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Income Taxes | 12 Months Ended
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Mar. 31, 2020
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes
| Years Ended March 31,
(In millions) | 2020 |  | 2019 |  | 2018
Income from continuing operations before income taxes |  |  |  |  |
U.S. | $ | 216 |  |  | $ | 1,512 |  |  | $ | 1,175 |
Foreign | 928 |  |  | (902 | ) |  | (936 | )
Total income from continuing operations before income taxes | $ | 1,144 |  |  | $ | 610 |  |  | $ | 239 |
Income tax expense (benefit) related to continuing operations consists of the following:
| Years Ended March 31,
(In millions) | 2020 |  | 2019 |  | 2018
Current |  |  |  |  |
Federal | $ | 170 |  |  | $ | (20 | ) |  | $ | 577 |
State | 48 |  |  | 35 |  |  | 33 |
Foreign | 142 |  |  | 152 |  |  | 205 |
Total current | 360 |  |  | 167 |  |  | 815 |
Deferred |  |  |  |  |
Federal | (204 | ) |  | 223 |  |  | (767 | )
State | (105 | ) |  | 44 |  |  | 17 |
Foreign | (33 | ) |  | (78 | ) |  | (118 | )
Total deferred | (342 | ) |  | 189 |  |  | (868 | )
Income tax expense (benefit) | $ | 18 |  |  | $ | 356 |  |  | $ | (53 | )
The Company recorded income tax expense of $18 million and $356 million in 2020 and 2019, and income tax benefit of $53 million related to continuing operations in 2018. The Company’s reported income tax expense rates were 1.6% and 58.4% in 2020 and 2019 and an income tax benefit rate of 22.2% in 2018. Fluctuations in the Company’s reported income tax rates are primarily due to the impact of the Change Healthcare joint venture divestiture in 2020, the 2017 Tax Act in 2018, the impact of nondeductible impairment charges, and varying proportions of income attributable to foreign countries that have income tax rates different from the U.S. rate. The reconciliation of income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate of 21% for 2020 and 2019 and 31.6% for 2018 to income before income taxes is as follows:
| Years Ended March 31,
(In millions) | 2020 |  | 2019 |  | 2018
Income tax expense at federal statutory rate | $ | 240 |  |  | $ | 128 |  |  | $ | 75 |
State income taxes, net of federal tax benefit | (41 | ) |  | 70 |  |  | 50 |
Tax effect of foreign operations | (81 | ) |  | (86 | ) |  | (146 | )
Unrecognized tax benefits and settlements | (7 | ) |  | 20 |  |  | 454 |
Non-deductible goodwill | 7 |  |  | 357 |  |  | 585 |
Share-based compensation | 2 |  |  | 4 |  |  | (8 | )
Net tax benefit on intellectual property transfer | — |  |  | (42 | ) |  | (178 | )
Tax-free gain on investment exit (1) | (87 | ) |  | — |  |  | — |
Impact of change in U.S. tax rate on temporary differences | — |  |  | (81 | ) |  | (1,324 | )
Transition tax on foreign earnings | — |  |  | (5 | ) |  | 457 |
Capital loss carryback | (19 | ) |  | — |  |  | — |
Other, net (2) | 4 |  |  | (9 | ) |  | (18 | )
Income tax expense (benefit) | $ | 18 |  |  | $ | 356 |  |  | $ | (53 | )
(1) | Refer to Financial Note 2, “Investment in Change Healthcare Joint Venture,” for additional information regarding the separation of the Change Healthcare JV.
(2) | The Company’s effective tax rates were impacted by other favorable U.S. federal permanent differences including research and development credits of $7 million, $7 million and $11 million in 2020, 2019 and 2018.
On March 10, 2020, the Company completed the previously announced separation of its interest in the Change Healthcare JV as described in Financial Note 2, “Investment in Change Healthcare Joint Venture.” The Company’s reported income tax expense rate for 2020 was favorably impacted by this transaction given that it was intended to generally be a tax-free split-off for U.S. federal income tax purposes. In the fourth quarter of 2020, the Company recognized an estimated gain for financial reporting purposes of $414 million (pre-tax and after-tax) related to the separation transaction. The Company’s reported income tax expense rate for 2020 was unfavorably impacted by non-cash pre-tax charges of $275 million (pre-tax and after-tax) to remeasure the carrying value of assets and liabilities held for sale related to the expected formation of a new German wholesale joint venture within the Company’s European Pharmaceutical Solutions segment. Refer to Financial Note 3, “Held for Sale,” for more information. The Company’s reported income tax expense rate for 2019 was unfavorably impacted by non-cash pre-tax charges of $1.8 billion (pre-tax and after-tax) to impair the carrying value of goodwill for its European Pharmaceutical Solutions segment, given that these charges are generally not deductible for tax purposes. Its reported income tax benefit rate for 2018 was unfavorably impacted by non-cash charges of $1.7 billion (pre-tax and after-tax) to impair the carrying value of goodwill, given that generally no tax benefit was recognized for these charges. Refer to Financial Note 14, “Goodwill and Intangible Assets, Net,” for more information. During 2019, the Company sold software between wholly-owned legal entities within the McKesson group that are based in different tax jurisdictions. The transferor entity recognized a gain on the sale of assets that was not subject to income tax in its local jurisdiction; such gain was eliminated upon consolidation. An entity based in the U.S. was the acquirer of the software and is entitled to amortize the purchase price of the assets for tax purposes. In accordance with the adopted amended accounting guidance on income taxes, a discrete tax benefit of $42 million was recognized in the second quarter of 2019 with a corresponding increase to a deferred tax asset for the future tax amortization. On December 19, 2016, the Company sold various software relating to its technology businesses between wholly owned legal entities within the McKesson group that are based in different tax jurisdictions. The transferor entity recognized a gain on the sale of assets that was not subject to income tax in its local jurisdiction; such gain was eliminated upon consolidation. A McKesson entity based in the U.S. was the recipient of the software and is entitled to amortize the fair value of the assets for book and tax purposes. The tax benefit associated with the amortization of these assets is recognized over the tax lives of the assets. As a result, the Company recognized a net tax benefit of $178 million in 2018. The Company no longer recognized the tax benefit associated with this amortization in continuing operations upon adoption of the amended guidance related to intra-entity transfer of an asset other than inventory in 2020 or 2019. Deferred tax balances consisted of the following:
