Income Taxes

12 Months Ended

Dec. 31, 2020

7. Income Taxes

Components of income tax expense were as follows for the years ended December 31:



Millions	2020		2019		2018
Current tax expense:
Federal	$	1,026	$	1,000	$	1,144
State		259		254		287
Foreign		6		8		5
Total current tax expense		1,291		1,262		1,436
Deferred and other tax expense:
Federal		295		417		344
State		45		128		5
Foreign		-		21		(10)
Total deferred and other tax expense		340		566		339
Total income tax expense	$	1,631	$	1,828	$	1,775

For the years ended December 31, reconciliations between statutory and effective tax rates are as follows:



Tax Rate Percentages	2020		2019		2018
Federal statutory tax rate	21.0	%	21.0	%	21.0	%
State statutory rates, net of federal benefits	3.7		3.7		3.9
Excess tax benefits from equity compensation plans	(0.8)		(0.7)		(0.4)
Dividends received deduction	(0.5)		(0.6)		(0.6)
Deferred tax adjustments	(0.1)		(0.1)		(0.6)
Other	0.1		0.3		(0.4)
Effective tax rate	23.4	%	23.6	%	22.9	%

Deferred tax assets and liabilities are recorded for the expected future tax consequences of events that are reported in different periods for financial reporting and income tax purposes. The majority of our deferred tax assets relate to deductions that already have been claimed for financial reporting purposes but not for tax purposes. The majority of our deferred tax liabilities relate to differences between the tax bases and financial reporting amounts of our land and depreciable property, due to accelerated tax depreciation (including bonus depreciation), revaluation of assets in purchase accounting transactions, and differences in capitalization methods.

In 2019, Arkansas enacted legislation to reduce their corporate income tax rate for future years resulting in a $21 million reduction of our deferred tax expense.

In 2018, Iowa and Missouri enacted legislation to reduce their corporate tax rates for future years resulting in a $31 million reduction of our deferred tax expense.

Deferred income tax (liabilities)/assets were comprised of the following at December 31:



Millions	2020		2019
Deferred income tax liabilities:
Property	$	(12,474)	$	(12,184)
Operating lease assets		(397)		(447)
Other		(444)		(341)
Total deferred income tax liabilities		(13,315)		(12,972)
Deferred income tax assets:
Accrued wages		40		45
Accrued casualty costs		143		146
Stock compensation		26		37
Retiree benefits		255		171
Operating lease liabilities		396		453
Other		208		128
Total deferred income tax assets		1,068		980
Net deferred income tax liability	$	(12,247)	$	(11,992)

When appropriate, we record a valuation allowance against deferred tax assets to reflect that these tax assets may not be realized. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized based on management’s judgments using available evidence for purposes of estimating whether future taxable income will be sufficient to realize a deferred tax asset. In 2020 and 2019, there were no valuation allowances.

Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.

A reconciliation of changes in unrecognized tax benefits liabilities/(assets) from the beginning to the end of the reporting period is as follows:



Millions	2020		2019		2018
Unrecognized tax benefits at January 1	$	64	$	174	$	179
Increases for positions taken in current year		18		20		30
Increases for positions taken in prior years		7		44		9
Decreases for positions taken in prior years		(19)		(96)		(30)
Refunds from/(payments to) and settlements with taxing authorities		-		(11)		21
Increases/(decreases) for interest and penalties		5		(5)		4
Lapse of statutes of limitations		(1)		(62)		(39)
Unrecognized tax benefits at December 31	$	74	$	64	$	174

We recognize interest and penalties as part of income tax expense. Total accrued liabilities for interest and penalties were $8 million and $3 million at December 31, 2020 and 2019, respectively. Total interest and penalties recognized as part of income tax expense (benefit) were $5 million for 2020, ($4) million for 2019, and ($1) million for 2018.

In the second quarter of 2019, UPC signed final Revenue Agent Reports (RARs) from the Internal Revenue Service (IRS) for the limited scope audits of UPC’s 2016 and 2017 tax returns. As a result of the signed RARs, UPC paid the IRS $11 million in the third quarter of 2019, consisting of $10 million of tax and $1 million of interest. The statute of limitations has run for all years prior to 2017.

In 2017, UPC amended its 2013 income tax return, primarily to claim deductions resulting from the resolution of prior year IRS examinations. The IRS and Joint Committee on Taxation reviewed our 2013 amended return, and in the second quarter of 2018 we received a refund of $19 million.

Several state tax authorities are examining our state income tax returns for years 2015 through 2018.

We do not expect our unrecognized tax benefits to change significantly in the next 12 months.

The portion of our unrecognized tax benefits that relates to permanent changes in tax and interest would reduce our effective tax rate, if recognized. The remaining unrecognized tax benefits relate to tax positions for which only the timing of the benefit is uncertain. Recognition of the tax benefits with uncertain timing would reduce our effective tax rate only through a reduction of accrued interest and penalties. The unrecognized tax benefits that would reduce our effective tax rate are as follows:



Millions	2020		2019		2018
Unrecognized tax benefits that would reduce the effective tax rate	$	52	$	39	$	63
Unrecognized tax benefits that would not reduce the effective tax rate		22		25		111
Total unrecognized tax benefits	$	74	$	64	$	174

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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