Income Taxes

6 Months Ended

Jun. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

7. Income Taxes

The following table presents Devon’s total income tax expense (benefit) and a reconciliation of its effective income tax rate to the U.S. statutory income tax rate.

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Earnings before income taxes	$	2,495	$	304	$	3,757	$	272
Current income tax expense	$	252	$	19	$	355	$	14
Deferred income tax expense (benefit)		305		24		469		(219	)
Total income tax expense (benefit)	$	557	$	43	$	824	$	(205	)

U.S. statutory income tax rate	21	%	21	%	21	%	21	%
State income taxes	1	%	0	%	1	%	1	%
Subsidiary reorganization	0	%	6	%	0	%	7	%
Deferred tax asset valuation allowance	0	%	(19	%)	0	%	(116	%)
Other	0	%	6	%	0	%	12	%
Effective income tax rate	22	%	14	%	22	%	(75	%)

Prior to December 31, 2021, Devon maintained a valuation allowance against all U.S. federal deferred tax assets. Devon recognized approximately $250 million of deferred tax liabilities to account for the Merger. The recognition of these deferred tax liabilities caused a decrease to Devon’s net deferred tax assets and a corresponding decrease to the valuation allowance Devon had recognized on its U.S. federal deferred tax assets in the first quarter of 2021.

Due to significant increases in commodity pricing and projections of future income, in the fourth quarter of 2021, Devon reassessed its evaluation of the realizability of deferred tax assets in future years and determined that a U.S. federal valuation allowance was no longer necessary at December 31, 2021.

In the fourth quarter of 2020, Devon recorded a deferred tax asset representing the deductible outside basis difference in its investment in a consolidated subsidiary. In the second quarter of 2021, Devon realized this deferred tax asset, increasing its U.S. federal net operating loss carryforwards by $1.8 billion.

In the table above, the "other" effect for 2021 is composed primarily of permanent differences related to costs incurred in connection with the Merger. Such items represent $18 million of income tax expense in the first six months of 2021.

Pursuant to the tax sharing agreement with The Williams Companies, Inc. ("Williams") assumed in the Merger, Devon has remained responsible for the tax from audit adjustments related to the WPX business for periods prior to WPX’s spin-off from Williams on December 31, 2011. The 2011 consolidated tax filing by Williams was audited by the Internal Revenue Service (“IRS”) during which the IRS proposed adjustments related to the WPX business. After a lengthy appeals process, these matters were effectively settled with the IRS during the second quarter of 2022 upon review and approval by the Joint Committee on Taxation. Accordingly, Devon believes these matters have now been effectively settled with no material impacts to Devon.