Income Taxes

3 Months Ended

Mar. 31, 2020

Note 12. Income Taxes


Provision for Taxes on Income	Three Months Ended March 31,
	2020			2019
(Benefit) Provision for Taxes on Income	$	(18.7)		$	13.3
Effective Tax Rate	27.6		%	29.7		%

Our income taxes for the three months ended March 31, 2019 and 2020, respectively, reflect the results on a stand-alone basis independent of Lilly, except for the period during which we were included in a combined tax return until full separation. In the jurisdictions in which we were included in a combined tax return, our income taxes were determined based on the tax matters agreement between us and Lilly. Prior to the Separation, the income tax expense included in these financial statements has been calculated using the separate return basis as if Elanco filed separate tax returns.

In 2017, the U.S. enacted the Tax Cuts and Jobs Act (2017 Tax Act), which significantly revised U.S. tax law. Guidance related to the 2017 Tax Act, including Notices, Proposed Regulations, and Final Regulations, has been issued, and we expect additional guidance will be issued in 2020. This additional guidance could materially impact our assumptions and estimates used to record our U.S. federal and state income tax expense resulting from the 2017 Tax Act.

We are included in Lilly's U.S. tax examinations by the Internal Revenue Service through the full separation date of March 11, 2019. Pursuant to the tax matters agreement we executed with Lilly in connection with the IPO, the potential liabilities or potential refunds attributable to pre-IPO periods in which Elanco was included in a Lilly consolidated or combined tax return remain with Lilly. During the fourth quarter of 2019, the IRS began its examination of tax years 2016 - 2018. Because the examination is still in the early stages of information gathering, the resolution of the audit will likely extend beyond the next 12 months.

For the three months ended March 31, 2020, we recognized an income tax benefit of $18.7 million. The effective tax rate of 27.6% differs from the statutory income tax rate primarily due to a pre-tax book loss mainly driven by acquisition and integration costs. In addition, a discrete income tax benefit of $1.9 million was recognized related to the excess tax benefits for stock-based compensation that vested in the three months ended March 31, 2020.

For the three months ended March 31, 2019, we incurred $13.3 million of income tax expense. The effective rate for the three months ended March 31, 2019, of 29.7% was different from the statutory income tax rate primarily due to a one-time foreign exchange gain on the transfer of assets upon separation in addition to the impact of state income taxes.