Income Taxes (Unaudited)

9 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

	Three Months Ended September 30						Nine Months Ended September 30
$ in millions	2020			2019			2020			2019
Federal and foreign income tax expense	$	181		$	122		$	564		$	460
Effective income tax rate	15.5		%	11.6		%	16.5		%	14.8		%

Current Quarter

The third quarter 2020 effective tax rate (ETR) increased to 15.5 percent from 11.6 percent in the prior year period primarily due to lower research credits, partially offset by benefits relating to foreign-derived intangible income (FDII) after final regulations issued in July clarified Foreign Military Sales qualify for the deduction. The company’s third quarter 2020 ETR includes benefits of $45 million for research credits and $30 million for FDII. The company’s third quarter 2019 ETR includes benefits of $89 million for research credits and $17 million for FDII.

Year to Date

The year to date 2020 ETR increased to 16.5 percent from 14.8 percent in the prior year period due to the same current quarter items discussed above. The company’s year to date 2020 ETR includes benefits of $135 million for research credits and $46 million for FDII. The company’s year to date 2019 ETR includes benefits of $171 million for research credits and $26 million for FDII.

In March 2020, the CARES Act was enacted. The CARES Act includes certain changes to U.S. tax law that impact the company, including a technical correction to the 2017 Tax Cuts and Jobs Act, which makes certain qualified improvement property eligible for bonus depreciation. The CARES Act did not have a significant impact on the company’s third quarter and year to date 2020 effective tax rate.

During the three and nine months ended September 30, 2020, we increased our unrecognized tax benefits by approximately $219 million and $294 million, respectively, primarily related to state apportionment, our methods of accounting associated with the timing of revenue recognition and related costs, and the 2017 Tax Act. It is reasonably possible that within the next 12 months our unrecognized tax benefits related to these matters may decrease by up to $50 million. Since enactment of the 2017 Tax Act, the Internal Revenue Service (IRS) and U.S. Treasury Department have issued and are expected to further issue interpretive guidance that impacts taxpayers. We will continue to evaluate such guidance as it is issued.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Northrop Grumman 2014-2017 federal tax returns and refund claims related to its 2007-2016 federal tax returns are currently under IRS examination. In addition, legacy Orbital ATK federal tax returns for the year ended March 31, 2015, the nine-month transition period ended December 31, 2015 and calendar years 2016-2017 are currently under appeal with the IRS.