Marathon Petroleum Corp

Income Taxes

The TCJA was signed into law on December 22, 2017. The TCJA provided several key changes to U.S. tax law, including a federal corporate tax rate of 21 percent replacing the current rate applicable to MPC of 35 percent. MPC was required to calculate the effect of the TCJA on its deferred tax balances as of the enactment date. The effect of the federal corporate income tax rate change reduced net deferred tax liabilities by $1.5 billion in 2017. Any subsequent effect of a change in estimate affecting deferred taxes as of December 31, 2017 is expected to be immaterial, but could have an impact on the effective tax rate due to the permanent nature of applying differing tax rates to such a change in estimate.

Income tax provisions (benefits) were:



	2017									2016							2015
(In millions)	Current			Deferred			Total			Current			Deferred		Total		Current		Deferred			Total
Federal	$	681		$	(1,270	)	$	(589	)	$	189		$	336	$	525	$	1,210	$	134		$	1,344
State and local	98			33			131			27			57		84		152		9			161
Foreign	(6		)	4			(2		)	(1		)	1		—		10		(9		)	1
Total	$	773		$	(1,233	)	$	(460	)	$	215		$	394	$	609	$	1,372	$	134		$	1,506

A reconciliation of the federal statutory income tax rate (35 percent) applied to income before income taxes to the provision for income taxes follows:



	2017		2016		2015
Statutory rate applied to income before income taxes	35	%	35	%	35	%
State and local income taxes, net of federal income tax effects	2		3		2
Domestic manufacturing deduction	(1	)	(1	)	(2	)
Noncontrolling interests	(4	)	(1	)	—
Biodiesel excise tax credit	—		(1	)	(1	)
TCJA legislation	(45	)	—		—
Other	(1	)	(2	)	—
Provision for income taxes	(14	)%	33	%	34	%

Deferred tax assets and liabilities resulted from the following:



	December 31,
(In millions)	2017		2016
Deferred tax assets:
Employee benefits	$	348	$	578
Environmental	16		34
Deferred revenue	21		31
Net operating loss carryforwards	12		23
Other	23		27
Total deferred tax assets	420		693
Deferred tax liabilities:
Property, plant and equipment	1,603		2,591
Inventories	473		707
Investments in subsidiaries and affiliates	912		1,145
Other	73		94
Total deferred tax liabilities	3,061		4,537
Net deferred tax liabilities	$	2,641	$	3,844

Net deferred tax liabilities were classified in the consolidated balance sheets as follows:



	December 31,
(In millions)	2017		2016
Assets:
Other noncurrent assets	$	13	$	17
Liabilities:
Deferred income taxes	2,654		3,861
Net deferred tax liabilities	$	2,641	$	3,844

Tax carryforwards – At December 31, 2017 and 2016, federal operating loss carryforwards were $5 million and $18 million, respectively, which expire in 2022 through 2036. As of December 31, 2017 and 2016, state and local operating loss carryforwards were $8 million, which expire in 2017 through 2036. The decrease in both the federal and state loss carryforwards was due to the utilization of loss carryforwards made available to MPC as a result of the reorganization transactions which simplified the MPLX ownership structure as discussed in Note 4.

Valuation allowances – As of December 31, 2017 and 2016, $11 million and $10 million of valuation allowances have been recorded against foreign tax credits and state net operating losses due to the expectation that these deferred tax assets are not likely to be realized.

MPC is continuously undergoing examination of its U.S. federal income tax returns by the Internal Revenue Service (“IRS”). Since 2012, we have continued to participate in the Compliance Assurance Process (“CAP”). CAP is a real-time audit of the U.S. Federal income tax return that allows the IRS, working in conjunction with MPC, to determine tax return compliance with the U.S. Federal tax law prior to filing the return. This program provides us with greater certainty about our tax liability for years under examination by the IRS.

IRS audits have been completed through the 2009 tax year. We believe adequate provision has been established for potential tax in periods not closed to examination. Further, we are routinely involved in U.S. state income tax audits. We believe all other audits will be resolved with the amounts provided for these liabilities. As of December 31, 2017, our income tax returns remain subject to examination in the following major tax jurisdictions for the tax years indicated:



United States Federal	2010	-	2016
States	2008	-	2016

The following table summarizes the activity in unrecognized tax benefits:



(In millions)	2017			2016			2015
January 1 balance	$	7		$	12		$	12
Additions for tax positions of prior years	13			6			—
Reductions for tax positions of prior years	—			(10		)	—
Settlements	(1		)	(1		)	—
December 31 balance	$	19		$	7		$	12

If the unrecognized tax benefits as of December 31, 2017 were recognized, $10 million would affect our effective income tax rate. There were $10 million of uncertain tax positions as of December 31, 2017 for which it is reasonably possible that the amount of unrecognized tax benefits would significantly decrease during the next twelve months.

Prior to its spin-off on June 30, 2011, Marathon Petroleum Corporation was included in the Marathon Oil Corporation (“Marathon Oil”) federal income tax returns for all applicable years. During the third quarter 2017, Marathon Oil received a notice of Final Partnership Administrative Adjustment (“FPAA”) from the IRS for taxable year 2010, relating to certain partnership transactions. Marathon Oil filed a U.S. Tax Court petition disputing these adjustments during the fourth quarter of 2017. We received an FPAA for taxable years 2011-2014 for items resulting from the Marathon Oil IRS dispute discussed above. We filed a U.S. Tax Court petition in the fourth quarter of 2017 for tax years 2011-2014 to dispute these corollary adjustments. We continue to believe that the issue in dispute is more likely than not to be fully sustained and therefore, no liability has been accrued for this matter.

Pursuant to our tax sharing agreement with Marathon Oil, the unrecognized tax benefits related to pre-spinoff operations for which Marathon Oil was the taxpayer remain the responsibility of Marathon Oil and we have indemnified Marathon Oil accordingly. See Note 25 for indemnification information.

Interest and penalties related to income taxes are recorded as part of the provision for income taxes. Such interest and penalties were net expenses (benefits) of $3 million, $(5) million and $3 million in 2017, 2016 and 2015, respectively. As of December 31, 2017 and 2016, $17 million and $13 million of interest and penalties were accrued related to income taxes.