Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law. The Act reduces the U.S. corporate income tax rate from a maximum of 35% to 21% for all corporations, effective January 1, 2018, and makes certain changes to U.S. taxation of income earned by foreign subsidiaries, capital expenditures, interest expense and various other items.

As a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, we re-measured our net deferred tax liabilities at December 31, 2017 and recognized a provisional tax benefit of approximately $1.1 billion in our consolidated statement of operations for the year ended December 31, 2017. As a result of finalizing our provisional amount recorded in 2017, we recorded a reduction to this amount for purchase price accounting adjustments resulting from the Level 3 acquisition and the tax reform impact on those adjustments of $92 million in 2018.

The Act also includes certain anti-abuse and base erosion provisions that may impact the amounts of U.S. tax that we pay with respect to income earned by our foreign subsidiaries. We have completed our analysis of the impact of the one-time repatriation tax and concluded that we do not have a tax liability under this provision. We have also completed our analysis of the anti-abuse and base erosion provisions and have recorded a tax expense of $11 million related to global intangible low-taxed income provisions of the Act and do not have a liability in relation to base erosion and anti-abuse tax provisions of the Act.



	Years Ended December 31,
	2018			2017		2016
	(Dollars in millions)
Income tax expense (benefit) was as follows:
Federal
Current	$	(576	)	82		335
Deferred	734			(988	)	5
State
Current	(22		)	21		27
Deferred	52			16		8
Foreign
Current	36			22		26
Deferred	(54		)	(2	)	(7	)
Total income tax expense (benefit)	$	170		(849	)	394



	Years Ended December 31,
	2018			2017		2016
	(Dollars in millions)
Income tax (benefit) expense was allocated as follows:
Income tax (benefit) expense in the consolidated statements of operations:
Attributable to income	$	170		(849	)	394
Stockholders' equity:
Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes	—			—		(2	)
Tax effect of the change in accumulated other comprehensive loss	(2		)	81		(109	)

The following is a reconciliation from the statutory federal income tax rate to our effective income tax rate:



	Years Ended December 31,
	2018		2017		2016
	(Percentage of pre-tax income)
Statutory federal income tax rate	21.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	(1.5	)%	3.9	%	2.3	%
Impairment of goodwill	(36.6	)%	—	%	—	%
Change in liability for unrecognized tax position	1.3	%	1.0	%	0.2	%
Tax reform	(5.9	)%	(209.8	)%	—	%
Net foreign income taxes	1.8	%	(0.7	)%	0.1	%
Foreign dividend paid to a domestic parent company	—	%	0.2	%	1.8	%
Research and development credits	0.9	%	(1.4	)%	(0.6	)%
Tax impact on sale of data centers and colocation business	—	%	5.0	%	—	%
Tax benefit of net operating loss carryback	9.1	%	—	%	—	%
Level 3 acquisition transaction costs	—	%	6.0	%	—	%
Other, net	(1.0	)%	3.6	%	(0.2	)%
Effective income tax rate	(10.9	)%	(157.2	)%	38.6	%

The effective tax rate for the year ended December 31, 2018 reflects a $572 million unfavorable impact of the non-deductible goodwill impairment and a $92 million unfavorable impact due to finalizing the impacts of tax reform. Partially offsetting these amounts is a $142 million benefit generated by a loss carryback to 2016. The effective tax rate for the year ended December 31, 2017 reflects the benefit of approximately $1.1 billion from the re-measurement of deferred taxes as noted above, a $27 million tax expense related to the sale of our colocation business and $32 million tax impact of non-deductible transaction costs related to the Level 3 acquisition. The effective tax rate for the year ended December 31, 2016 reflects a tax impact of $18 million from an intercompany dividend payment from one of our foreign subsidiaries to its domestic parent company that was made as part of our corporate restructuring in preparation for the sale of our colocation business.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:



