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INCOME TAXES
 12 Months Ended
Dec. 30, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES
NOTE 22: INCOME TAXES
Income Tax Provision
The provisions for current and deferred income taxes are summarized as follows:
Fiscal Year Ended
(In millions)December 30, 2022December 31, 2021January 1, 2021
Current:
United States$633 $415 $337 
International82 70 76 
State and local98 65 45 
813 550 458 
Deferred:
United States(523)(55)(150)
International(61)(34)(73)
State and local(17)(21)(1)
(601)(110)(224)
$212 $440 $234 
The total income tax provision above was attributable to continuing operations.
A reconciliation of the U.S. statutory income tax rate to our effective income tax rate is as follows:
Fiscal Year Ended
December 30, 2022December 31, 2021January 1, 2021
U.S. statutory income tax rate21.0 %21.0 %21.0 %
State taxes2.2 1.8 3.2 
International income— 0.4 0.4 
Non-deductible goodwill impairment14.2 0.6 5.8 
Research and development tax credit(13.0)(5.9)(9.2)
FDII deduction (5.1)(1.4)(1.3)
Change in valuation allowance0.1 0.9 0.5 
Impact of divestitures and reorganizations(1.3)4.1 — 
Equity-based compensation(1)
(0.2)(1.1)(1.0)
Settlement of tax audits(0.7)(1.1)(1.8)
Other items(0.5)— 0.1 
Effective income tax rate16.7 %19.3 %17.7 %
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(1)Includes non-deductible equity-based compensation and excess tax benefits from equity-based compensation.
As of December 30, 2022, we estimate our outside basis difference in foreign subsidiaries that are considered indefinitely reinvested to be approximately $1.0 billion. The outside basis difference is comprised predominantly of purchase accounting adjustments and to a lesser extent, undistributed earnings and other equity adjustments. In the event of a disposition of the foreign subsidiaries or a distribution, we may be subject to incremental U.S. income taxes, subject to an adjustment for foreign tax credits, and withholding taxes or income taxes payable to the foreign jurisdictions. As of December 30, 2022, the determination of the amount of unrecognized deferred tax liability related to the outside basis difference is not practicable.
Tax Law Changes
On August 16, 2022, President Biden signed into law the IRA which includes implementation of a new 15% CAMT, a 1% excise tax on stock repurchases and tax incentives for energy and climate initiatives. These provisions are effective beginning January 1, 2023, and we expect them to be immaterial to our financial results, financial position and cash flows.
Beginning in fiscal 2022, pursuant to provisions in the TCJA, research and experimental expenditures must be capitalized and amortized over five years instead of deductible when incurred.
Deferred Income Tax Assets (Liabilities)
The components of deferred income tax assets (liabilities) were as follows:
(In millions)December 30, 2022December 31, 2021
 
Deferred tax assets:
Accruals$227 $288 
Tax loss and credit carryforwards194 174 
Pension and other post-employment benefits13 107 
Operating lease obligation239 245 
Capitalized research and experimental expenditures646 — 
Other 359 329 
Valuation allowance(1)
(243)(257)
Deferred tax assets, net1,435 886 
Deferred tax liabilities:
Property, plant and equipment(167)(103)
Acquired intangibles(1,566)(1,663)
Operating lease right-of-use asset(210)(218)
Other(138)(161)
Deferred tax liabilities(2,081)(2,145)
Net deferred tax liabilities$(646)$(1,259)
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(1)The valuation allowance has been established to offset certain domestic and foreign deferred tax assets due to uncertainty regarding our ability to realize them in the future. The net change in our valuation allowance in fiscal 2022 and 2021 was a decrease of $14 million and an increase of $92 million, respectively.
Net deferred tax assets (liabilities) were classified as follows in our Consolidated Balance Sheet:
(In millions)December 30, 2022December 31, 2021
Deferred income tax assets$73 $85 
Deferred income tax liabilities(719)(1,344)
Net deferred tax liabilities$(646)$(1,259)
Tax loss and credit carryforwards at December 30, 2022 have expiration dates ranging from less than one year to no expiration date. A significant portion of the carryforwards are either indefinite or begin expiring 2035. The tax-effected amounts of Federal, international and state and local operating loss carryforwards at December 30, 2022 were $5 million, $70 million and $7 million, respectively. The tax-effected amounts of Federal, international and state and local capital loss carryforwards were not material at December 30, 2022. The amounts of Federal, international and state and local credit carryforwards at December 30, 2022 were $5 million, $8 million and $103 million, respectively.
Income from continuing operations before income taxes of international subsidiaries was $95 million and $29 million in fiscal 2022 and 2021, respectively, and loss from continuing operations before income taxes of international subsidiaries was $101 million in fiscal 2020. We paid $309 million, $358 million and $394 million in income taxes, net of refunds received, in fiscal 2022, 2021 and 2020, respectively.
Tax Uncertainties
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
Fiscal Year Ended
(In millions)December 30, 2022December 31, 2021January 1, 2021
Balance at beginning of period$587 $542 $438 
Additions based on tax positions taken during current period124 115 60 
Additions based on tax positions taken during prior periods4 11 21 
Additions for tax positions related to acquired entities— — 116 
Decreases based on tax positions taken during prior periods(76)(64)(82)
Decreases from lapse in statutes of limitations(6)(15)(3)
Decreases from settlements(20)(2)(8)
Balance at end of period$613 $587 $542 
As of December 30, 2022, we had $613 million of unrecognized tax benefits, of which $486 million would favorably impact our future tax rates in the event that the tax benefits are eventually recognized. As of December 31, 2021, we had $587 million of unrecognized tax benefits, of which $488 million would favorably impact our future tax rates in the event that the tax benefits are eventually recognized.
We recognize accrued interest and penalties related to unrecognized tax benefits as part of our income tax expense. We recognized interest and penalties of $12 million, $3 million and $14 million in fiscal 2022, 2021 and 2020, respectively. We had accrued $59 million for the potential payment of interest and penalties as of December 30, 2022 (and this amount was not included in the $613 million of unrecognized tax benefits balance at December 30, 2022 shown above). We had accrued $47 million for the potential payment of interest and penalties as of December 31, 2021 (and this amount was not included in the $587 million of unrecognized tax benefits balance at December 31, 2021 shown above).
We file numerous separate and consolidated income tax returns reporting our financial results and, where appropriate, those of our subsidiaries and affiliates, in the U.S. Federal jurisdiction and various state, local and foreign jurisdictions. Pursuant to the Compliance Assurance Process, the IRS is examining the Harris Federal tax returns for fiscal 2017, 2018, 2019 and 2020 and refund claims related to fiscal 2010 through 2016. In addition, legacy L3’s Federal tax returns for calendar years 2017 and 2018 are currently under IRS examination and refund claims related to calendar years 2012, 2013, 2015 and 2016 have been filed with the IRS.
We are currently under examination or contesting proposed adjustments by various state and international tax authorities for fiscal years ranging from 2013 through 2020. It is reasonably possible that there could be a significant decrease or increase to our unrecognized tax benefit balance during the course of the next twelve months as these examinations continue, other tax examinations commence or various statutes of limitations expire. An estimate of the range of possible changes is not practicable for the remaining unrecognized tax benefits because of the significant number of jurisdictions in which we do business and the number of open tax periods under various stages of examination.