Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (“tax reform”) was signed into law. Tax reform lowered the Federal corporate tax rate from 35% to 21% and made numerous other tax law changes. GAAP requires companies to recognize the effect of tax law changes in the period of enactment. As a result, “Purchased services and rents” includes a $151 million benefit for earnings generated from reductions to net deferred tax liabilities at certain equity investees and “Income taxes” includes a $3,331 million benefit primarily due to the remeasurement of our net deferred tax liabilities to reflect the lower rate. Reasonable estimates were made based on our analysis of tax reform. These provisional amounts may be adjusted in future periods during 2018 when additional information is obtained. Additional information that may affect our provisional amounts would include further clarification and guidance on how the IRS will implement tax reform, including guidance with respect to 100% bonus depreciation on self-constructed assets, further clarification and guidance on how state taxing authorities will implement tax reform and the related effect on our state income tax returns, completion of our 2017 tax return filings, any changes made by our equity method investees, and the potential for additional guidance from the SEC or the FASB related to tax reform.
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| ($ in millions) |
Current: | |
| | |
| | |
|
Federal | $ | 500 |
| | $ | 612 |
| | $ | 505 |
|
State | 83 |
| | 75 |
| | 61 |
|
Total current taxes | 583 |
| | 687 |
| | 566 |
|
| | | | | |
Deferred: | |
| | |
| | |
|
Federal | (2,924 | ) | | 206 |
| | 292 |
|
State | 65 |
| | 21 |
| | 28 |
|
Total deferred taxes | (2,859 | ) | | 227 |
| | 320 |
|
| | | | | |
Income taxes | $ | (2,276 | ) | | $ | 914 |
| | $ | 886 |
|
Reconciliation of Statutory Rate to Effective Rate
“Income taxes” in the Consolidated Statements of Income differs from the amounts computed by applying the statutory federal corporate tax rate as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| Amount | | % | | Amount | | % | | Amount | | % |
| ($ in millions) |
| | | | | | | | | | | |
Federal income tax at statutory rate | $ | 1,095 |
| | 35.0 |
| | $ | 904 |
| | 35.0 |
| | $ | 855 |
| | 35.0 |
|
State income taxes, net of federal tax effect | 88 |
| | 2.8 |
| | 70 |
| | 2.8 |
| | 72 |
| | 3.0 |
|
Excess tax benefits on stock-based compensation
| (39 | ) | | (1.2 | ) | | (17 | ) | | (0.7 | ) | | — |
| | — |
|
Equity in earnings related to tax reform | (38 | ) | | (1.2 | ) | | — |
| | — |
| | — |
| | — |
|
Other, net | (51 | ) | | (1.7 | ) | | (43 | ) | | (1.7 | ) | | (41 | ) | | (1.7 | ) |
Tax reform | (3,331 | ) | | (106.5 | ) | | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | |
Income taxes | $ | (2,276 | ) | | (72.8 | ) | | $ | 914 |
| | 35.4 |
| | $ | 886 |
| | 36.3 |
|
Deferred Tax Assets and Liabilities
Certain items are reported in different periods for financial reporting and income tax purposes. Deferred tax assets and liabilities are recorded in recognition of these differences. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| ($ in millions) |
Deferred tax assets: | | | |
|
Compensation and benefits, including postretirement benefits | $ | 235 |
| | $ | 464 |
|
Accruals, including casualty and other claims | 64 |
| | 102 |
|
Other | 67 |
| | 62 |
|
Total gross deferred tax assets | 366 |
| | 628 |
|
Less valuation allowance | (44 | ) | | (39 | ) |
| | | |
Net deferred tax assets | 322 |
| | 589 |
|
| | | |
Deferred tax liabilities: | |
| | |
|
Property | (6,212 | ) | | (9,301 | ) |
Other | (434 | ) | | (428 | ) |
Total deferred tax liabilities | (6,646 | ) | | (9,729 | ) |
| | | |
Deferred income taxes | $ | (6,324 | ) | | $ | (9,140 | ) |
Except for amounts for which a valuation allowance has been provided, we believe that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. The valuation allowance at the end of each year primarily relates to subsidiary state income tax net operating losses and state investment tax credits that may not be utilized prior to their expiration. The total valuation allowance increased by $5 million in 2017 and $4 million in 2016.
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| ($ in millions) |
| | | |
Balance at beginning of year | $ | 27 |
| | $ | 25 |
|
| | | |
Additions based on tax positions related to the current year | 4 |
| | 3 |
|
Additions for tax positions of prior years | 2 |
| | — |
|
Reductions for tax positions of prior years | (2 | ) | | — |
|
Settlements with taxing authorities | (11 | ) | | — |
|
Lapse of statutes of limitations | (3 | ) | | (1 | ) |
| | | |
Balance at end of year | $ | 17 |
| | $ | 27 |
|
Included in the balance of unrecognized tax benefits at December 31, 2017, are potential benefits of $11 million that would affect the effective tax rate if recognized. Unrecognized tax benefits are adjusted in the period in which new information about a tax position becomes available or the final outcome differs from the amount recorded.
IRS examinations have been completed for all years prior to 2013. We have amended our 2012 income tax return to request a refund of $46 million, which is not included in the above balance of unrecognized tax benefits. State income tax returns generally are subject to examination for a period of three to four years after filing of the return. In addition, we are generally obligated to report changes in taxable income arising from federal income tax examinations to the states within a period of up to two years from the date the federal examination is final. We have various state income tax returns either under examination, administrative appeal, or litigation.