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Income Taxes | 12 Months Ended
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Dec. 31, 2023
Income Tax Disclosure [Abstract] |
Income Taxes | NOTE 12: INCOME TAXES Income Before Income Taxes. The sources of income from continuing operations before income taxes are:
(dollars in millions) | 2023 |  | 2022 |  | 2021
United States(1) | $ | 938 |  |  | $ | 4,151 |  |  | $ | 3,676 |
Foreign | 2,898 |  |  | 1,966 |  |  | 1,433 |
Income from continuing operations before income taxes | $ | 3,836 |  |  | $ | 6,117 |  |  | $ | 5,109 |
(1) 2023 includes the impacts of the Powder Metal Matter. The Company intends to repatriate certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S. As such, we recorded the taxes associated with the future remittance of these earnings. For the remainder of the Company’s undistributed international earnings, unless tax effective to repatriate, the Company will continue to permanently reinvest these earnings. As of December 31, 2023, such undistributed earnings were approximately $20 billion, excluding other comprehensive income amounts. It is not practicable to estimate the amount of tax that might be payable on the remaining amounts. Provision for Income Taxes. The income tax expense (benefit) for the years ended December 31 are as follows:
(dollars in millions) | 2023 |  | 2022 |  | 2021
Current: |  |  |  |  |
United States: |  |  |  |  |
Federal | $ | 213 |  |  | $ | 1,724 |  |  | $ | 387 |
State | 70 |  |  | 216 |  |  | 238 |
Foreign | 575 |  |  | 513 |  |  | 427 |
| 858 |  |  | 2,453 |  |  | 1,052 |
Future: |  |  |  |  |
United States: |  |  |  |  |
Federal | (411) |  |  | (1,399) |  |  | (26) |
State | (53) |  |  | (166) |  |  | 41 |
Foreign | 62 |  |  | (98) |  |  | (103) |
| (402) |  |  | (1,663) |  |  | (88) |
Income tax expense | $ | 456 |  |  | $ | 790 |  |  | $ | 964 |
Prior to 2022, research and experimental expenditures were generally deductible in the period incurred. A provision enacted in the Tax Cuts and Jobs Act of 2017 related to the capitalization of research and experimental expenditures for tax purposes became effective on January 1, 2022. In September and December 2023, the Internal Revenue Service (IRS) issued interim guidance, retroactive to 2022, clarifying the capitalization requirements for certain types of research and experimental expenditures. The IRS notices also provide that the Department of the Treasury and the IRS intend to issue proposed regulations consistent with the guidance set forth in the notices and that taxpayers may rely on the guidance in the notices prior to the issuance of the proposed regulations. The Company’s analysis indicates the guidance provided in the notices result in fewer costs being subject to capitalization, and as such, costs previously required to be capitalized are now deductible in the year incurred. Accordingly, the financial statements for the year ended December 31, 2023 include the estimated impacts of the interim guidance provided in the notices for both the 2022 and 2023 tax years including lower income tax payables, adjustments to deferred taxes, a higher income tax expense due to the diluted Foreign Derived Intangible Income (FDII) benefit resulting from lower taxable income, and reductions in revenue attributable to the decreased reimbursable state income taxes. The Company will continue to review the applicability of the notices to our businesses and will review the proposed regulations when issued and adjust the estimates as necessary. Reconciliation of Effective Income Tax Rate. Differences between effective income tax rates and the statutory U.S. federal income tax rate are as follows:
| 2023 |  | 2022 |  | 2021
(dollars in millions) | Amount | Rate |  | Amount | Rate |  | Amount | Rate
Statutory U.S. federal income tax rate | $ | 805 |  | 21.0 | % |  | $ | 1,285 |  | 21.0 | % |  | $ | 1,073 |  | 21.0 | %
Tax on international activities | (27) |  | (0.7) |  |  | (186) |  | (3.1) |  |  | (204) |  | (4.0) |
Tax charges related to separation of Carrier and Otis and Raytheon merger | — |  | — |  |  | — |  | — |  |  | (39) |  | (0.8) |
Disposals of businesses | — |  | — |  |  | — |  | — |  |  | 108 |  | 2.2 |
