Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The components of the income tax expense are as follows:

	Years Ended December 31,
	2022		2021	2020
	(Dollars in millions)
Income tax expense:
Federal
Current	$	838	5	5
Deferred	(332)		514	338
State
Current	283		42	50
Deferred	(191)		72	55
Foreign
Current	32		23	29
Deferred	(73)		12	(27)
Total income tax expense	$	557	668	450

	Years Ended December 31,
	2022		2021	2020
	(Dollars in millions)
Income tax expense was allocated as follows:
Income tax expense in the consolidated statements of operations:
Attributable to income	$	557	668	450
Stockholders' equity:
Tax effect of the change in accumulated other comprehensive loss	$	297	222	17

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

	Years Ended December 31,
	2022		2021		2020
	(Percentage of pre-tax (loss) income)
Statutory federal income tax rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal income tax benefit	(8.8)	%	3.3	%	(10.8)	%
Goodwill impairment	(68.9)	%	—	%	(71.0)	%
Change in liability for unrecognized tax position	(0.2)	%	0.1	%	(0.6)	%
Legislative changes to Global Intangible Low-Taxes Income ("GILTI")	—	%	—	%	1.8	%
Nondeductible executive stock compensation	(0.1)	%	0.2	%	(1.6)	%
Change in valuation allowance	0.9	%	—	%	2.6	%
Net foreign income taxes	3.0	%	0.6	%	(0.6)	%
Research and development credits	1.1	%	(0.5)	%	1.6	%
Divestitures of businesses(1)	(4.0)	%	—	%	—	%
Other, net	(0.2)	%	—	%	0.1	%
Effective income tax rate	(56.2)	%	24.7	%	(57.5)	%

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(1)Includes GILTI incurred as a result of the sale of our Latin American business.

The effective tax rate for the year ended December 31, 2022 includes a $682 million unfavorable impact of non-deductible goodwill impairments and $128 million unfavorable impact related to incurring GILTI as a result of the sale of our Latin American business. The effective tax rate for the year ended December 31, 2020 includes a $555 million unfavorable impact of non-deductible goodwill impairments, a $14 million favorable impact in tax regulations passed in 2020 allowing a high tax exception related to our tax exposure of to GILTI, as well as a $20 million benefit related to the release of previously established valuation allowances against capital losses.

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,
	2022(1)		2021(1)
	(Dollars in millions)
Deferred tax assets
Post-retirement and pension benefit costs	$	725	978
Net operating loss carryforwards	871		2,463
Other employee benefits	85		96
Other	519		554
Gross deferred tax assets	2,200		4,091
Less valuation allowance	(550)		(1,566)
Net deferred tax assets	1,650		2,525
Deferred tax liabilities
Property, plant and equipment, primarily due to depreciation differences	(3,046)		(3,941)
Goodwill and other intangible assets	(1,634)		(2,473)
Gross deferred tax liabilities	(4,680)		(6,414)
Net deferred tax liability	$	(3,030)	(3,889)

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(1)Excludes $138 million of deferred tax assets and $38 million of deferred tax liabilities related to the EMEA business that were classified as held for sale as of December 31, 2022. Excludes $46 million of deferred tax assets and $129 million of deferred tax liabilities related to the Latin American business sold on August 1, 2022 that were classified as held for sale as of December 31, 2021. There were no material deferred tax amounts classified as held for sale related to the ILEC business.

Of the $3.0 billion and $3.9 billion net deferred tax liability at December 31, 2022 and 2021, respectively, $3.2 billion and $4.0 billion is reflected as a long-term liability and $133 million and $160 million is reflected as a net noncurrent deferred tax asset, in other, net on our consolidated balance sheets at December 31, 2022 and 2021, respectively.

Income taxes payable as of December 31, 2022 and 2021 were $943 million and $3 million, respectively. The increase to our payable in the current period is primarily driven by the sale of our Latin American and ILEC businesses.

At December 31, 2022, we had federal NOLs of $1.0 billion, net of expirations from Section 382 limitations and uncertain tax positions, for U.S. federal income tax purposes. 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. Our ability to use these NOLs is subject to annual limits imposed by Section 382. As a result, we anticipate that our cash income tax liabilities will increase substantially in future periods. If unused, the NOLs will expire between 2028 and 2033. The federal NOLs will expire as follows:

Expiring	Amount
December 31,	(Dollars in millions)
2028	572
2029	645
2030	668
2031	733
2032	348
2033	238
NOLs per return	3,204
Uncertain tax positions	(2,190)
Financial NOLs	$	1,014

At December 31, 2022 we had state net operating loss carryforwards of $13 billion (net of uncertain tax positions). 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.

We establish valuation allowances when necessary to reduce the deferred tax assets to amounts we expect to realize. As of December 31, 2022, a valuation allowance of $550 million 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, 2022 and 2021 is primarily related to NOL carryforwards. This valuation allowance decreased by $1.0 billion during 2022, primarily due to the impact of adjustments related to the planned divestiture of our EMEA business, including classification of a portion of the valuation allowance as held for sale.

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 2022 and 2021 is as follows:

	2022		2021
	(Dollars in millions)
Unrecognized tax benefits at beginning of year	$	1,375	1,474
Increase in tax positions of the current year netted against deferred tax assets	—		1
Increase in tax positions of prior periods netted against deferred tax assets	—		—
Decrease in tax positions of the current year netted against deferred tax assets	—		(101)
Decrease in tax positions of prior periods netted against deferred tax assets	(661)		(1)
Increase in tax positions taken in the current year	634		4
(Decrease) increase in tax positions taken in the prior year	(3)		2
Decrease due to payments/settlements	—		(3)
Decrease from the lapse of statute of limitations	—		(1)
Decrease related to divestitures of businesses	$	(27)	—
Unrecognized tax benefits at end of year	$	1,318	$	1,375

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 $847 million and $273 million at December 31, 2022 and 2021, 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 $26 million and $24 million at December 31, 2022 and 2021, 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 2002. 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 $1 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.