Income Taxes
(Benefit) Provision for income taxes
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
(In millions) | | Current | | Deferred | | Total | | Current | | Deferred | | Total | | Current | | Deferred | | Total |
Federal | | $ | (66 | ) | | $ | (81 | ) | | $ | (147 | ) | | $ | (18 | ) | | $ | — |
| | $ | (18 | ) | | $ | (29 | ) | | $ | 168 |
| | $ | 139 |
|
State and local | | (1 | ) | | — |
| | (1 | ) | | 1 |
| | — |
| | 1 |
| | (5 | ) | | 33 |
| | 28 |
|
Foreign | | 53 |
| | 9 |
| | 62 |
| | 32 |
| | 9 |
| | 41 |
| | 4 |
| | 12 |
| | 16 |
|
Total | | $ | (14 | ) | | $ | (72 | ) | | $ | (86 | ) | | $ | 15 |
| | $ | 9 |
| | $ | 24 |
| | $ | (30 | ) | | $ | 213 |
| | $ | 183 |
|
A reconciliation of the federal statutory tax rate of 35 percent to total provision follows:
|
| | | | | | | | | | | | |
(In millions) | | 2017 | | 2016 | | 2015 |
Statutory rate applied to earnings (loss) before income taxes | | $ | 105 |
| | $ | (146 | ) | | $ | (511 | ) |
Valuation allowance | | 36 |
| | 252 |
| | 804 |
|
Excess percentage depletion | | (68 | ) | | (49 | ) | | (49 | ) |
State and local income taxes after federal income tax effects | | (28 | ) | | (20 | ) | | (42 | ) |
Adjustments of prior years’ federal income taxes | | (5 | ) | | (6 | ) | | (23 | ) |
Tax credits | | (56 | ) | | (39 | ) | | (7 | ) |
Effects of foreign operations | | 56 |
| | 36 |
| | 5 |
|
Effect of tax reform | | (81 | ) | | — |
| | — |
|
Alternative minimum tax credit refund | | (48 | ) | | (18 | ) | | — |
|
Other | | 3 |
| | 14 |
| | 6 |
|
Total (benefit) provision | | $ | (86 | ) | | $ | 24 |
| | $ | 183 |
|
The tax benefit differs from the domestic statutory rate of 35 percent as a result of the items listed above. In particular, it includes a benefit of $10 million related to the corporate rate reduction provided by the 2017 Act, as well as a benefit of $71 million related to the reversal of the valuation allowance recorded against the remaining balance of the Company’s AMT credits, which became fully refundable pursuant to the 2017 Act. Also included in the 2017 tax benefit is a benefit of $48 million related to the Company’s election to claim a refund of AMT credits pursuant to a provision in the Protecting Americans from Tax Hikes (PATH) Act.
Included in the 2016 tax provision is a benefit of $18 million related to the Company's election to claim a refund of AMT credits pursuant to a provision in the PATH Act. The provision also reflects a write-off of certain deferred tax assets and liabilities related to branch operations pursuant to new regulations. However, the write-off does not impact the total provision because of the valuation allowance on the net domestic deferred tax asset.
Included in the 2015 tax provision is a tax benefit of $31 million relating to adjustments to tax reserves related to the conclusion of certain audits.
Unrecognized tax benefits
Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken, in a tax return and the benefit recognized for accounting purposes pursuant to the guidance in ASC Topic 740 on income taxes. The total amount of unrecognized tax benefits was $42 million, $72 million and $74 million as of December 31, 2017, 2016 and 2015, respectively.
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $6 million as of December 31, 2017 and $9 million as of December 31, 2016.
U. S. Steel records interest related to uncertain tax positions as a part of net interest and other financial costs in the Consolidated Statements of Operations. Any penalties are recognized as part of selling, general and administrative expenses. U. S. Steel had accrued liabilities of $6 million and $4 million for interest and penalties related to uncertain tax positions as of December 31, 2017 and 2016, respectively.
A tabular reconciliation of unrecognized tax benefits follows:
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| | | | | | | | | | | | |
(In millions) | | 2017 | | 2016 | | 2015 |
Unrecognized tax benefits, beginning of year | | $ | 72 |
| | $ | 74 |
| | $ | 112 |
|
Increases – tax positions taken in prior years | | 1 |
| | — |
| | — |
|
Decreases – tax positions taken in prior years | | (26 | ) | | (4 | ) | | (5 | ) |
Increases – current tax positions | | — |
| | 3 |
| | — |
|
Settlements | | (4 | ) | | — |
| | (26 | ) |
Lapse of statute of limitations | | (1 | ) | | (1 | ) | | (7 | ) |
Unrecognized tax benefits, end of year | | $ | 42 |
| | $ | 72 |
| | $ | 74 |
|
Tax years subject to examination
Below is a summary of the tax years open to examination by major tax jurisdiction:
U.S. Federal – 2011 and forward*
U.S. States – 2009 and forward
Slovakia – 2007 and forward
*U. S. Steel's 2011 federal tax year remains open to the extent of net operating losses carried back from 2013.