U.S. research and development credit | (168) |  | (4.4) |  |  | (164) |  | (2.7) |  |  | (172) |  | (3.4) |
U.S. federal statute lapse | (59) |  | (1.5) |  |  | — |  | — |  |  | — |  | — |
State income tax, net | 17 |  | 0.4 |  |  | 59 |  | 1.0 |  |  | 174 |  | 3.4 |
Foreign Derived Intangible Income (FDII) | (142) |  | (3.7) |  |  | (214) |  | (3.5) |  |  | (121) |  | (2.4) |
U.K. corporate tax rate enactment | — |  | — |  |  | — |  | — |  |  | 73 |  | 1.5 |
Other | 30 |  | 0.8 |  |  | 10 |  | 0.2 |  |  | 72 |  | 1.4 |
Effective income tax rate | $ | 456 |  | 11.9 | % |  | $ | 790 |  | 12.9 | % |  | $ | 964 |  | 18.9 | %
The 2023 effective tax rate includes a benefit of $168 million associated with U.S. research and development credits, $142 million related to the FDII benefit, and a federal tax benefit of $59 million associated with the expiration of the U.S. federal income tax statute of limitations for RTX’s 2019 tax year. The 2022 effective tax rate includes a benefit of $214 million related to the FDII benefit, $207 million associated with legal entity and operational reorganizations implemented in 2022, and $164 million associated with U.S. research and development credits. The increase in the FDII benefit from 2021 is primarily attributable to the capitalization of research or experimental expenditures for tax-purposes, enacted as part of the Tax Cuts and Jobs Act of 2017 effective beginning January 1, 2022. The 2021 effective tax rate includes tax benefits of $244 million included in international activities associated with legal entity and operational reorganizations implemented in 2021, $172 million associated with U.S. research and development credits and $121 million associated with FDII, and tax charges of $174 million associated with net state income taxes, $108 million associated with the disposition of the Forcepoint business and the global training and services business, and $73 million associated with the revaluation of deferred taxes resulting from the increase in the U.K. corporate tax rate to 25% enacted in 2021. Deferred Tax Assets and Liabilities. The tax effects of temporary differences and tax carryforwards which gave rise to future income tax benefits and payables at December 31, 2023 and 2022 are as follows:
(dollars in millions) | 2023 |  | 2022
Future income tax benefits: |  |  |
Insurance and employee benefits | $ | 994 |  |  | $ | 1,126 |
Inventory and contract balances | 571 |  |  | 639 |
Warranty provisions | 240 |  |  | 242 |
Capitalization of research and experimental expenditures | 1,631 |  |  | 1,712 |
Other basis differences | 779 |  |  | 828 |
Powder Metal Matter | 644 |  |  | — |
Tax loss carryforwards | 905 |  |  | 305 |
Tax credit carryforwards | 891 |  |  | 970 |
Valuation allowances | (1,465) |  |  | (842) |
Total future income tax benefits | $ | 5,190 |  |  | $ | 4,980 |
Future income taxes payable: |  |  |
Goodwill and Intangible assets | $ | 6,228 |  |  | $ | 6,588 |
Fixed assets | 1,739 |  |  | 1,751 |
Other basis differences | 238 |  |  | 220 |
Total future income tax payable | $ | 8,205 |  |  | $ | 8,559 |
Valuation allowances have been established primarily for tax credit carryforwards, tax loss carryforwards, and certain temporary differences to reduce the future income tax benefits to expected realizable amounts. Prior to 2023, certain of the Company’s indefinite-lived non-US tax loss carryforwards were determined to have a remote possibility of realization and therefore were not reported in the table above. In connection with the implementation of the Organisation for Economic Co-operation and Development (OECD) global minimum tax initiative known as Pillar Two, any existing deferred taxes not disclosed in the Company’s 2023 financial statements will not be available in the future to reduce tax otherwise due under Pillar Two. Accordingly, beginning in 2023, the Company is disclosing in the above table the tax effects of these indefinite-lived non-US tax loss carryforwards offset with a full valuation allowance. Changes to valuation allowances consisted of the following:
(dollars in millions) | 2023 |  | 2022 |  | 2021
Balance at January 1 | $ | 842 |  |  | $ | 825 |  |  | $ | 757 |
