Income Taxes

The components of earnings before income taxes were:



Years ended December 31,	2017		2016		2015
U.S.		$9,615		$5,175		$6,828
Non-U.S.	432		393		327
Total		$10,047		$5,568		$7,155

Income tax expense/(benefit) consisted of the following:



Years ended December 31,	2017			2016			2015
Current tax expense
U.S. federal		$1,276			$1,193			$2,102
Non-U.S.	149			133			122
U.S. state	23			15			21
Total current	1,448			1,341			2,245
Deferred tax expense
U.S. federal	405			(618		)	(297		)
Non-U.S.	(1		)	(4		)	4
U.S. state	(2		)	(46		)	27
Total deferred	402			(668		)	(266		)
Total income tax expense		$1,850			$673			$1,979

Net income tax payments were $896, $1,460 and $1,490 in 2017, 2016 and 2015, respectively.

The following is a reconciliation of the U.S. federal statutory tax rate of 35% to our effective income tax rates:



Years ended December 31,	2017		2016		2015
U.S. federal statutory tax	35.0	%	35.0	%	35.0	%
Impact of Tax Cuts and Jobs Act⁽¹⁾	(10.5	)
Tax basis adjustment⁽²⁾			(7.9	)
Federal audit settlements⁽³⁾			(3.2	)
Excess tax benefits⁽⁴⁾	(2.1	)	(1.9	)
Research and development credits	(1.6	)	(5.2	)	(3.4	)
U.S. manufacturing activity tax benefit	(1.3	)	(3.8	)	(2.9	)
Tax on non-US activities	(0.9	)	(0.5	)	(0.6	)
Other provision adjustments	(0.2	)	(0.4	)	(0.4	)
Effective income tax rate	18.4	%	12.1	%	27.7	%

⁽¹⁾

On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was enacted. The TCJA revises the U.S. corporate income tax by, among other things, lowering the rate from 35% to 21% effective January 1, 2018, implementing a territorial tax system and imposing a one-time tax on deemed repatriated earnings of non-U.S. subsidiaries. In the fourth quarter of 2017, we recorded provisional tax benefits of $1,210 related to the remeasurement of our net U.S. deferred tax liabilities to reflect the reduction in the corporate tax rate. We also recorded a provisional tax expense of $159 related to tax on non-U.S. activities resulting from the TCJA.


⁽²⁾	In the third quarter of 2016, we recorded incremental tax benefits of $440 related to the application of a 2012 Federal Court of Claims decision which held that the tax basis in certain assets could be increased (tax basis adjustment).


⁽³⁾	In the third quarter of 2016, a tax benefit of $177 was recorded as a result of the settlement of the 2011-2012 federal tax audit.


⁽⁴⁾	In 2017 and 2016, we recorded excess tax benefits related to employee share-based payments of $207 and $105.

Significant components of our deferred tax (liabilities)/assets at December 31 were as follows:



	2017			2016
Inventory and long-term contract methods of income recognition	(6,290		)	(9,954		)
Pension benefits	3,690			7,385
Retiree health care benefits	1,319			2,268
Fixed assets, intangibles and goodwill (net of valuation allowance of $16 and $16)	(1,259		)	(2,007		)
Other employee benefits	847			1,225
Customer and commercial financing	(369		)	(730		)
Accrued expenses and reserves	347			587
Net operating loss, credit and capital loss carryovers (net of valuation allowance of $53 and $79)⁽¹⁾	299			277
Other	(82		)	(57		)
Net deferred tax (liabilities)/assets⁽²⁾		($1,498	)		($1,006	)


⁽¹⁾	Of the deferred tax asset for net operating loss and credit carryovers, $278 expires on or before December 31, 2036 and $21 may be carried over indefinitely.


⁽²⁾	Included in the net deferred tax (liabilities)/assets as of December 31, 2017 and 2016 are deferred tax assets in the amounts of $4,636 and $7,701 related to Accumulated other comprehensive loss.

Net deferred tax (liabilities)/assets at December 31 were as follows:



	2017			2016
Deferred tax assets		$8,459			$13,591
Deferred tax liabilities	(9,888		)	(14,502		)
Valuation allowance	(69		)	(95		)
Net deferred tax (liabilities)/assets		($1,498	)		($1,006	)

The deferred tax assets are reduced by a valuation allowance if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The TCJA one-time repatriation tax liability effectively taxed the undistributed earnings previously deferred from U.S. income taxes. We have not provided for foreign withholding tax on the undistributed earnings from our non-U.S. subsidiaries because such earnings are considered to be indefinitely reinvested. If such earnings were to be distributed, any foreign withholding tax would not be significant.

In accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118 the amounts recorded in the fourth quarter of 2017 related to the TCJA represent reasonable estimates based on our analysis to date and are considered to be provisional and subject to revision during 2018. Provisional amounts were recorded for the repatriation tax, the remeasurement of our 2017 U.S. net deferred tax liabilities and ancillary state tax effects. These amounts are considered to be provisional as we continue to assess available tax methods and elections and refine our computations. In addition, further regulatory guidance related to the TCJA is expected to be issued in 2018 which may result in changes to our current estimates. Any revisions to the estimated impacts of TCJA will be recorded quarterly until the computations are complete which is expected no later than the fourth quarter of 2018.

As of December 31, 2017 and 2016, the amounts accrued for the payment of income tax-related interest and penalties included in the Consolidated Statements of Financial Position were not significant. The amounts of interest benefit included in the Consolidated Statements of Operations were not significant for the years ended December 31, 2017, 2016 and 2015.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2017			2016			2015
Unrecognized tax benefits – January 1		$1,557			$1,617			$1,312
Gross increases – tax positions in prior periods	3			17			38
Gross decreases – tax positions in prior periods	(44		)	(348		)	(25		)
Gross increases – current-period tax positions	220			344			292
Settlements				(73		)
Unrecognized tax benefits – December 31		$1,736			$1,557			$1,617

As of December 31, 2017, 2016 and 2015, the total amount of unrecognized tax benefits was $1,736, $1,557 and $1,617, respectively, of which $1,568, $1,402 and $1,479 would affect the effective tax rate, if recognized. As of December 31, 2017, these amounts are primarily associated with U.S. federal tax issues such as the amount of research tax credits claimed, the U.S. manufacturing activity tax benefit and tax basis adjustments. Also included in these amounts are accruals for domestic state tax issues such as the allocation of income among various state tax jurisdictions and the amount of state tax credits claimed.

Federal income tax audits have been settled for all years prior to 2013. The Internal Revenue Service (IRS) began the 2013-2014 federal tax audit in the fourth quarter of 2016. We are also subject to examination in major state and non-U.S. jurisdictions for the 2001-2016 tax years. We believe appropriate provisions for all outstanding tax issues have been made for all jurisdictions and all open years.

Audit outcomes and the timing of audit settlements are subject to significant uncertainty. It is reasonably possible that within the next 12 months unrecognized tax benefits related to federal and state matters under audit may decrease by up to $540 and $430, respectively, based on current estimates.