Income Taxes

12 Months Ended

Dec. 31, 2020

Substantially all of the Company’s pre-tax earnings are derived from domestic operations in all periods presented. The income tax provision was as follows for the years ended December 31:



(In millions)	2020		2019		2018
Components of income tax provision (benefit):
Current:
Federal	$	(25)	$	25	$	189
State	71		69		39
Foreign	79		57		17
	125		151		245
Deferred:
Federal	189		118		110
State	(34)		(18)		24
Foreign	(84)		(53)		(1)
	71		47		133
Income tax provision	$	196	$	198	$	378

A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows for the years ended December 31:



	2020		2019		2018
Statutory federal income tax rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal effect	2.0	%	3.7	%	3.2	%

Tax expense due to federal tax reform	—	%	—	%	1.2	%

Enacted United Kingdom tax rate change	2.8	%	—	%	—	%
Foreign derived intangibles income deduction	(3.2)	%	(0.2)	%	(0.2)	%
Excess tax benefit from share-based awards	(3.9)	%	(5.1)	%	(2.2)	%
Sale of businesses and subsidiary restructuring	0.7	%	(2.6)	%	1.3	%

Unrecognized tax benefits	(1.0)	%	(0.1)	%	—	%
Nondeductible executive compensation	2.0	%	1.0	%	0.2	%
Valuation Allowance	(1.7)	%	0.3	%	—	%
Other, net	(2.0)	%	0.3	%	(0.2)	%
Effective income tax rate	16.7	%	18.3	%	24.3	%

Significant components of deferred tax assets and liabilities consisted of the following at December 31:



(In millions)	2020		2019
Accrued expenses	$	189	$	303

Share-based compensation	185		216
Net operating loss and credit carry-forwards	1,158		1,444
Foreign tax credits on undistributed earnings	—		289
Leasing liabilities	171		219
Other	76		65
Subtotal	1,779		2,536
Valuation allowance	(888)		(1,145)
Total deferred tax assets	891		1,391

Capitalized software development costs	(614)		(622)
Intangible assets	(2,993)		(3,297)
Property and equipment	(198)		(143)
Capitalized commissions	(87)		(86)
Investments in joint ventures	(908)		(841)
Leasing right-of-use assets	(141)		(205)

Other	(311)		(332)
Total deferred tax liabilities	(5,252)		(5,526)
Total	$	(4,361)	$	(4,135)

In connection with the acquisition of First Data (see Note 4), the Company recorded $3.7 billion of deferred tax liabilities for the deferred tax effects associated with the fair value of assets acquired and liabilities assumed using the applicable tax rates, with a corresponding adjustment to goodwill. During the current year through the measurement period ended July 29, 2020, the Company recognized an incremental increase of $136 million to deferred tax liabilities related to measurement period adjustments, with a corresponding adjustment to goodwill. The measurement period adjustments to the preliminary First Data purchase price allocation were the result of additional analysis performed and information identified based on facts and circumstances that existed as of the acquisition date.

The Company recorded a valuation allowance of $888 million and $1.1 billion at December 31, 2020 and 2019, respectively, against its deferred tax assets. The decrease in the valuation allowance in 2020 is primarily the result of a subsidiary restructuring. Substantially all of the acquired First Data valuation allowance relates to certain foreign and state net operating loss carryforwards.

Deferred tax assets and liabilities are reported in the consolidated balance sheets as follows at December 31:



(In millions)	2020		2019
Noncurrent assets	$	28	$	112
Noncurrent liabilities	(4,389)		(4,247)
Total	$	(4,361)	$	(4,135)

Noncurrent deferred tax assets are included in other long-term assets in the consolidated balance sheets at December 31, 2020 and 2019.

The following table presents the amounts of federal, state and foreign net operating loss carryforwards and general business credit carryforwards at December 31:



(In millions)	2020		2019
Net operating loss carryforwards: (1)
Federal	$	443	$	1,674
State	3,944		4,636
Foreign	3,343		3,201
General business credit carryforwards (2)	41		57

(1)At December 31, 2020, the Company had federal net operating loss carryforwards of $443 million, most of which expire in 2021 through 2037, state net operating loss carryforwards of $3.9 billion, most of which expire in 2021 through 2040, and foreign net operating loss carryforwards of $3.3 billion, of which $263 million expire in 2021 through 2040, and the remainder of which do not expire.

(2)At December 31, 2020, the Company had general business credit carryforwards of $41 million which expire in 2025 through 2038.

The Company asserts that its investment in its foreign subsidiaries is intended to be indefinitely reinvested with limited exceptions for select foreign subsidiaries. Undistributed historical and future earnings of its foreign subsidiaries are not considered to be indefinitely reinvested. Should these earnings be distributed in the future in the form of dividends or otherwise, the Company may be subject to foreign taxes. The Company has the ability and intent to limit distributions so as to not make a distribution in excess of its investment in those subsidiaries. The Company will continue to monitor its global cash requirements and the need to recognize a deferred tax liability.

Unrecognized tax benefits were as follows at December 31:



(In millions)	2020		2019		2018
Unrecognized tax benefits - Beginning of year	$	145	$	49	$	42
Increases for assumed tax positions related to First Data	—		82		—
Increases for tax positions taken during the current year	9		8		3
Increases for tax positions taken in prior years	53		16		20
Decreases for tax positions taken in prior years	(23)		(2)		(8)
Decreases for settlements	(2)		(1)		—
Lapse of the statute of limitations	(11)		(7)		(8)
Unrecognized tax benefits - End of year	$	171	$	145	$	49

At December 31, 2020, unrecognized tax benefits of $116 million, net of federal and state benefits, would affect the effective income tax rate if recognized. The Company believes it is reasonably possible that the liability for unrecognized tax benefits may decrease by up to $61 million over the next twelve months as a result of possible closure of federal tax audits, potential settlements with certain states and foreign countries, and the lapse of the statute of limitations in various state and foreign jurisdictions.

The Company classifies interest expense and penalties related to income taxes as components of its income tax provision. The income tax provision included interest expense and penalties on unrecognized tax benefits of $3 million in 2020, $2 million in 2019 and $1 million in 2018. Accrued interest expense and penalties related to unrecognized tax benefits totaled $22 million and $19 million at December 31, 2020 and 2019, respectively.

The Company’s U.S. federal income tax returns for 2016 through 2020, and tax returns in certain states and foreign jurisdictions for 2005 through 2020, remain subject to examination by taxing authorities. In connection with the acquisition of First Data, the Company is subject to income tax examination from 2009 forward in relation to First Data’s U.S. federal income tax return. State and local examinations are substantially complete through 2010 in relation to First Data’s state and local tax filings. Foreign jurisdictions generally remain subject to examination by their respective authorities from 2010 forward in relation to First Data’s foreign tax filings, none of which are considered significant jurisdictions.

During the third quarter of 2020, the U.S. Department of Treasury released certain proposed and final regulations relating to provisions that were enacted under the Tax Cuts and Jobs Act of 2017. The new regulations did not have a material impact on the Company’s consolidated financial statements.

The Company accounts for research and development costs in accordance with ASC subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development costs are charged to expense as incurred. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. In September 2017, the Internal Revenue Service issued Directive LB&I-04-0917-005 pertaining to the allowance of the credit for increasing research activities under Internal Revenue Code section 41 allowing a safe harbor for LB&I taxpayers reporting research and development costs under ASC 730-10. During the year ended December 31, 2020, the Company incurred $150 million of research and development costs related to First Data.

- 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 + Details