Additions charged to income tax expense | 170 |  |  | 54 |  |  | 136 |
Reductions credited to goodwill, due to acquisitions | — |  |  | — |  |  | (19) |
Reductions credited to income tax expense | (58) |  |  | (82) |  |  | (37) |
Other adjustments (1) | 511 |  |  | 45 |  |  | (12) |
Balance at December 31 | $ | 1,465 |  |  | $ | 842 |  |  | $ | 825 |
(1) 2023 includes the addition of the indefinite-lived tax loss carryforwards now disclosed in connection with OECD Pillar Two. Tax Credit and Loss Carryforwards. At December 31, 2023, tax credit carryforwards, principally state and foreign, and tax loss carryforwards, principally state and foreign, were as follows:
(dollars in millions) | Tax Credit Carryforwards |  | Tax Loss Carryforwards
Expiration period: |  |  |
2024-2028 | $ | 56 |  |  | $ | 317 |
2029-2033 | 36 |  |  | 180 |
2034-2043 | 299 |  |  | 832 |
Indefinite | 500 |  |  | 3,272 |
Total | $ | 891 |  |  | $ | 4,601 |
Unrecognized Tax Benefits. At December 31, 2023, we had gross tax-effected unrecognized tax benefits of $1,442 million, of which $1,313 million, if recognized, would impact the effective tax rate. A reconciliation of the beginning and ending amounts of unrecognized tax benefits and interest expense related to unrecognized tax benefits for the years ended December 31, 2023, 2022, and 2021 is as follows:
(dollars in millions) | 2023 |  | 2022 |  | 2021
Balance at January 1 | $ | 1,515 |  |  | $ | 1,458 |  |  | $ | 1,225 |
Additions for tax positions related to the current year | 89 |  |  | 106 |  |  | 110 |
Additions for tax positions of prior years | 5 |  |  | 23 |  |  | 282 |
Reductions for tax positions of prior years | (141) |  |  | (56) |  |  | (49) |
Settlements | (26) |  |  | (16) |  |  | (110) |
Balance at December 31 | $ | 1,442 |  |  | $ | 1,515 |  |  | $ | 1,458 |
Gross interest expense related to unrecognized tax benefits | $ | 62 |  |  | $ | 34 |  |  | $ | 39 |
Total accrued interest balance at December 31 | 233 |  |  | 190 |  |  | 165 |
We conduct business globally and, as a result, RTX or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Canada, China, France, Germany, India, Poland, Saudi Arabia, Singapore, Switzerland, the United Kingdom, and the United States. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2013. As a result of the expiration of the U.S. federal income tax statute of limitations for RTX’s 2019 tax year, we recognized a net income benefit of $53 million in the fourth quarter of 2023, of which $59 million is within Income tax expense. The Examination Division of the IRS is concluding the examination phase of RTX (formerly United Technologies Corporation) tax years 2017 and 2018, pre-acquisition Rockwell Collins tax years 2016, 2017 and 2018, and pre-merger Raytheon Company tax years 2017, 2018 and 2019 as well as certain refund claims of Raytheon Company for tax years 2014, 2015 and 2016 filed prior to the Raytheon merger. The examination phase of these audits is expected to close in the first half of 2024. The Company will dispute certain IRS proposed adjustments for each exam at the Appeals Division of the IRS. The timing of any resolution at the Appeals Division is currently uncertain. The Company believes that it is reasonably possible that the closure of the examination phase for the RTX 2017 and 2018 and Rockwell Collins 2016, 2017, and 2018 tax years will result in a net income benefit in the range of $225 million to $305 million. This range includes the effects of adjusting interest accruals and certain tax related indemnity receivables related to the separation and distributions of Carrier Global Corporation (Carrier) and Otis Worldwide Corporation (Otis). The tax components of this range are included in the revaluation range discussed below. In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. It is reasonably possible that a net reduction within the range of $300 million to $450 million of unrecognized tax benefits may occur within the next 12 months as a result of the revaluation of uncertain tax positions arising from developments in examinations, in appeals, or in the courts, or the closure of tax statutes.

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