Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Income (loss) before income taxes for the years ended December 31, 2020, 2019 and 2018 consisted of the following.

	2020		2019		2018
U.S.	$	(129.1)	$	—	$	169.0
Non-U.S.	109.7		190.9		180.5
Income (loss) before income taxes	$	(19.4)	$	190.9	$	349.5

The following table details the components of the Provision for income taxes for the years ended December 31, 2020, 2019 and 2018.

	2020		2019		2018
Current:
U.S. federal	$	27.7	$	6.3	$	25.6
U.S. state and local	10.2		0.9		1.5
Non-U.S.	79.5		45.2		47.8
Deferred:
U.S. federal	(53.4)		(13.2)		14.4
U.S. state and local	(5.5)		0.5		(0.7)
Non-U.S.	(45.5)		(7.9)		(8.5)
Provision for income taxes	$	13.0	$	31.8	$	80.1

Certain prior period amounts within this Note have been reclassified to conform to the current period presentation.

The U.S. federal corporate statutory rate is reconciled to the Company’s effective income tax rate for the years ended December 31, 2020, 2019 and 2018 as follows.

	2020		2019		2018
U.S. federal corporate statutory rate	21.0	%	21.0	%	21.0	%
State and local taxes, less federal tax benefit	(23.5)		1.4		0.3
U.S. deferred change due to U.S. tax law change	—		—		4.3
Net effects of foreign tax rate differential	(30.8)		1.3		2.2
Withholding tax	(30.4)		0.2		1.3
Repatriation cost	40.9		—		(1.5)
U.S. transition tax toll charge net of FTC	—		—		(3.7)
Global Intangible Low-Tax Income (“GILTI”)	(27.4)		(2.5)		3.4
ASC 740-30 (formerly APB 23)	(43.7)		1.2		(1.0)
Valuation allowance changes	11.3		(2.5)		(1.2)
Uncertain tax positions	(11.0)		0.4		0.1
Equity compensation	19.4		(9.1)		(3.0)
Nondeductible foreign interest expense	—		—		1.7
Capital gain	—		3.0		—
Nondeductible acquisition costs	(18.2)		3.5		0.1
Foreign Derived Intangible Income (“FDII”) deduction	29.5		(0.4)		(0.3)
Tax credits	16.1		(0.5)		(0.6)
Other, net	(20.2)		(0.3)		(0.2)
Effective income tax rate	(67.0)	%	16.7	%	22.9	%

The principal items that gave rise to deferred income tax assets and liabilities as of December 31, 2020 and 2019 are as follows.

	2020		2019
Deferred Tax Assets:
Reserves and accruals	$	76.9	$	30.8
Bad debts	12.0		3.3
Inventory reserve	12.3		4.2
Postretirement benefits - pensions	62.6		19.3
Tax loss carryforwards	102.7		28.4
Deferred taxes recorded in other comprehensive income	18.0		—
Foreign tax credit carryforwards	74.6		52.2
Other	13.5		1.0
Total deferred tax assets	372.6		139.2
Valuation allowance	(141.3)		(67.9)
Deferred Tax Liabilities:
LIFO inventory	(25.1)		(9.3)
Property, plant and equipment	(60.7)		(15.5)
Intangibles	(972.6)		(280.9)
Unremitted foreign earnings	(32.5)		(7.8)
Deferred taxes recorded in other comprehensive income	—		(4.1)
Other	—		(1.8)
Total deferred tax liabilities	(1,090.9)		(319.4)
Net deferred income tax liability	$	(859.6)	$	(248.1)

The Company believes that it is more likely than not that it will realize its deferred tax assets through the reduction of future taxable income, other than for the deferred tax assets reflected below. Tax attributes and related valuation allowances as of December 31, 2020 were as follows.

	Tax Benefit		Valuation Allowance		Carryforward Period Ends
Tax Attributes to be Carried Forward
U.S. federal net operating loss	$	0.2	$	—	Unlimited
U.S. federal net operating loss	9.8		(2.1)		2030-2039
U.S. federal capital loss	7.6		(7.6)		2021
U.S. federal capital loss	0.8		(0.8)		2030-2039
U.S. federal tax credit	74.6		(74.6)		2021-2037
Alternative minimum tax credit	1.3		(0.1)		Unlimited
U.S. state and local net operating losses	3.0		(0.7)		2021-2039
U.S. state and local tax credit	0.3		—		2021-2039
Non U.S. net operating losses	71.9		(48.8)		Unlimited
Non U.S. capital losses	0.6		(0.5)		Unlimited
Excess interest	9.1		(2.9)		Unlimited
Other deferred tax assets	2.7		(3.1)		Unlimited
Total tax carryforwards	$	181.9	$	(141.2)

A reconciliation of the changes in the valuation allowance for deferred tax assets for the years ended December 31, 2020, 2019 and 2018 are as follows.

