Prior to the Separation, our operating results were included in Fortive’s various consolidated U.S. federal and certain state income tax returns, as well as certain non-U.S. returns. For periods prior to the Separation, our combined financial statements reflect income tax expense and deferred tax balances as if we had filed tax returns on a standalone basis separate from Fortive. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if we were a separate taxpayer and a standalone enterprise for the periods prior to the Separation. For periods prior to the Separation, our pretax operating results include any transactions with Fortive as if it were an unrelated party.

In connection with the Separation, we entered into agreements with Fortive, including a Tax Matters Agreement. The Tax Matters Agreement distinguishes between the treatment of tax matters for “joint” filings compared to “separate” filings prior to the Separation. “Joint” filings are returns, such as the United States federal return, that include operations from both Fortive legal entities and the Company. By contrast, “separate” filings are tax returns (primarily U.S. state returns and non U.S. returns), that exclusively include either Fortive’s or the Company’s operations, respectively. In accordance with the Tax Matters Agreement, the Company is liable for and has indemnified Fortive against all income tax liabilities involving “separate” filings for periods prior to the Separation.


($ in millions)	2020		2019		2018
Current:
Federal U.S.	$	122.9	$	80.2	$	71.2
Non-U.S.	19.8		19.5		25.5
State and local	18.4		16.8		19.3
Deferred:
Federal U.S.	(33.3)		13.2		8.9
Non-U.S.	(8.4)		(1.1)		(3.7)
State and local	(1.1)		0.7		0.6
Income tax provision	$	118.3	$	129.3	$	121.8

All deferred tax assets and liabilities have been classified as noncurrent and are included in Other assets and Other long-term liabilities in the accompanying Consolidated and Combined Balance Sheets. Deferred income tax assets and liabilities as of December 31 were as follows:


($ in millions)	2020		2019
Deferred Tax Assets:
Allowance for credit losses	$	22.9	$	12.6
Financing receivables	—		4.6
Operating lease liabilities	10.2		8.7
Inventories	6.3		6.9
Pension benefits	0.6		0.8
Other accruals and prepayments	23.2		25.9
Deferred revenue	9.5		6.3
Warranty services	12.6		12.3
Stock-based compensation expense	6.7		4.3
Tax credit and loss carryforwards	29.0		34.4
Other	4.0		—
Valuation allowances	(22.4)		(29.7)
Total deferred tax assets	102.6		87.1
Deferred Tax Liabilities:
Property, plant and equipment	(8.6)		(8.0)
Operating lease right-of-use assets	(9.4)		(8.7)
Insurance, including self-insurance	(18.3)		(78.2)
Goodwill and other intangibles	(66.2)		(75.7)
Other	(4.4)		0.4
Total deferred tax liabilities	(106.9)		(170.2)


Net deferred tax liability	$	(4.3)	$	(83.1)

Applying the valuation allowance methodology discussed in Note 2. Basis of Presentation and Summary of Significant Accounting Policies, valuation allowances have been established for certain deferred income tax assets to the extent they are not expected to be realized within the particular tax carryforward period. The Company’s valuation allowance decreased by $7.3 million during the current year, primarily related to the write off of foreign tax credit carryforwards with a full valuation allowance that had been recorded under the separate return methodology utilized in the carve out financial statements as of December 31, 2019 that were retained by Fortive with the Separation.

As of December 31, 2020, the Company has federal, various state, and foreign net operating losses in the amounts of $1.8 million, $25.8 million, and $123.1 million, respectively. These net operating loss carryforwards have various expiration periods beginning in 2022. As of December 31, 2020, the Company had foreign tax credit carryforwards of $0.3 million and state tax credit carryforwards of $0.6 million, which begin to expire in 2030 and 2027, respectively.


	Percentage of Pretax Earnings
	2020		2019		2018
Statutory federal income tax rate	21.0	%	21.0	%	21.0	%
Increase (decrease) in tax rate resulting from:
State income taxes (net of federal income tax benefit)	3.1	%	2.8	%	3.1	%
Non-U.S. income taxed at different rate than U.S. statutory rate	4.0	%	0.8	%	2.2	%
Foreign derived intangible income taxation	(1.6)	%	(1.5)	%	(1.8)	%
Goodwill impairment	1.1	%	—	%	—	%
Compensation related	—	%	(0.8)	%	(0.5)	%
Non-taxable income	(3.3)	%	—	%	—	%
Uncertain tax positions	1.5	%	0.5	%	—	%
Other	(0.1)	%	—	%	—	%
Effective income tax rate	25.7	%	22.8	%	24.0	%

Our effective tax rate for 2020, 2019, and 2018 differs from the U.S. federal statutory rate of 21.0% due primarily to the effect of state taxes and foreign taxable earnings at a rate different from the U.S. federal statutory rate. Additionally, in 2020, there is a favorable impact related to non-taxable income which is partially offset by nondeductible book goodwill impairments and uncertain tax position accruals.

