Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

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INCOME TAXES
 12 Months Ended
Dec. 31, 2024
Income Tax Disclosure [Abstract]  
INCOME TAXES
NOTE 4. INCOME TAXES
The following table summarizes income before income taxes:
  Years ended December 31,
In millions 2024 2023 2022
U.S. income (loss) $ 2,857  $ (541) $ 1,336 
Foreign income 2,046  2,167  1,483 
Income before income taxes $ 4,903  $ 1,626  $ 2,819 
Income tax expense (benefit) consisted of the following:
  Years ended December 31,
In millions 2024 2023 2022
Current      
U.S. federal and state $ 433  $ 611  $ 425 
Foreign 611  632  485 
Total current income tax expense 1,044  1,243  910 
Deferred      
U.S. federal and state (241) (468) (229)
Foreign 32  11  (45)
Total deferred income tax benefit (209) (457) (274)
Income tax expense $ 835  $ 786  $ 636 
A reconciliation of the statutory U.S. federal income tax rate to the effective tax rate was as follows:
  Years ended December 31,
  2024 2023 2022
Statutory U.S. federal income tax rate 21.0  % 21.0  % 21.0  %
State income tax, net of federal effect 1.2  (0.4) 1.3 
Differences in rates and taxability of foreign subsidiaries and joint ventures (1)
4.2  11.9  3.1 
Research tax credits (1.5) (4.7) (1.8)
Foreign derived intangible income (1.3) (4.2) (2.0)
Settlement Agreements, federal impact (2)
—  22.4  — 
Settlement Agreements, state impact (2)
—  2.1  — 
Non-taxable Atmus gain (3)
(6.1) —  — 
Other, net (0.5) 0.2  1.0 
Effective tax rate 17.0  % 48.3  % 22.6  %
(1) Included the jurisdictional mix of pre-tax income and impact of actual and planned repatriation of earnings back to the U.S.
(2) See NOTE 14, "COMMITMENTS AND CONTINGENCIES," for additional information.
(3) See NOTE 21, "ATMUS INITIAL PUBLIC OFFERING (IPO) AND DIVESTITURE," for additional information.
The year ended December 31, 2024, contained net favorable discrete tax items primarily due to the $1.3 billion non-taxable gain on the Atmus split-off. Other discrete tax items were net favorable by $59 million, primarily due to $52 million of favorable return to provision adjustments, $22 million of favorable share-based compensation tax benefits, $21 million of favorable adjustments related to audit settlements and $20 million of favorable adjustments from tax return amendments, partially offset by $50 million of unfavorable adjustments related to Accelera strategic reorganization actions and net $6 million of other unfavorable adjustments. See NOTE 21, "ATMUS INITIAL PUBLIC OFFERING (IPO) AND DIVESTITURE," and NOTE 22, "ACCELERA STRATEGIC REORGANIZATION ACTIONS," for additional information.
The year ended December 31, 2023, contained unfavorable net discrete items of $397 million, primarily due to $398 million in the fourth quarter related to the $2.0 billion charge from the Settlement Agreements, $22 million of unfavorable adjustments for uncertain tax positions and $3 million of net unfavorable other discrete tax items, partially offset by $21 million of favorable return to provision adjustments and $5 million of favorable share-based compensation tax benefits. See NOTE 14, “COMMITMENTS AND CONTINGENCIES,” for additional information.
The year ended December 31, 2022, contained discrete tax items that netted to zero, primarily due to $31 million of favorable changes in accrued withholding taxes, $29 million of favorable changes in tax reserves, $15 million of favorable valuation allowance adjustments and $9 million of favorable other net discrete items, offset by $69 million of unfavorable tax costs associated with internal restructuring ahead of the planned separation of Atmus and $15 million of unfavorable return to provision adjustments related to the 2021 filed tax returns.
At December 31, 2024, $5.6 billion of non-U.S. earnings are considered indefinitely reinvested in operations outside the U.S. for which deferred taxes were not provided. Determination of the related deferred tax liability, if any, is not practicable because of the complexities associated with the hypothetical calculation.
Carryforward tax benefits and the tax effect of temporary differences between financial and tax reporting that give rise to net deferred tax assets (liabilities) were as follows:
  December 31,
In millions 2024 2023
Deferred tax assets    
U.S. and state carryforward benefits $ 254  $ 272 
Foreign carryforward benefits 653  609 
Employee benefit plans 308  347 
Warranty expenses 545  483 
Lease liabilities 109  125 
Capitalized research and development expenditures 805  591 
Accrued expenses 207  253 
Other 139  78 
Gross deferred tax assets 3,020  2,758 
Valuation allowance (872) (789)
Total deferred tax assets 2,148  1,969 
Deferred tax liabilities    
Property, plant and equipment (371) (367)
Unremitted income of foreign subsidiaries and joint ventures (162) (179)
Employee benefit plans (289) (278)
Lease assets (109) (123)
Intangible assets (315) (406)
Other (172) (64)
Total deferred tax liabilities (1,418) (1,417)
Net deferred tax assets $ 730  $ 552 
Our 2024 U.S. carryforward benefits include $254 million of state credit and net operating loss carryforward benefits that begin to expire in 2025. Our foreign carryforward benefits include $653 million of net operating loss carryforwards that begin to expire in 2025. A valuation allowance is recorded to reduce the gross deferred tax assets to an amount we believe is more likely than not to be realized. The valuation allowance at December 31, 2024 was $872 million and increased by a net $83 million. The valuation allowance at December 31, 2023 was $789 million and increased by a net $85 million. The valuation allowance at December 31, 2022 was $704 million and increased by a net $344 million, primarily due to the Meritor acquisition. The valuation allowance is primarily attributable to the uncertainty regarding the realization of a portion of the U.S. state and foreign net operating loss and tax credit carryforward benefits.
Our Consolidated Balance Sheets contain the following tax related items:
December 31,
In millions 2024 2023
Prepaid expenses and other current assets    
Refundable income taxes $ 121  $ 81 
Other assets
Deferred income tax assets 1,119  1,082 
Long-term refundable income taxes 47  27 
Other accrued expenses
Income tax payable 244  242 
Other liabilities
Long-term income taxes 5  111 
Deferred income tax liabilities 389  530 
A reconciliation of unrecognized tax benefits for the years ended December 31, 2024, 2023 and 2022 was as follows:
December 31,
In millions 2024 2023 2022
Balance at beginning of year $ 330  $ 283  $ 89 
Additions to tax positions due to acquisitions —  8  189 
Additions to current year tax positions 21  21  17 
Additions to prior years' tax positions 9  19  17 
Reductions to prior years' tax positions (18) (1) (1)
Reductions for tax positions due to settlements with taxing authorities (38) —  (28)
Balance at end of year $ 304  $ 330  $ 283 
Included in the December 31, 2024, 2023 and 2022, balances are $289 million, $314 million and $270 million, respectively, related to tax positions that, if recognized, would favorably impact the effective tax rate in future periods. We also accrued interest expense related to the unrecognized tax benefits of $31 million, $33 million and $18 million as of December 31, 2024, 2023 and 2022, respectively. We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.
Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a positive impact on earnings.
As a result of our global operations, we file income tax returns in various jurisdictions including U.S. federal, state and foreign jurisdictions. We are routinely subject to examination by taxing authorities throughout the world, including Australia, Belgium, Brazil, Canada, China, France, India, Mexico, the U.K. and the U.S. With few exceptions, our U.S. federal, major state and foreign jurisdictions are no longer subject to income tax assessments for years before 2018.