Income Taxes

12 Months Ended

Sep. 28, 2019

INCOME TAXES

Detail of the provision for income taxes from continuing operations consists of the following:



						in millions
	2019		2018			2017
Federal	$	325	$	(426	)	$	755
State	42		118			81
Foreign	29		26			14
	$	396	$	(282	)	$	850

Current	$	304	$	583		$	889
Deferred	92		(865		)	(39		)
	$	396	$	(282	)	$	850

The reasons for the difference between the statutory federal income tax rate and our effective income tax rate from continuing operations are as follows:



	2019		2018		2017
Federal income tax rate	21.0	%	24.5	%	35.0	%
State income taxes	2.9		3.3		2.3
Unrecognized tax benefits, net	(6.6	)	(0.1	)	(0.1	)
Impact of the Tax Act	—		(37.9	)	—
Domestic production deduction	—		(1.7	)	(3.1	)
Impairment and sale of non-protein businesses	—		3.1		—
Other	(1.0	)	(1.5	)	(1.8	)
	16.3	%	(10.3	)%	32.3	%

During fiscal 2019, changes in unrecognized tax benefits decreased tax expense by $160 million, and state tax expense, excluding changes in unrecognized tax benefits and net of federal tax benefit, was $69 million.

During fiscal 2018, the domestic production deduction decreased tax expense by $46 million, and state tax expense, net of federal tax benefit, was $90 million. The change in federal tax rate from the Tax Act resulted in a tax benefit of $1,004 million related to deferred tax remeasurement. Additionally, favorable timing differences deductible in fiscal 2018 at the 24.5% blended tax rate but reversing in future years at 21% resulted in a $35 million tax benefit. The impacts of the non-deductible impairment and sale of certain assets in our non-protein businesses increased the effective tax rate by 3.1%.

During fiscal 2017, the domestic production deduction decreased tax expense by $80 million, and state tax expense, net of federal tax benefit, was $61 million.

Approximately $2,332 million, $2,700 million and $2,603 million of income from continuing operations before income taxes for fiscal 2019, 2018 and 2017, respectively, were from our operations based in the United States.

On December 22, 2017, President Trump signed into law the Tax Act. The Tax Act made significant changes to the U.S. tax code including, but not limited to, (1) reducing the corporate federal income tax rate from 35% to 21% effective January 1, 2018, (2) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, (3) the repeal of the domestic production activity deduction beginning with our fiscal 2019, and (4) new provisions designed to tax global intangible low-taxed income and to allow a deduction for foreign-derived intangible income beginning with our fiscal 2019.

Under generally accepted accounting principles ("U.S. GAAP"), specifically ASC Topic 740, Income Taxes, the tax effects of changes in tax laws must be recognized in the period in which the law is enacted, or December 22, 2017, for the Tax Act. ASC 740 also requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred taxes were remeasured based upon the new tax rates. The change in deferred taxes was recorded as an adjustment to our fiscal 2018 deferred tax provision.

During the first quarter of fiscal 2019 we completed our accounting for the Tax Act and recorded an immaterial adjustment to income tax expense.

We recognize deferred income taxes for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The tax effects of major items recorded as deferred tax assets and liabilities as of September 28, 2019, and September 29, 2018, are as follows:



									in millions
	2019					2018
	Deferred Tax					Deferred Tax
	Assets			Liabilities		Assets			Liabilities
Property, plant and equipment	$	—		$	891	$	—		$	714
Intangible assets	—			1,624		—			1,533
Accrued expenses	297			—		230			—
Net operating loss and other carryforwards	99			—		92			—
Other	84			231		98			193
	$	480		$	2,746	$	420		$	2,440
Valuation allowance	$	(86	)			$	(79	)
Net deferred tax liability				$	2,352				$	2,099

At September 28, 2019, our gross state tax net operating loss carryforwards approximated $691 million and expire in fiscal years 2020 through 2039. Gross foreign net operating loss carryforwards approximated $98 million, of which $65 million expire in fiscal years 2020 through 2031, and the remainder has no expiration. We also have tax credit carryforwards of approximately $42 million, of which $38 million expire in fiscal years 2020 through 2033, and the remainder has no expiration.

We have accumulated undistributed earnings of foreign subsidiaries aggregating approximately $252 million and $210 million at September 28, 2019, and September 29, 2018, respectively. The Tax Act generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries after December 31, 2017. As a result, our intention is that excess cash held by our foreign subsidiaries that is not subject to regulatory restrictions will be repatriated net of applicable withholding taxes which are expected to be immaterial. The remainder of accumulated undistributed earnings are expected to be indefinitely reinvested outside of the United States. If these earnings were distributed in the form of dividends or otherwise, we could be subject to state income taxes and withholding taxes payable to various foreign countries. Due to the uncertainty of the manner in which the undistributed earnings would be brought back to the United States and the tax laws in effect at that time, it is not currently practicable to estimate the tax liability that might be payable on the repatriation of these foreign earnings; however, we do not expect any tax due to be material.

The following table summarizes the activity related to our gross unrecognized tax benefits at September 28, 2019, September 29, 2018, and September 30, 2017:



							in millions
	2019			2018			2017
Balance as of the beginning of the year	$	308		$	316		$	305
Increases related to current year tax positions	20			19			38
Increases related to prior year tax positions	21			8			5
Increase related to AdvancePierre acquisition	—			—			9
Reductions related to prior year tax positions	(17		)	(18		)	(27		)
Reductions related to settlements	(9		)	(8		)	(4		)
Reductions related to expirations of statutes of limitations	(154		)	(9		)	(10		)
Balance as of the end of the year	$	169		$	308		$	316

The amount of unrecognized tax benefits, if recognized, that would impact our effective tax rate was $116 million at September 28, 2019 and $216 million at September 29, 2018. We classify interest and penalties on unrecognized tax benefits as income tax expense. At September 28, 2019, and September 29, 2018, before tax benefits, we had $46 million and $73 million, respectively, of accrued interest and penalties on unrecognized tax benefits.

As of September 28, 2019, certain United States federal income tax returns are subject to examination for fiscal years 2013 through 2018. We are also subject to income tax examinations by major state and foreign jurisdictions for fiscal years 2012 through 2018 and 2002 through 2018, respectively. We do not expect material changes to our unrecognized tax benefits during the next twelve months.