Annual report [Section 13 and 15(d), not S-K Item 405]

INCOME TAXES

v3.25.4
INCOME TAXES
 12 Months Ended
Dec. 31, 2025
Income Tax Disclosure [Abstract]  
INCOME TAXES
NOTE 4. INCOME TAXES
The following table summarizes income before income taxes:
  Years ended December 31,
In millions 2025 2024 2023
U.S. income (loss) $ 1,781  $ 2,857  $ (541)
Foreign income 2,182  2,046  2,167 
Income before income taxes $ 3,963  $ 4,903  $ 1,626 
Effective December 31, 2025, we adopted ASU 2023-09 on a prospective basis. See NOTE 1, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” for additional details on the adoption of this standard. The tables below provide the prospective disclosures required by ASU 2023-09.
Income tax expense (benefit) consisted of the following:
  Year ended December 31,
In millions 2025
Current  
U.S. federal $ 130 
U.S. state and local 18 
Foreign 772 
Total current income tax expense 920 
Deferred  
U.S. federal 86 
U.S. state and local 8 
Foreign (8)
Total deferred income tax expense 86 
Income tax expense $ 1,006 
On July 4, 2025, the One Big Beautiful Bill Act (The Act) was signed into law, enacting significant changes to U.S. federal income tax rules affecting corporations, such as the ability to immediately deduct domestic research and development costs, restoration of elective 100 percent bonus depreciation for qualified property and changes to the international tax provisions. Implementation of The Act resulted in an increase to tax expense of $39 million in 2025, primarily due to a reduction in the foreign income deduction and changes to the research and development tax credit.
During 2025, we responded to rapidly deteriorating conditions in our electrolyzer markets and overall hydrogen market in our Accelera segment by recording $458 million in charges related to inventory write-downs, asset impairments, severance and contract termination costs. These actions resulted in an increase in the effective tax rate of 2.6 percent in 2025. See NOTE 22, “ACCELERA ACTIONS,” for additional information.
Reconciliations of the statutory U.S. federal income tax expense and tax rate to the net expense and effective tax rate were as follows:
In millions Year ended December 31, 2025
U.S. federal statutory tax expense/rate $ 832  21.0  %
Domestic federal
Effect of cross-border tax laws
Foreign derived intangible income (42) (1.1)
Other 15  0.4 
Tax credits
Research tax credits (69) (1.7)
Other (36) (0.9)
Nontaxable or nondeductible items 1  — 
Effect of changes in tax laws or rates enacted in the current period 14  0.3 
Other 26  0.7 
Domestic state and local taxes, net of federal income tax effect (1)
20  0.5 
Foreign tax effects
Canada
Valuation allowance 63  1.6 
Other 54  1.4 
China
Withholding tax 55  1.4 
Equity income or loss (49) (1.2)
Other (7) (0.2)
India 50  1.3 
Netherlands
Nontaxable or nondeductible items 44  1.1 
Other (8) (0.2)
United Kingdom
Tax incentives (44) (1.1)
Other 16  0.4 
Other foreign jurisdictions 105  2.6 
Worldwide changes in unrecognized tax benefits (34) (0.9)
Total tax expense/rate $ 1,006  25.4  %
(1) State and local taxes in California, Illinois, Pennsylvania, Georgia, Tennessee, Michigan, North Carolina, Wisconsin and Iowa comprise the majority of this category.
The year ended December 31, 2025 contained net favorable discrete tax items of $75 million, primarily due to $51 million of favorable adjustments for uncertain tax positions, $15 million of favorable adjustments for share-based compensation tax benefits, $7 million of favorable return to provision adjustments and $2 million of other favorable adjustments.
Income taxes paid, net of refunds received, consisted of the following:
  Year ended December 31,
In millions 2025
U.S. federal $ 328 
U.S. state and local 32 
Foreign
India 182 
China 184 
Other 348 
Total income taxes paid $ 1,074 
The tables below provide the historical disclosures for the years ended December 31, 2024 and 2023. Income tax expense (benefit) under the previous standard was as follows:
  Years ended December 31,
In millions 2024 2023
Current    
U.S. federal and state $ 433  $ 611 
Foreign 611  632 
Total current income tax expense 1,044  1,243 
Deferred
U.S. federal and state $ (241) $ (468)
Foreign 32  11 
Total deferred income tax benefit (209) (457)
Income tax expense $ 835  $ 786 

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
Statutory U.S. federal income tax rate 21.0  % 21.0  %
State income tax, net of federal effect 1.2  (0.4)
Differences in rates and taxability of foreign subsidiaries and joint ventures (1)
4.2  11.9 
Research tax credits (1.5) (4.7)
Foreign derived intangible income (1.3) (4.2)
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 
Effective tax rate 17.0  % 48.3  %
(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 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 DIVESTITURE,” and NOTE 22, “ACCELERA ACTIONS,” for additional information.
The year ended December 31, 2023, contained unfavorable net discrete tax 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.
At December 31, 2025, certain 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 2025 2024
Deferred tax assets    
U.S. and state carryforward benefits $ 258  $ 254 
Foreign carryforward benefits 784  653 
Employee benefit plans 170  308 
Warranty expenses 599  545 
Lease liabilities 142  109 
Capitalized research and development expenditures 676  805 
Accrued expenses 230  207 
Other 209  139 
Gross deferred tax assets 3,068  3,020 
Valuation allowance (954) (872)
Total deferred tax assets 2,114  2,148 
Deferred tax liabilities    
Property, plant and equipment (439) (371)
Unremitted income of foreign subsidiaries and joint ventures (175) (162)
Employee benefit plans (242) (289)
Lease assets (135) (109)
Intangible assets (342) (315)
Other (106) (172)
Total deferred tax liabilities (1,439) (1,418)
Net deferred tax assets $ 675  $ 730 
Our 2025 U.S. carryforward benefits include $258 million of state credit and net operating loss carryforward benefits that begin to expire in 2026. Our foreign carryforward benefits include $784 million of net operating loss carryforwards that begin to expire in 2026. 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, 2025 was $954 million and increased by a net $82 million. 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 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 2025 2024
Prepaid expenses and other current assets    
Refundable income taxes $ 264  $ 121 
Other assets
Deferred income tax assets 1,063  1,119 
Long-term refundable income taxes 20  47 
Other accrued expenses
Income tax payable 156  244 
Other liabilities
Long-term income taxes 8  5 
Deferred income tax liabilities 388  389 
A reconciliation of unrecognized tax benefits for the years ended December 31, 2025, 2024 and 2023 was as follows:
December 31,
In millions 2025 2024 2023
Balance at beginning of year $ 304  $ 330  $ 283 
Additions to tax positions due to acquisitions —  —  8 
Additions to current year tax positions 18  21  21 
Additions to prior years' tax positions 12  9  19 
Reductions to prior years' tax positions (62) (18) (1)
Reductions for tax positions due to settlements with taxing authorities —  (38) — 
Balance at end of year $ 272  $ 304  $ 330 
Included in the December 31, 2025, 2024 and 2023, balances are $263 million, $289 million and $314 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 $27 million, $31 million and $33 million as of December 31, 2025, 2024 and 2023, respectively. We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.
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 2021.
Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that adequate provision has been made, there is the possibility that the ultimate resolution of any issues could have an adverse effect on our earnings. Conversely, if any issues are resolved favorably in the future, the related provision would be reduced, thus having a positive impact on earnings.