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Income Taxes | 12 Months Ended
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Mar. 31, 2023
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes
| Years Ended March 31,
(In millions) | 2023 |  | 2022 |  | 2021
Income (loss) from continuing operations before income taxes |  |  |  |  |
U.S. | $ | 3,308 |  |  | $ | 1,944 |  |  | $ | (6,019) |
Foreign | 1,322 |  |  | (16) |  |  | 985 |
Income (loss) from continuing operations before income taxes | $ | 4,630 |  |  | $ | 1,928 |  |  | $ | (5,034) |
Income tax expense (benefit) related to continuing operations consists of the following:
| Years Ended March 31,
(In millions, except percentages) | 2023 |  | 2022 |  | 2021
Current |  |  |  |  |
Federal | $ | 619 |  |  | $ | 233 |  |  | $ | (15) |
State | 126 |  |  | 129 |  |  | 47 |
Foreign | 180 |  |  | 240 |  |  | 181 |
Total current | 925 |  |  | 602 |  |  | 213 |
Deferred |  |  |  |  |
Federal | (46) |  |  | 88 |  |  | (562) |
State | 36 |  |  | (16) |  |  | (204) |
Foreign | (10) |  |  | (38) |  |  | (142) |
Total deferred | (20) |  |  | 34 |  |  | (908) |
Income tax expense (benefit) | $ | 905 |  |  | $ | 636 |  |  | $ | (695) |
Reported income tax rate | 19.5 | % |  | 33.0 | % |  | (13.8) | %
Fluctuations in the Company’s reported income tax rates are primarily due to non-cash charges related to remeasuring the value of the E.U. disposal group and U.K. disposal group held for sale to fair value less costs to sell in fiscal 2022, the impact of opioid-related claims, including charges of $8.1 billion ($6.8 billion after-tax) in fiscal 2021, changes in the mix of earnings between various taxing jurisdictions, and other discrete items recognized in each fiscal year. The reconciliation of income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate of 21.0% to income before income taxes was as follows:
| Years Ended March 31,
(In millions) | 2023 |  | 2022 |  | 2021
Income tax expense (benefit) at federal statutory rate | $ | 972 |  |  | $ | 405 |  |  | $ | (1,057) |
State income taxes, net of federal tax benefit | 134 |  |  | 85 |  |  | (206) |
Tax effect of foreign operations | (145) |  |  | (186) |  |  | (77) |
Unrecognized tax benefits and settlements | 6 |  |  | (26) |  |  | 41 |
Opioid-related litigation and claims | 9 |  |  | 38 |  |  | 715 |
Net tax benefit on intellectual property transfer | — |  |  | — |  |  | (105) |
E.U. disposal transaction loss | (8) |  |  | 345 |  |  | — |
Share-based compensation | (58) |  |  | (10) |  |  | 1 |
Other, net (1) | (5) |  |  | (15) |  |  | (7) |
Income tax expense (benefit) | $ | 905 |  |  | $ | 636 |  |  | $ | (695) |
(1)The Company’s effective tax rates were impacted by other favorable U.S. federal permanent differences, including research and development credits of $4 million in each of fiscal 2023 and fiscal 2022, and $5 million in fiscal 2021. During the year ended March 31, 2023, the Company recognized discrete tax benefits primarily consisting of $115 million related to statute of limitation expirations and tax settlements in various taxing jurisdictions and $58 million related to the tax impact of share-based compensation. During the year ended March 31, 2022, the Company recorded non-deductible, non-cash pre-tax charges of $438 million primarily to remeasure the E.U. disposal group to fair value less costs to sell, and $1.2 billion to remeasure the U.K. disposal group to fair value less costs to sell, as described in Financial Note 2, “Business Acquisitions and Divestitures.” The Company’s reported income tax rate for fiscal 2022 and fiscal 2021 was impacted by the charge for opioid-related claims of $274 million ($237 million after-tax) and $8.1 billion ($6.8 billion after-tax), respectively, as described in Financial Note 17, “Commitments and Contingent Liabilities.” The Company’s reported income tax rate for fiscal 2021 was unfavorably impacted by a non-deductible, non-cash pre-tax charge of $58 million, primarily to remeasure the carrying value of assets and liabilities held for sale related to the formation of a German pharmaceutical wholesale joint venture, which the Company exited in fiscal 2022. Refer to Financial Note 2, “Business Acquisitions and Divestitures,” and Financial Note 5, “Other Income, Net,” for more information. During fiscal 2021, the Company sold intellectual property between wholly-owned legal entities within McKesson that are based in different tax jurisdictions. The transferor entity recognized a gain on the sale of assets which was not subject to income tax in its local jurisdiction; such gains were eliminated upon consolidation. The acquiring entities of the intellectual property were entitled to amortize the purchase price of the assets for tax purposes. In accordance with ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” discrete tax benefits of $105 million were recognized for fiscal 2021, with a corresponding increase to a deferred tax asset for the temporary difference arising from the buyer’s excess tax basis. Deferred tax balances consisted of the following:
| March 31,
(In millions) | 2023 |  | 2022
Assets |  |  |
Receivable allowances | $ | 51 |  |  | $ | 49 |
Opioid-related litigation and claims | 699 |  |  | 755 |
Compensation and benefit related accruals | 265 |  |  | 285 |
Net operating loss and credit carryforwards | 760 |  |  | 739 |
Lease obligations | 427 |  |  | 422 |
Other | 127 |  |  | 83 |
Subtotal | 2,329 |  |  | 2,333 |
Less: valuation allowance | (696) |  |  | (726) |
Total assets | 1,633 |  |  | 1,607 |