	As of December 31,
	2018			2017
	(Dollars in millions)
Deferred tax assets
Post-retirement and pension benefit costs	$	1,111		1,321
Net operating loss carryforwards	3,445			3,951
Other employee benefits	162			112
Other	553			714
Gross deferred tax assets	5,271			6,098
Less valuation allowance	(1,331		)	(1,341	)
Net deferred tax assets	3,940			4,757
Deferred tax liabilities
Property, plant and equipment, primarily due to depreciation differences	(3,011		)	(2,935	)
Goodwill and other intangible assets	(3,303		)	(3,785	)
Other	(23		)	(16	)
Gross deferred tax liabilities	(6,337		)	(6,736	)
Net deferred tax liability	$	(2,397	)	(1,979	)

Of the $2.4 billion and $2.0 billion net deferred tax liability at December 31, 2018 and 2017, respectively, $2.5 billion and $2.4 billion is reflected as a long-term liability and $131 million and $434 million is reflected as a net noncurrent deferred tax asset at December 31, 2018 and 2017, respectively.

At December 31, 2018, we had federal NOLs of $7.3 billion, net of limitations of Section 382 of the Internal Revenue Code ("Section 382") and uncertain tax positions, for U.S. federal income tax purposes. If unused, the NOLs will expire between 2022 and 2037. The U.S. federal net operating loss carryforwards expire as follows:



Expiring	Amount
December 31,	(Dollars in millions)
2022	$	1,043
2023	1,440
2024	1,402
2025	1,042
2026	1,525
2027	375
2028	637
2029	645
2030	671
2031	732
2032	348
2033	238
2037	2,715
NOLs per return	12,813
Uncertain tax positions	(5,526		)
Financial NOLs	$	7,287

At December 31, 2018 we had state net operating loss carryforwards of $19 billion (net of uncertain tax positions). We also had foreign NOL carryforwards of $6 billion. At December 31, 2018, we had federal tax credits of $52 million. Our acquisitions of Level 3, Qwest and SAVVIS, Inc. caused "ownership changes" within the meaning of Section 382 for the acquired companies. As a result, our ability to use these NOLs and tax credits are subject to annual limits imposed by Section 382. Despite this, we expect to use substantially all of these tax attributes to reduce our future federal tax liabilities, although the timing of that use will depend upon our future earnings and future tax circumstances.

We establish valuation allowances when necessary to reduce the deferred tax assets to amounts we expect to realize. As of December 31, 2018, a valuation allowance of $1.3 billion was established as it is more likely than not that this amount of net operating loss, capital loss and tax credit carryforwards will not be utilized prior to expiration. Our valuation allowance at December 31, 2018 and 2017 is primarily related to foreign and state NOL carryforwards. This valuation allowance decreased by $10 million during 2018, primarily due to the impact of foreign exchange rate adjustments and state law changes.

A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from January 1 to December 31 for 2018 and 2017 is as follows:



	2018			2017
	(Dollars in millions)
Unrecognized tax benefits at beginning of year	$	40		16
Assumed in the acquisition of Level 3	—			18
Tax position of prior periods netted against deferred tax assets	1,338			2
Increase in tax positions taken in the current year	4			1
Increase in tax positions taken in the prior year	211			3
Decrease due to payments/settlements	(1		)	—
Decrease from the lapse of statute of limitations	(2		)	—
Decrease due to the reversal of tax positions taken in a prior year	(3		)	—
Unrecognized tax benefits at end of year	$	1,587		40

The total amount (including both interest and any related federal benefit) of unrecognized tax benefits that, if recognized, would impact the effective income tax rate was $256 million and $66 million at December 31, 2018 and 2017, respectively.

Our policy is to reflect interest expense associated with unrecognized tax benefits in income tax expense. We had accrued interest (presented before related tax benefits) of approximately $17 million and $56 million at December 31, 2018 and 2017, respectively.

We, or at least one of our subsidiaries, file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carryforwards are available.

Based on our current assessment of various factors, including (i) the potential outcomes of these ongoing examinations, (ii) the expiration of statute of limitations for specific jurisdictions, (iii) the negotiated settlement of certain disputed issues, and (iv) the administrative practices of applicable taxing jurisdictions, it is reasonably possible that the related unrecognized tax benefits for uncertain tax positions previously taken may decrease by up to $12 million within the next 12 months. The actual amount of such decrease, if any, will depend on several future developments and events, many of which are outside our control.