Following the Separation, we made income tax payments of $4.6 million. Prior to the Separation, we did not make any income tax payments related to “joint” tax returns as these liabilities were the responsibility of Fortive. Vontier did make income tax payments related to “separate” tax returns for which it was responsible. We recorded, through Net Parent investment, $1.4 million to establish the net income tax receivable as of the Separation.

As of December 31, 2020, gross unrecognized tax benefits were $17.4 million ($18.9 million total, including $2.8 million associated with interest and penalties, and net of the impact of $1.3 million of indirect tax benefits). As of December 31, 2019, gross unrecognized tax benefits were $14.5 million ($14.2 million total, including $2.7 million associated with interest and penalties, and net of the impact of $3.0 million of indirect tax benefits). We recognized approximately $0.3 million, $0.2 million, and $0.2 million in potential interest and penalties associated with uncertain tax positions during the years ended December 31, 2020, 2019, and 2018, respectively. To the extent taxes are not assessed with respect to uncertain tax positions, substantially all amounts accrued (including interest and penalties and net of indirect offsets) will be reduced and reflected as a reduction of the overall income tax provision. Unrecognized tax benefits and associated accrued interest and penalties are included in our income tax provision.


($ in millions)	2020		2019		2018
Unrecognized tax benefits, beginning of year	$	14.5	$	11.5	$	11.3
Additions based on tax positions related to the current year	8.5		0.4		0.2
Additions for tax positions of prior years	0.5		2.6		—
Reductions for tax positions of prior years	(0.6)		—		—
Lapse of statute of limitations	(0.3)		—		—
Settlements	(2.1)		—		—
Effect of foreign currency translation	0.3		—		—
Separation-related adjustments	(3.4)		—		—
Unrecognized tax benefits, end of year	$	17.4	$	14.5	$	11.5

We are routinely examined by various domestic and international taxing authorities. The amount of income taxes we pay is subject to audit by federal, state and foreign tax authorities, which may result in proposed assessments. The Company is subject

to examination in the United States, various states and foreign jurisdictions. In accordance with the Tax Matters Agreement with Fortive, the Company is liable for taxes arising from examinations of the following; (i) the Company’s initial U.S. federal taxable year October 9, 2020 through December 31, 2020; (ii) separate company state tax returns for all periods; (iii) joint state tax returns for the period October 9, 2020 through December 31, 2020; (iv) international separate company returns for all periods; and (v) joint international tax returns that include only Vontier legal entities for all periods. We review our global tax positions on a quarterly basis. Based on these reviews, the results of discussions and resolutions of matters with certain tax authorities, tax rulings and court decisions and the expiration of statutes of limitations reserves for contingent tax liabilities are accrued or adjusted as necessary. The Company does not believe that the total amount of unrecognized tax benefits will change by a material amount within the next 12 months due to the settlement of audits and expirations of statutes of limitations.

Pursuant to U.S. tax law, the Company’s initial U.S. federal income tax return is for the short taxable year October 9, 2020 through December 31, 2020. We expect to file our initial U.S. federal income tax return for the 2020 short tax year with the Internal Revenue Service (“IRS”) during 2021. Therefore, the IRS has not yet begun examination of the Company. The Company remains subject to tax audit for its separate company tax returns in various U.S. states for the tax years 2011 to 2020. Our operations in certain foreign jurisdictions remain subject to routine examination for the tax years 2007 to 2020.

As of December 31, 2020, the Company’s undistributed earnings of its foreign subsidiaries are intended to be permanently reinvested in non-U.S. operations. The operating plans, budgets and forecasts, and long-term and short-term financial requirements of the parent company and the subsidiaries indicate that there is no current or known future need to distribute cash from our foreign subsidiaries to Vontier Corporation for any purpose. Therefore, no U.S. deferred taxes have been recorded. A determination of the amount of the unrecognized deferred tax liability related to these undistributed earnings is not practicable due to the complexity and variety of assumptions necessary based on the manner in which the undistributed earnings would be repatriated.