Status of Internal Revenue Service (IRS) examinations
The IRS audit of U. S. Steel’s 2012 and 2013 tax returns began in 2015 and is ongoing. The IRS and the Company have agreed to a number of adjustments, but two issues remain unagreed and the parties are using the Appeals process in an attempt to resolve their differences. To the extent that some issues have been agreed to, the effect of those items are now reflected in the Company’s tax accounts. The IRS completed its audit of U. S. Steel’s 2010 and 2011 tax returns in 2014, and the audit report was agreed to by the Company, and was approved by the Congressional Joint Committee on Taxation in the first quarter of 2015.
Taxes on foreign earnings
Pretax earnings for 2017 include domestic earnings of $75 million and earnings attributable to foreign sources of $226 million. Pretax loss and earnings for 2016 and 2015 include domestic losses of $588 million and $1,193 million, respectively, and earnings attributable to foreign sources of $172 million and a loss attributable to foreign sources of $266 million, respectively. At the end of both 2017 and 2016, U. S. Steel does not have any undistributed foreign earnings and profits for which U.S. deferred taxes have not been provided.
Deferred taxes
Deferred tax assets and liabilities resulted from the following:
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| | | | | | | | |
| | December 31, |
(In millions) | | 2017 | | 2016 |
Deferred tax assets: | | | | |
Federal tax loss carryforwards (expiring in 2033 through 2036) | | $ | 394 |
| | $ | 754 |
|
Federal capital loss carryforwards (expiring 2021) | | 36 |
| | — |
|
State tax credit carryforwards (expiring in 2018 through 2031) | | 14 |
| | 15 |
|
State tax loss carryforwards (expiring in 2018 through 2037) | | 155 |
| | 110 |
|
Minimum tax credit carryforwards | | 76 |
| | 109 |
|
General business credit carryforwards (expiring in 2025 through 2037) | | 86 |
| | 85 |
|
Foreign tax loss and credit carryforwards (expiring in 2024 through 2027) | | 102 |
| | 51 |
|
Employee benefits | | 266 |
| | 633 |
|
Receivables, payables and debt | | — |
| | 5 |
|
Future reduction of foreign tax credits | | 1 |
| | 1 |
|
Contingencies and accrued liabilities | | 70 |
| | 97 |
|
Investments in subsidiaries and equity investees | | 33 |
| | 211 |
|
Valuation allowance | | (608 | ) | | (1,113 | ) |
Total deferred tax assets | | 625 |
| | 958 |
|
Deferred tax liabilities: | | | | |
Property, plant and equipment | | 516 |
| | 899 |
|
Inventory | | 6 |
| | 23 |
|
Receivables, payables and debt | | 14 |
| | — |
|
Expected federal benefit for deducting state deferred income taxes | | 14 |
| | 9 |
|
Indefinite-lived intangible assets | | 18 |
| | 28 |
|
Other temporary differences | | 7 |
| | 21 |
|
Total deferred tax liabilities | | 575 |
| | 980 |
|
Net deferred tax asset (liability) | | $ | 50 |
| | $ | (22 | ) |
U. S. Steel recognizes deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The realization of deferred tax assets is assessed quarterly based on several interrelated factors. These factors include U. S. Steel’s expectation to generate sufficient future taxable income and the projected time period over which these deferred tax assets will be realized.
At December 31, 2017, the net domestic deferred tax asset was $53 million, net of an established valuation allowance of $604 million. At December 31, 2016, the net domestic deferred tax liability was $28 million, net of an established valuation allowance of $1,109 million.
At December 31, 2017, the net foreign deferred tax liability was $3 million, net of an established valuation allowance of $4 million. At December 31, 2016, the net foreign deferred tax asset was $6 million, net of an established valuation allowance of $4 million. The net foreign deferred tax asset will fluctuate as the value of the U.S. dollar changes with respect to the euro.
U. S. Steel will continue to monitor the realizability of its deferred tax assets on a quarterly basis taking into consideration, among other items, the uncertainty regarding the Company's continued ability to generate domestic income in the near term. In the future, if we determine that realization is more likely than not for deferred tax assets with a valuation allowance, the related valuation allowance will be reduced, and we will record a non-cash benefit to earnings.