| March 31,
(In millions) | 2020 |  | 2019
Assets |  |  |
Receivable allowances | $ | 72 |  |  | $ | 70 |
Compensation and benefit related accruals | 331 |  |  | 377 |
Net operating loss and credit carryforwards | 828 |  |  | 885 |
Lease obligations | 482 |  |  | — |
Other | 109 |  |  | 216 |
Subtotal | 1,822 |  |  | 1,548 |
Less: valuation allowance | (833 | ) |  | (870 | )
Total assets | 989 |  |  | 678 |
Liabilities |  |  |
Inventory valuation and other assets | (1,947 | ) |  | (2,016 | )
Fixed assets and systems development costs | (202 | ) |  | (170 | )
Intangibles | (531 | ) |  | (513 | )
Change Healthcare equity investment | — |  |  | (885 | )
Lease right-of-use assets | (449 | ) |  | — |
Other | (56 | ) |  | (34 | )
Total liabilities | (3,185 | ) |  | (3,618 | )
Net deferred tax liability | $ | (2,196 | ) |  | $ | (2,940 | )
Long-term deferred tax asset | $ | 59 |  |  | $ | 58 |
Long-term deferred tax liability | (2,255 | ) |  | (2,998 | )
Net deferred tax liability | $ | (2,196 | ) |  | $ | (2,940 | )
The Company assesses the available positive and negative evidence to determine whether deferred tax assets are more likely than not to be realized. As a result of this assessment, valuation allowances have been recorded on certain deferred tax assets in various tax jurisdictions. The valuation allowances were approximately $833 million and $870 million in 2020 and 2019 and primarily relate to net operating and capital losses incurred in certain tax jurisdictions for which no tax benefit was recognized. The decrease in the valuation allowance of $37 million included $30 million of expense related to foreign losses incurred in 2020, for which no benefit was recognized, offset by the remeasurement of foreign loss carryforwards and their related valuation allowance of $67 million. The Company has federal, state and foreign net operating loss carryforwards of $75 million, $3.3 billion and $1.9 billion at March 31, 2020. Federal and state net operating losses will expire at various dates from 2021 through 2041. Substantially all its foreign net operating losses have indefinite lives. In addition, the Company has foreign capital loss carryforwards of $739 million with indefinite lives. The following table summarizes the activity related to the Company’s gross unrecognized tax benefits for the last three years:
| Years Ended March 31,
(In millions) | 2020 |  | 2019 |  | 2018
Unrecognized tax benefits at beginning of period | $ | 1,052 |  |  | $ | 1,183 |  |  | $ | 486 |
Additions based on tax positions related to prior years | 20 |  |  | 78 |  |  | 47 |
Reductions based on tax positions related to prior years | (168 | ) |  | (234 | ) |  | (124 | )
Additions based on tax positions related to current year | 82 |  |  | 68 |  |  | 778 |
Reductions based on settlements | (8 | ) |  | (13 | ) |  | (7 | )
Reductions based on the lapse of the applicable statutes of limitations | (13 | ) |  | (25 | ) |  | — |
Exchange rate fluctuations | (7 | ) |  | (5 | ) |  | 3 |
Unrecognized tax benefits at end of period | $ | 958 |  |  | $ | 1,052 |  |  | $ | 1,183 |
As of March 31, 2020, the Company had $958 million of unrecognized tax benefits, of which $763 million would reduce income tax expense and the effective tax rate, if recognized. The decrease in unrecognized tax benefits in 2020 compared to 2019 is primarily attributable to the favorable resolution of an outstanding California tax refund claim which decreased unrecognized tax benefits by $91 million. The decrease in unrecognized tax benefits in 2019 compared to 2018 is primarily attributable to a $171 million decrease, with a corresponding increase in taxes payable, due to the issuance of new tax regulations. During the next twelve months, the Company does not expect any material reduction in its unrecognized tax benefits. However, this may change as it continues to have ongoing negotiations with various taxing authorities throughout the year. The Company reports interest and penalties on income taxes as income tax expense. It recognized income tax expense of $23 million and $33 million in 2020 and 2019 and an income tax benefit of $1 million in 2018, representing interest and penalties, in its consolidated statements of operations. As of March 31, 2020 and 2019, it accrued $91 million and $68 million cumulatively in interest and penalties on unrecognized tax benefits. The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. During the three months ended March 31, 2020, the Company signed the Revenue Agent’s Report from the U.S. Internal Revenue Service (“IRS”) relating to their audit of the fiscal years 2013 through 2015. During the third quarter of 2018, the Company signed the Revenue Agent’s Report from the U.S. IRS relating to their audit of the fiscal years 2010 through 2012. The Company is generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal years 2013 through the current fiscal year. Undistributed earnings of the Company’s foreign operations of approximately $5 billion were considered indefinitely reinvested. Following enactment of the 2017 Tax Act, the repatriation of cash to the United States is generally no longer taxable for federal income tax purposes. However, the repatriation of cash held outside the United States could be subject to applicable foreign withholding taxes and state income taxes. The Company may remit foreign earnings to the United States to the extent it is tax efficient to do so. It does not expect the tax impact from remitting these earnings to be material.

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- 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. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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