Liabilities |  |  |
Inventory valuation and other assets | (2,079) |  |  | (1,993) |
Fixed assets and systems development costs | (32) |  |  | (184) |
Intangibles | (267) |  |  | (233) |
Lease right-of-use assets | (412) |  |  | (401) |
Other | (19) |  |  | (17) |
Total liabilities | (2,809) |  |  | (2,828) |
Net deferred tax liability | $ | (1,176) |  |  | $ | (1,221) |
Long-term deferred tax asset | $ | 211 |  |  | $ | 197 |
Long-term deferred tax liability | (1,387) |  |  | (1,418) |
Net deferred tax liability | $ | (1,176) |  |  | $ | (1,221) |
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 $696 million and $726 million in fiscal 2023 and fiscal 2022, respectively, 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 $30 million in the current fiscal year relates primarily to the remeasurement of foreign loss carryforwards and their related valuation allowance for foreign exchange fluctuations, partially offset by the net operating losses incurred and deferred tax movements in certain tax jurisdictions for which no tax benefit was recognized. The Company has federal, state, and foreign net operating loss carryforwards of $49 million, $3.4 billion, and $2.0 billion at March 31, 2023, respectively. Federal and state net operating losses will expire at various dates from 2024 through 2043. Substantially all its foreign net operating losses have indefinite lives. In addition, the Company has foreign capital loss carryforwards of $701 million with indefinite lives. The following table summarizes the activity related to the Company’s gross unrecognized tax benefits for the last three fiscal years:
| Years Ended March 31,
(In millions) | 2023 |  | 2022 |  | 2021
Unrecognized tax benefits at beginning of period | $ | 1,523 |  |  | $ | 1,754 |  |  | $ | 958 |
Additions based on tax positions related to prior years | — |  |  | 14 |  |  | 53 |
Reductions based on tax positions related to prior years | (26) |  |  | (131) |  |  | (5) |
Additions based on tax positions related to current year | 21 |  |  | 14 |  |  | 755 |
Reductions based on settlements | (96) |  |  | (20) |  |  | (8) |
Reductions based on the lapse of the applicable statutes of limitations | (16) |  |  | (102) |  |  | (12) |
Exchange rate fluctuations | (7) |  |  | (6) |  |  | 13 |
Unrecognized tax benefits at end of period | $ | 1,399 |  |  | $ | 1,523 |  |  | $ | 1,754 |
As of March 31, 2023, the Company had $1.4 billion of unrecognized tax benefits, of which $1.3 billion would reduce income tax expense and the effective tax rate, if recognized. The decreases in unrecognized tax benefits in each fiscal year are primarily attributable to statute of limitation expirations in various taxing jurisdictions. During the next twelve months, the Company does not expect any material reduction in its unrecognized tax benefits. However, this may change as the Company continues to have ongoing discussions with various taxing authorities throughout the year. The unrecognized tax benefit may also increase or decrease due to future developments in opioid-related litigation and claims, as discussed in Financial Note 17, “Commitments and Contingent Liabilities.” During the fourth quarter of fiscal 2023, the Internal Revenue Service (“IRS”) communicated proposed adjustments to taxable income reported in the Company’s fiscal 2018 and fiscal 2019 U.S. Federal Corporate Income Tax returns. The adjustments would increase federal income tax liability in the range of $600 million to $700 million. The Company disagrees with the proposed adjustments and intends to pursue resolution through the administrative process with the IRS Independent Office of Appeals and, if necessary, through judicial remedies. The Company expects it could take several years to reach a final resolution on these matters. Although the final resolution of these matters is uncertain, the Company believes in the merits of its tax positions and believes that it has adequately reserved for any adjustments to the provision of income taxes that may ultimately result. However, if the IRS prevails in these matters, the assessed tax and interest, if any, could have a material adverse effect on the Company’s financial position, results of operations, and cash flows in the period of resolution. The Company reports interest and penalties on income taxes as income tax expense. It recognized income tax expense of $31 million, $8 million, and $9 million in fiscal 2023, fiscal 2022, and fiscal 2021, respectively, representing interest and penalties, in its Consolidated Statements of Operations. As of March 31, 2023 and 2022, the Company accrued cumulatively $138 million and $108 million, respectively, in interest and penalties on unrecognized tax benefits in its Consolidated Balance Sheets. The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, and various foreign jurisdictions. The Company is generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal 2015 through the current fiscal year. Undistributed earnings of the Company’s foreign operations of approximately $4.8 billion were considered indefinitely reinvested at March 31, 2023. Following the enactment of the 2017 Tax Act, the repatriation of cash to the U.S. is generally no longer taxable for federal income tax purposes. However, the repatriation of cash held outside the U.S. could be subject to applicable foreign withholding taxes and state income taxes. The Company may remit foreign earnings to the U.S. 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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