Income Taxes

9 Months Ended

Sep. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Note 11. Income Taxes

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Income tax expense (benefit)	$	7		$	(26)		$	34		$	(71)
Effective tax rate	(17.1)		%	20.0		%	315.6		%	15.9		%

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 nine months ended September 30, 2022, we recognized income tax expense of $7 million and $34 million, respectively. Our effective tax rate of (17.1)% and 315.6%, respectively, differs from the statutory income tax rate largely due to changes in earnings mix between periods resulting in projected losses in the U.S. and projected earnings outside of the U.S. The U.S. federal and state jurisdictions are subject to valuation allowances. Income tax expense was partially offset by beneficial net foreign currency gains, which are nontaxable in certain tax jurisdictions outside of the U.S. The income tax expense for the nine months ended September 30, 2022 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 and net foreign currency gains, which are nontaxable in certain tax jurisdictions outside of the U.S.

For the three and nine months ended September 30, 2021, we recognized an income tax benefit of $26 million and $71 million, respectively. For the three months ended September 30, 2021, our effective tax rate of 20.0% differs from the statutory income tax rate primarily due to preliminary accounting for the acquisition of KindredBio, which caused a partial release of the U.S. federal valuation allowance, as well as profits being located in jurisdictions with higher statutory tax rates. For the nine months ended September 30, 2021, our effective tax rate of 15.9% differs from the statutory income tax rate primarily because the U.S. federal and state jurisdictions are currently generating losses that are subject to valuation allowances.