Note 13. Income Taxes

 

We conduct business globally and, as a result, file numerous consolidated and separate income tax returns within and outside the U.S.  For all of our U.S. subsidiaries, we file a consolidated federal income tax return.  Income from continuing operations before income taxes is as follows:

 

 

Income tax expense for continuing operations is summarized as follows:

 

 

The following table reconciles the federal statutory income tax rate to our effective income tax rate for continuing operations:

 

* Included a favorable impact of (1.4)% in 2015 related to a net change in valuation allowances.

 

U.S. Tax Reform

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. Among other things, the Act reduces the U.S. federal corporate tax rate from 35% to 21% and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred.  We have reasonably estimated the effects of the Act and recorded provisional amounts in the fourth quarter of 2017 totaling $266 million. Our provisional estimate included a $154 million charge to remeasure our U.S. federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%.  In addition, the provisional estimate included $112 million in expense for the one-time transition tax. This tax was based on approximately $1.6 billion of our post-1986 earnings and profits that were previously deferred from U.S. income taxes, and on the amount of those earnings held in cash and other specified net assets.

 

The U.S. Government and state tax authorities are expected to continue to issue guidance regarding the Act, which may result in adjustments to our provisional estimates. We are continuing to analyze certain aspects of the Act and may refine our estimates, which could potentially affect the measurement of our net deferred tax assets or give rise to new deferred tax amounts.  The final determination of the remeasurement of our net deferred tax assets and the transition tax will be completed as additional information becomes available, but no later than one year from the enactment date.

 

No additional income taxes related to outside basis differences have been provided as all such amounts continue to be indefinitely reinvested in foreign operations.  Should these earnings be distributed in the future in the form of dividends or otherwise, we would be subject to withholding taxes payable to various non-U.S. jurisdictions and U.S. states. It is not practicable to determine the amount of unrecognized deferred tax liability related to any undistributed foreign earnings.   We will continue to assess our ability and intent to repatriate these earnings during the measurement period.

 

Federal Tax Settlement of 1998 to 2008

For 2016, the provision for income taxes included a benefit of $319 million to reflect the settlement with the U.S. Internal Revenue Service Office of Appeals for our 1998 to 2008 tax years, which resulted in a $206 million benefit attributable to continuing operations and $113 million attributable to discontinued operations.

 

Unrecognized Tax Benefits

Our unrecognized tax benefits represent tax positions for which reserves have been established.  Unrecognized state tax benefits and interest related to unrecognized tax benefits are reflected net of applicable tax benefits. A reconciliation of our unrecognized tax benefits is as follows:

 

 

At the end of 2017 and 2016, if these unrecognized tax benefits were recognized in future periods, they would favorably impact our effective tax rate.

 

In the normal course of business, we are subject to examination by tax authorities throughout the world.  We are no longer subject to U.S. federal tax examinations for years before 2012, U.S. state and local income tax examinations for years before 1997, and non-U.S. income tax examinations for years before 2011.

 

Deferred Taxes

The tax effects of temporary differences that give rise to significant portions of our net deferred tax assets and liabilities are provided below:

 

*Accrued expenses included warranty reserves, self-insured liabilities and interest.

 

We believe earnings during the period when the temporary differences become deductible will be sufficient to realize the related future income tax benefits.  For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not more than likely, a valuation allowance is provided.  In 2017, we recorded $46 million in deferred tax assets, along with a $33 million valuation allowance, related to state loss carryforwards as the likelihood that we will be able to utilize these carryforwards is no longer deemed remote predominately due to a consolidated filing election made during the year.

 

The following table presents the breakdown of net deferred tax assets:

 

 

Our net operating loss and credit carryforwards at December 30, 2017 are as follows: