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Income Taxes | 12 Months Ended
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Dec. 31, 2020
Income Tax Disclosure [Abstract] |
Income Taxes |
8. | Income Taxes
Income Tax Expense (Benefit) The following table presents Devon’s income tax components.
|  | Year Ended December 31, |
|  | 2020 |  |  | 2019 |  |  | 2018 |
Current income tax benefit: |  |  |  |  |  |  |  |  |  |  |  |
U.S. federal |  | $ | (219 | ) |  | $ | (3 | ) |  | $ | (14 | )
Various states |  |  | — |  |  |  | (2 | ) |  |  | (3 | )
Total current income tax benefit |  |  | (219 | ) |  |  | (5 | ) |  |  | (17 | )
Deferred income tax expense (benefit): |  |  |  |  |  |  |  |  |  |  |  |
U.S. federal |  |  | (304 | ) |  |  | 8 |  |  |  | 184 |
Various states |  |  | (24 | ) |  |  | (33 | ) |  |  | 63 |
Total deferred income tax expense (benefit) |  |  | (328 | ) |  |  | (25 | ) |  |  | 247 |
Total income tax expense (benefit) |  | $ | (547 | ) |  | $ | (30 | ) |  | $ | 230 |
Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate to earnings (loss) from continuing operations before income taxes as a result of the following:
|  | Year Ended December 31, |
|  | 2020 |  |  | 2019 |  |  | 2018 |
Earnings (loss) from continuing operations before income taxes |  | $ | (3,090 | ) |  | $ | (109 | ) |  | $ | 944 |
U.S. statutory income tax rate |  |  | 21 | % |  |  | 21 | % |  |  | 21 | %
Change in tax legislation |  |  | 4 | % |  |  | 0 | % |  |  | 0 | %
State income taxes |  |  | 1 | % |  |  | 24 | % |  |  | 5 | %
Change in unrecognized tax benefits |  |  | 0 | % |  |  | (13 | %) |  |  | (2 | %)
Audit settlements |  |  | 0 | % |  |  | 15 | % |  |  | (2 | %)
Other |  |  | (1 | %) |  |  | (19 | %) |  |  | 2 | %
Deferred tax asset valuation allowance |  |  | (7 | %) |  |  | 0 | % |  |  | 0 | %
Effective income tax rate |  |  | 18 | % |  |  | 28 | % |  |  | 24 | %
Devon and its subsidiaries are subject to U.S. federal income tax as well as income or capital taxes in various state and foreign jurisdictions. Devon’s tax reserves are related to tax years that may be subject to examinations by the relevant taxing authority. Devon is under audit in the U.S. and various foreign jurisdictions as part of its normal course of business. Devon assesses the realizability of its deferred tax assets. If Devon concludes that it is more likely than not that some portion or all of the deferred tax assets will not be realized, the asset is reduced by a valuation allowance. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws. 2020 The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) became law on March 27, 2020. The CARES Act allows net operating losses generated in taxable years beginning after December 31, 2017 and before January 1, 2021 to be carried back five years to offset taxable income and recoup previously paid taxes. As a result, Devon intends to carry net operating losses generated in 2019 and 2020 back to 2014 and 2015, respectively, and recorded a $220 million current income tax benefit, partially offset by a $107 million deferred income tax expense. The net $113 million income tax benefit recorded in 2020 is the result of the higher U.S. federal income tax rate in the carry back periods. Throughout 2019, Devon maintained a valuation allowance against certain deferred tax assets, including certain tax credits and state net operating losses. Since then, reduced demand from the COVID-19 pandemic has caused an unprecedented downturn in the commodity price environment. As a result, Devon recorded significant impairments during the first quarter of 2020 and is now in a net deferred tax asset position. Devon reassessed its position and recorded a 100% valuation allowance against all U.S. federal and state net deferred tax assets and has maintained a full valuation allowance position throughout 2020. 2019 On June 27, 2019, Devon completed the sale of substantially all of its oil and gas assets and operations in Canada. Devon’s foreign earnings have not been considered indefinitely reinvested since the announcement of the plan to separate the assets in the first quarter of 2019. As the separation took the form of an asset sale and Devon retained certain non-operating obligations to be settled over time, Devon did not record a deferred tax asset or corresponding valuation allowance related to its Canadian investment in 2019. Devon recorded tax impacts related to the Barnett Shale and Canadian assets in discontinued operations. During 2019, Devon recorded a tax expense of $14 million related to unrecognized tax benefits, due to a change in tax positions taken in prior periods. In the fourth quarter of 2019, Devon entered into an audit agreement with the Canada Revenue Agency. The Canadian income tax expense resulting from this agreement is reflected in discontinued operations. However, the agreement also resulted in a $16 million tax benefit to Devon’s U.S. continuing operations. The “other” effect is composed of permanent differences, including stock compensation, for which the dollar amounts do not increase or decrease in relation to the change in pre-tax earnings. Generally, permanent adjustments, as well as the state income tax, have an insignificant impact on Devon’s effective income tax rate. However, these items had a more noticeable impact to the rate in 2019 due to the low relative net loss in the period. 2018 Through the first six months of 2018, Devon maintained a 100% valuation allowance against its deferred tax assets resulting from prior year cumulative financial losses, oil and gas impairments and significant net operating losses for U.S. federal and state income tax. However, upon closing the EnLink divestiture in the third quarter of 2018, Devon realized a pre-tax gain of $2.6 billion. Based on its net deferred tax liability position, current period projected net operating loss utilization, and projections of future taxable income, Devon reassessed its position and determined that it was no longer in a full valuation allowance position, maintaining only valuation allowances against certain deferred tax assets, including certain tax credits and state net operating losses. As part of its reassessment, Devon determined that apart from the sale of EnLink and the General Partner, Devon would have remained in a full valuation allowance position. Accordingly, the deferred tax benefit resulting from the release of the valuation allowance that was generated in the first two quarters was allocated to continuing operations, while the $259 million of the deferred tax benefit resulting from the release of the remainder of the full valuation allowance position was allocated entirely to discontinued operations. Deferred Tax Assets and Liabilities The following table presents the tax effects of temporary differences that gave rise to Devon’s deferred tax assets and liabilities.