	2020		2019		2018
Valuation allowance for deferred tax assets at beginning of the period	$	67.9	$	72.5	$	47.9
Revaluation or additions due to acquisitions or mergers(1)	63.3		—		—
Change due to U.S. Tax Reform	—		—		23.4
Charged to tax expense	8.9		(5.4)		(4.2)
Charged to other accounts	1.1		0.1		(1.3)
Deductions(2)	0.1		0.7		6.7
Valuation allowance for deferred tax assets at end of the period	$	141.3	$	67.9	$	72.5

(1)Revaluation for the tax year ended December 31, 2020 relates to the inclusion of Ingersoll Rand's opening balance sheet (“OBS”) beginning valuation allowance.

(2)Deductions relate to the realization of net operating losses or the removal of deferred tax assets.

Total unrecognized tax benefits were $27.8 million, $12.5 million and $11.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. The net increase in this balance primarily relates to increases related to current-year positions of $16.8 million assumed in the acquisition of Ingersoll Rand Industrial and currency fluctuations of $2.0 million. Included in total unrecognized benefits at December 31, 2020 is $27.8 million of unrecognized tax benefits that would affect the Company's effective tax rate if recognized, of which $0.1 million would be offset by a reduction of a corresponding deferred tax asset. The balance of total unrecognized tax benefits is expected to decrease $11 million to $15 million within the next twelve months.

Below is a tabular reconciliation of the changes in total unrecognized tax benefits during the years ended December 31, 2020, 2019 and 2018.

	2020		2019		2018
Beginning balance	$	12.5	$	11.5	$	12.6
Gross increases for tax positions of prior years	—		0.6		—
Gross decreases for tax positions of prior years	—		—		—
Gross increases for tax positions of current year	16.8		—		—
Settlements	—		—		—
Lapse of statute of limitations	(3.5)		—		(0.5)
Changes due to currency fluctuations	2.0		0.4		(0.6)
Ending balance	$	27.8	$	12.5	$	11.5

The Company includes interest expense and penalties related to unrecognized tax benefits as part of the provision for income taxes. The Company's income tax liabilities at December 31, 2020 and 2019 include accrued interest and penalties of $2.3 million and $1.3 million, respectively.

The statutes of limitations for U.S. Federal tax returns are open beginning with the 2017 tax year, and state returns are open beginning with the 2016 tax year.

The Company is subject to income tax in approximately 46 jurisdictions outside the U.S. The statute of limitations varies by jurisdiction with 2015 being the oldest year still open. The Company's significant operations outside the U.S. are located in the United Kingdom, Germany, China, Ireland and Singapore. The Company is no longer subject to audit or inquiry in the United Kingdom (all prior year tax audits were concluded as of the date of these financial statements. In Germany, generally, the tax years 2011 and beyond remain open, as tax years 2011-2014 are still under audit, and a new tax audit covering tax years 2015-2019 was notified to the Company in 2020. The Company is under audit in Italy for tax years 2016 – 2018. However, as this audit covers pre-merger tax years for legacy Ingersoll Rand Industrial entities, the Company has been indemnified by Trane Technologies for any future liability arising from the audit. Note that any other liabilities arising from pre-merger tax years for legacy Ingersoll Rand Industrial entities would be similarly indemnified.

The Company does not assert the ASC 740-30 (formerly APB 23) indefinite reinvestment of the Company’s historical non-U.S. earnings or future non-U.S. earnings. This assertion has not changed following the merger. The Company records a deferred foreign tax liability to cover all estimated withholding, state income tax and foreign income tax associated with repatriating all non-U.S. earnings back to the United States. The Company’s deferred income tax liability as of December 31, 2020 was $32.5 million which is a significant increase over prior year due mainly to increased foreign operations as a result of the Ingersoll Rand Industrial acquisition.