Income Taxes

6 Months Ended

Jun. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Note 11. Income Taxes

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Income tax expense (benefit)	$	4		$	(26)		$	27		$	(45)
Effective tax rate	(22.5)		%	11.1		%	50.7		%	14.2		%

We were 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 our initial public offering (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. The U.S. examination of tax years 2016 to 2018 began in the fourth quarter of 2019 and remains ongoing. The resolution of this audit period will likely extend beyond the next 12 months.

For the three and six months ended June 30, 2022, we recognized income tax expense of $4 million and $27 million, respectively. Our effective tax rate of (22.5)% and 50.7%, respectively, differs from the statutory income tax rate largely due to changes in the earnings mix between periods resulting in projected losses in the U.S. The U.S. federal and state losses are subject to valuation allowances. The income tax expense was partially offset by the $17 million income tax benefit reclassified from accumulated other comprehensive loss due to the termination of interest rate swaps during the period.

For the three and six months ended June 30, 2021, we recognized an income tax benefit of $26 million and $45 million, respectively. Our effective tax rate of 11.1% and 14.2%, respectively, differs from the statutory income tax rate primarily because the U.S. federal and state jurisdictions were currently generating losses that were subject to valuation allowances.