|  | December 31, |
|  | 2020 |  |  | 2019 |
Deferred tax assets: |  |  |  |  |  |  |  |
Capital loss carryforwards |  | $ | 547 |  |  | $ | — |
Investment in subsidiary |  |  | 441 |  |  |  | — |
Net operating loss carryforwards |  |  | 238 |  |  |  | 306 |
Accrued liabilities |  |  | 125 |  |  |  | 35 |
Asset retirement obligation |  |  | 94 |  |  |  | 123 |
Pension benefit obligation |  |  | 43 |  |  |  | 39 |
Other |  |  | 96 |  |  |  | 66 |
Total deferred tax assets before valuation allowance |  |  | 1,584 |  |  |  | 569 |
Less: valuation allowance |  |  | (1,355 | ) |  |  | (106 | )
Net deferred tax assets |  |  | 229 |  |  |  | 463 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Property and equipment |  |  | (213 | ) |  |  | (800 | )
Other |  |  | — |  |  |  | (4 | )
Total deferred tax liabilities |  |  | (213 | ) |  |  | (804 | )
Net deferred tax asset (liability) |  | $ | 16 |  |  | $ | (341 | )
The $16 million net Canadian deferred tax asset as of December 31, 2020, is expected to be realized by the end of 2022. Included in Devon’s Canadian net deferred tax asset balance are $593 million of deferred tax assets primarily related to capital loss carryforwards and a $577 million valuation allowance against Canadian deferred tax assets. Devon has a deductible outside basis difference in its investment in its consolidated Canadian subsidiary. In the fourth quarter of 2020, it became apparent that this basis difference would reverse within the foreseeable future. As such, Devon recorded a $441 million deferred tax asset with a corresponding increase to its U.S. deferred tax asset valuation allowance. The tax benefit associated with recording this deferred tax asset and the offsetting tax expense associated with the corresponding change in valuation allowance are recorded in discontinued operations. At December 31, 2020, Devon has recognized $238 million of deferred tax assets related to various net operating loss carryforwards available to offset future taxable income. Devon has $581 million of U.S. federal net operating loss carryforwards ($431 million expiring in 2037 with the remainder having an indefinite life) and $2.5 billion of U.S. state net operating loss carryforwards expiring between 2021 and 2040. In the current environment, Devon currently does not anticipate utilizing all of its U.S. federal or state net operating loss carryforwards, as indicated by the full valuation allowance against its U.S. deferred tax assets. Unrecognized Tax Benefits The following table presents changes in Devon’s unrecognized tax benefits.
|  | December 31, |
|  | 2020 |  |  | 2019 |
|  | (Millions) |
Balance at beginning of year |  | $ | 65 |  |  | $ | 51 |
Tax positions taken in prior periods |  |  | (42 | ) |  |  | 14 |
Balance at end of year |  | $ | 23 |  |  | $ | 65 |
Devon recognized no net interest or penalties in 2020 and its unrecognized tax benefit balance included no interest and penalties at December 31, 2020. Devon recognized a net interest benefit of $5 million in 2019 and its unrecognized tax benefit balance included no interest and penalties at December 31, 2019. At December 31, 2020 and December 31, 2019, there were $23 million and $65 million, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. Due to regulatory changes during 2020, $42 million of Devon’s current unrecognized tax benefits were reclassified as deferred unrecognized tax benefits. The deferred unrecognized tax benefits of $50 million and $7 million, respectively, at December 31, 2020 and December 31, 2019 are not included in the table above but are accounted for in Devon’s deferred tax disclosure above. Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities.
Jurisdiction |  | Tax Years Open
U.S. Federal |  | 2017-2020
Various U.S. states |  | 2016-2020
Canada |  | 2004-2020
Certain statute of limitation expirations are scheduled to occur in the next twelve months. However, Devon is currently in various stages of the administrative review process for certain open tax years. In addition, Devon is currently subject to various income tax audits that have not reached the administrative review process.

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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://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI http://asc.fasb.org/extlink&oid=116825942&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI http://asc.fasb.org/extlink&oid=116825942&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI http://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 + Details
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