Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Income (loss) before income taxes for the years ended December 31, 2022, 2021 and 2020 consisted of the following.

	2022		2021		2020
U.S.	$	267.5	$	121.3	$	(158.4)
Non-U.S.	474.7		391.7		113.0
Income (loss) before income taxes	$	742.2	$	513.0	$	(45.4)

The following table details the components of the Provision (benefit) for income taxes for the years ended December 31, 2022, 2021 and 2020.

	2022		2021		2020
Current:
U.S. federal	$	66.5	$	(33.1)	$	6.6
U.S. state and local	21.5		5.8		6.7
Non-U.S.	147.4		109.1		79.6
Deferred:
U.S. federal	(37.3)		(19.5)		(33.4)
U.S. state and local	(5.5)		(0.9)		(2.9)
Non-U.S.	(43.0)		(83.2)		(45.2)
Provision (benefit) for income taxes	$	149.6	$	(21.8)	$	11.4

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, 2022, 2021 and 2020 as follows.

	2022		2021		2020
U.S. federal corporate statutory rate	21.0	%	21.0	%	21.0	%
State and local taxes, less federal tax benefit	2.0		1.1		(8.0)
Net effects of foreign tax rate differential	1.5		1.0		(14.6)
Withholding tax	2.1		3.0		(12.9)
Repatriation cost	(3.2)		1.4		17.7
Global Intangible Low-Tax Income (“GILTI”)	0.3		2.3		(11.7)
ASC 740-30 (formerly APB 23)	1.9		2.9		(18.6)
Valuation allowance changes	0.5		(5.4)		4.8
Uncertain tax positions	0.2		(1.3)		(4.7)
Equity compensation	(0.6)		(2.5)		6.1
Nondeductible acquisition costs	0.4		0.4		(7.7)
Foreign Derived Intangible Income (“FDII”) deduction	(1.6)		(3.2)		10.1
Tax credits	(1.1)		(0.8)		4.7
Income not subject to tax	(3.5)		(3.3)		—
Utilization of capital loss	—		(9.1)		—
Non-U.S. deferred change related to asset sales	—		(8.0)		—
Return to provision adjustment	—		(1.3)		0.5
Other, net	0.3		(2.4)		(11.8)
Effective income tax rate	20.2	%	(4.2)	%	(25.1)	%

The principal items that gave rise to deferred income tax assets and liabilities as of December 31, 2022 and 2021 are as follows.

	2022		2021
Deferred Tax Assets:
Reserves and accruals	$	78.5	$	69.3
Allowance for credit losses	7.4		10.0
Inventory reserve	4.9		12.0
Pension and postretirement benefit plans	25.4		41.7
Tax loss carryforwards	107.2		95.9
Deferred taxes recorded in other comprehensive income	0.1		10.2
Foreign tax credit carryforwards	53.8		43.8
Other	31.8		30.9
Total deferred tax assets	309.1		313.8
Valuation allowance	(107.3)		(106.4)
Deferred Tax Liabilities:
LIFO inventory	(21.8)		(16.2)
Investment in partnership	(36.3)		(37.4)
Property, plant and equipment	(36.0)		(40.9)
Intangible assets	(663.6)		(742.1)
Unremitted foreign earnings	(32.4)		(49.6)
Other	—		(1.6)
Total deferred tax liabilities	(790.1)		(887.8)
Net deferred income tax liability	$	(588.3)	$	(680.4)

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, 2022 were as follows.

	Tax Benefit		Valuation Allowance		Carryforward Period Ends
Tax Attributes to be Carried Forward
U.S. federal net operating loss	$	0.2	$	(0.2)	Unlimited
U.S. federal net operating loss	0.1		(0.1)		2031-2040
U.S. federal capital loss	24.8		—		2027
U.S. federal capital loss	—		—		2031-2040
U.S. federal tax credit	53.8		(53.8)		2023-2032
Alternative minimum tax credit	0.8		(0.1)		Unlimited
U.S. state and local net operating losses	2.8		(0.4)		2026-2041
U.S. state and local tax credit	0.3		—		2040
U.S. state capital loss	0.5		—		2027
Non U.S. net operating losses	67.0		(46.1)		Unlimited
Non U.S. capital losses	0.6		(0.6)		Unlimited
Excess interest	11.9		(2.6)		Unlimited
Other deferred tax assets	3.4		(3.4)		Unlimited
Total tax carryforwards	$	166.2	$	(107.3)

A reconciliation of the changes in the valuation allowance for deferred tax assets for the years ended December 31, 2022, 2021 and 2020 are as follows.

	2022		2021		2020
Beginning balance	$	106.4	$	140.6	$	67.9
Revaluation or additions due to acquisitions or mergers(1)	—		—		63.3
Charged to tax expense	3.1		(27.6)		8.3
Charged to other accounts	(2.2)		(6.6)		1.1
Deductions(2)	—		—		—
Ending balance	$	107.3	$	106.4	$	140.6

(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 $10.8 million, $21.1 million and $27.8 million for the years ended December 31, 2022, 2021 and 2020, respectively. The net decrease in this balance primarily relates to a release of the Italian audit settlement indemnified by Trane Technologies. The post-merger portion of the reserve was adjusted to reflect the settlement terms. Included in total unrecognized benefits at December 31, 2022 is $10.8 million of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized. The balance of total unrecognized tax benefits is not expected to significantly increase or decrease within the next twelve months. Below is a tabular reconciliation of the changes in total unrecognized tax benefits during the years ended December 31, 2022, 2021 and 2020.

	2022		2021		2020
Beginning balance	$	21.1	$	27.8	$	12.5
Gross increases for tax positions of prior years	0.4		0.8		—
Gross decreases for tax positions of prior years	(3.7)		—		—
Gross increases for tax positions of current year	4.1		5.3		16.8
Settlements	(9.9)		—		—
Lapse of statute of limitations	(0.1)		(11.8)		(3.5)
Changes due to currency fluctuations	(1.1)		(1.0)		2.0
Ending balance	$	10.8	$	21.1	$	27.8

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, 2022 and 2021 include accrued interest and penalties of $1.1 million and $1.2 million, respectively.

The statutes of limitations for U.S. Federal tax returns are open beginning with the 2019 tax year, and state returns are open beginning with the 2017 tax year.

The Company is subject to income tax in approximately 47 jurisdictions outside the U.S. The statute of limitations varies by jurisdiction with 2014 being the oldest year still open. The Company’s significant operations outside the U.S. are located in the United Kingdom, Germany, China, Ireland, Hong Kong, and Singapore. In Germany, a tax audit covering tax years 2015-2019 was still open. The Company is under audit in Italy for tax years 2014 – 2020. 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, 2022 was $32.4 million which is a significant increase over prior year due mainly to increased foreign operations as a result of the Ingersoll Rand Industrial acquisition.