all necessary information to record the effect of the change in tax law, and do not anticipate reporting additional tax effects in the future. However, should the Internal Revenue Service (IRS) issue further guidance or interpretation of relevant aspects of the new tax law, we may adjust these amounts.
The following is a summary of our net provision for income taxes for continuing operations:
|
| | | | | | | | | | | |
Year Ended December 31 | 2017 | | 2016 | | 2015 |
Current: | | | | | |
U.S. federal | $ | 656 |
| | $ | 698 |
| | $ | 841 |
|
State | 31 |
| | 24 |
| | 31 |
|
International | 77 |
| | 71 |
| | 98 |
|
Total current | 764 |
| | 793 |
| | 970 |
|
Deferred: | | | | | |
U.S. federal | 215 |
| | 140 |
| | 163 |
|
State | 7 |
| | 7 |
| | 7 |
|
International | 60 |
| | 37 |
| | 43 |
|
Adjustment for enacted change in U.S. tax law | 119 |
| | — |
| | — |
|
Total deferred | 401 |
| | 184 |
| | 213 |
|
Provision for income taxes, net | $ | 1,165 |
| | $ | 977 |
| | $ | 1,183 |
|
Net income tax payments | $ | 617 |
| | $ | 959 |
| | $ | 871 |
|
The reported tax provision differs from the amounts paid because some income and expense items are recognized in different time periods for financial reporting than for income tax purposes. State and local income taxes allocable to U.S. government contracts are included in operating costs and expenses in the Consolidated Statement of Earnings and, therefore, are not included in the provision above.
The reconciliation from the statutory federal income tax rate to our effective income tax rate follows:
|
| | | | | | | | |
Year Ended December 31 | 2017 | | 2016 | | 2015 |
Statutory federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State tax on commercial operations, net of federal benefits | 0.6 |
| | 0.6 |
| | 0.5 |
|
Impact of international operations | (4.5 | ) | | (4.0 | ) | | (1.3 | ) |
Domestic production deduction | (1.5 | ) | | (1.5 | ) | | (1.6 | ) |
Equity-based compensation | (2.6 | ) | | (2.3 | ) | | — |
|
Domestic tax credits | (0.8 | ) | | (0.9 | ) | | (1.1 | ) |
Contract close-outs | — |
| | — |
| | (2.8 | ) |
Impact of enacted change in U.S. tax law | 2.9 |
| | — |
| | — |
|
Other, net | (0.5 | ) | | (0.2 | ) | | (0.7 | ) |
Effective income tax rate | 28.6 | % | | 26.7 | % | | 28.0 | % |
Net Deferred Tax Asset (Liability). The tax effects of temporary differences between reported earnings and taxable income consisted of the following:
|
| | | | | | | |
December 31 | 2017 | | 2016 |
Retirement benefits | $ | 935 |
| | $ | 1,461 |
|
Tax loss and credit carryforwards | 437 |
| | 480 |
|
Salaries and wages | 137 |
| | 257 |
|
Workers’ compensation | 139 |
| | 235 |
|
Other | 335 |
| | 396 |
|
Deferred assets | 1,983 |
| | 2,829 |
|
Valuation allowances | (402 | ) | | (406 | ) |
Net deferred assets | $ | 1,581 |
| | $ | 2,423 |
|
| | | |
Intangible assets | $ | (688 | ) | | $ | (1,049 | ) |
Contract accounting methods | (500 | ) | | (188 | ) |
Property, plant and equipment | (182 | ) | | (320 | ) |
Capital Construction Fund qualified ships | (159 | ) | | (240 | ) |
Other | (221 | ) | | (245 | ) |
Deferred liabilities | $ | (1,750 | ) | | $ | (2,042 | ) |
Net deferred tax (liability) asset | $ | (169 | ) | | $ | 381 |
|
Our deferred tax assets and liabilities are included in other noncurrent assets and liabilities on the Consolidated Balance Sheet. Our net deferred tax asset (liability) consisted of the following:
|
| | | | | | | |
December 31 | 2017 | | 2016 |
Deferred tax asset | $ | 75 |
| | $ | 564 |
|
Deferred tax liability | (244 | ) | | (183 | ) |
Net deferred tax (liability) asset | $ | (169 | ) | | $ | 381 |
|
We believe it is more likely than not that we will generate sufficient taxable income in future periods to realize our deferred tax assets, subject to the valuation allowances recognized.
Our retirement benefits deferred tax balance includes a deferred tax asset of $1 billion on December 31, 2017, and $1.7 billion on December 31, 2016, related to the amounts recorded in accumulated other comprehensive loss (AOCL) to recognize the funded status of our retirement plans. See Notes M and Q for additional details.
One of our deferred tax liabilities results from our participation in the Capital Construction Fund (CCF), a program established by the U.S. government and administered by the Maritime Administration that supports the acquisition, construction, reconstruction or operation of U.S. flag merchant marine vessels. The program allows us to defer federal and state income taxes on earnings derived from eligible programs as long as the proceeds are deposited in the fund and withdrawals are used for qualified activities. We had U.S. government accounts receivable pledged (and thereby deposited) to the CCF of $692 and $388 on December 31, 2017 and 2016, respectively.
On December 31, 2017, we had net operating loss carryforwards of $1 billion that begin to expire in 2019, a capital loss carryforward of $234 that expires in 2020 and tax credit carryforwards of $123 that begin to expire in 2018.
Tax Uncertainties. For all periods open to examination by tax authorities, we periodically assess our liabilities and contingencies based on the latest available information. Where we believe there is more than a 50% chance that our tax position will not be sustained, we record our best estimate of the resulting tax liability, including interest, in the Consolidated Financial Statements. We include any interest or penalties incurred in connection with income taxes as part of income tax expense. The total amount of these tax liabilities on December 31, 2017, was not material to our results of operations, financial condition or cash flows.
We participate in the IRS Compliance Assurance Process (CAP), a real-time audit of our consolidated federal corporate income tax return. The IRS has examined our consolidated federal income tax returns through 2016. We do not expect the resolution of tax matters for open years to have a material impact on our results of operations, financial condition, cash flows or effective tax rate.
Based on all known facts and circumstances and current tax law, we believe the total amount of any unrecognized tax benefits on December 31, 2017, was not material to our results of operations, financial condition or cash flows, and if recognized, would not have a material impact on our effective tax rate. In addition, there are no tax positions for which it is reasonably possible that the unrecognized tax benefits will vary significantly over the next 12 months, producing, individually or in the aggregate, a material effect on our results of operations, financial condition or cash flows.