Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes.

Income Taxes

NOTE 10. Income Taxes

Income Before Income Taxes

(Millions)	2020		2019		2018
United States	$	3,720	$	3,008	$	3,487
International		2,991		2,704		3,513
Total	$	6,711	$	5,712	$	7,000

Provision for Income Taxes

(Millions)	2020		2019		2018
Currently payable
Federal	$	720	$	534	$	698
State		123		59		109
International		633		673		763
Tax Cuts and Jobs Act (TCJA) non-current transition tax provision		—		—		176
Deferred
Federal		(59)		(32)		(38)
State		(20)		(26)		(17)
International		(79)		(78)		(54)
Total	$	1,318	$	1,130	$	1,637

Components of Deferred Tax Assets and Liabilities

(Millions)	2020		2019
Deferred tax assets:
Accruals not currently deductible
Employee benefit costs	$	232	$	169
Product and other claims		338		280
Miscellaneous accruals		153		119
Pension costs		849		824
Stock-based compensation		231		218
Net operating/capital loss/tax credit carryforwards		148		150
Foreign tax credits		100		66
Currency translation		90		—
Inventory		54		70
Other		112		113
Gross deferred tax assets		2,307		2,009
Valuation allowance		(135)		(158)
Total deferred tax assets	$	2,172	$	1,851
Deferred tax liabilities:
Product and other insurance receivables	$	(4)	$	—
Accelerated depreciation		(607)		(580)
Intangible amortization		(1,023)		(1,021)
Currency translation		—		(30)
Other		—		—
Total deferred tax liabilities	$	(1,634)	$	(1,631)
Net deferred tax assets	$	538	$	220

The net deferred tax assets are included as components of Other Assets and Other Liabilities within the Consolidated Balance Sheet. See Note 7 “Supplemental Balance Sheet Information” for further details.

As of December 31, 2020, the Company had tax effected operating losses, capital losses, and tax credit carryovers for federal (approximately $108 million), state (approximately $84 million), and international (approximately $58 million), with all amounts before limitation impacts and valuation allowances. Federal tax attribute carryovers will expire after one to 10 years, the state after one to 11 years, and the international after one year to an indefinite carryover period. As of December 31, 2020, the Company has provided $135 million of valuation allowance against certain of these deferred tax assets based on management’s determination that it is more-likely-than-not that the tax benefits related to these assets will not be realized.

Reconciliation of Effective Income Tax Rate

	2020		2019		2018
Statutory U.S. tax rate	21.0	%	21.0	%	21.0	%
State income taxes - net of federal benefit	1.2		0.5		1.0
International income taxes - net	(1.2)		0.2		0.2
Global Intangible Low Taxed Income (GILTI)	0.8		1.8		1.1
Foreign Derived Intangible Income (FDII)	(1.8)		(2.9)		(1.3)
U.S. TCJA enactment - net impacts	—		—		2.5
U.S. research and development credit	(1.0)		(1.7)		(1.5)
Reserves for tax contingencies	0.5		2.3		1.2
Employee share-based payments	(0.5)		(1.3)		(1.4)
All other - net	0.6		(0.1)		0.6
Effective worldwide tax rate	19.6	%	19.8	%	23.4	%

The effective tax rate for 2020 was 19.6 percent, compared to 19.8 percent in 2019, a decrease of 0.2 percentage points, impacted by several factors. Primary factors that decreased the effective tax rate for 2020 included geographical income mix and adjustments to uncertain tax positions. These decreases were partially offset by decreased benefit from stock options.

The effective tax rate for 2019 was 19.8 percent, compared to 23.4 percent in 2018, a decrease of 3.6 percentage points, impacted by several factors. Primary factors that decreased the effective tax rate for 2020 included prior year measurement period adjustments related to 2017 Tax Cuts and Jobs Act (TCJA), prior year resolution of the NRD lawsuit (as described in Note 16), and geographical income mix. These decreases were partially offset by the deconsolidation of the Venezuelan subsidiary, adjustments to uncertain tax positions, and significant litigation-related charges.

The TCJA was enacted in December 2017, after which the SEC staff issued Staff Accounting Bulletin (SAB) 118, which provided a measurement period of up to one year from the TCJA’s enactment date for companies to complete their accounting under ASC 740. In connection with the enactment of the TCJA, the Company recorded net charges of $176 million as measurement period adjustments in 2018, which are comprised of both a transition tax in addition to a remeasurement of deferred tax assets/liabilities and other impacts.

The TCJA’s transition tax is payable over eight years beginning in 2018. As of December 31, 2020 and December 31, 2019, 3M reflected $584 million and $653 million, respectively, in long term income taxes payable. As of December 31, 2020 and December 31, 2019, 3M reflected $69 million and $33 million, respectively, payable within one year associated with the transition tax.

The IRS has completed its field examination of the Company’s U.S. federal income tax returns for 2005 through 2016, but the years have not closed as the Company is in the process of resolving issues identified during those examinations. The Company is under examination or in appeals for 2017 through 2018. In addition to the U.S. federal examination, there is also audit activity in several U.S. state and foreign jurisdictions where the Company is subject to ongoing tax examinations and governmental assessments, which could be impacted by evolving political environments in those jurisdictions. As of December 31, 2020, no taxing authority proposed significant adjustments to the Company’s tax positions for which the Company is not adequately reserved.

It is reasonably possible that the amount of unrecognized tax benefits could significantly change within the next 12 months. The Company has ongoing federal, state and international income tax audits in various jurisdictions and evaluates uncertain tax positions that may be challenged by local tax authorities and not fully sustained. These uncertain tax positions are reviewed on an ongoing basis and adjusted in light of facts and circumstances including progression of tax audits, developments in case law and closing of statutes of limitation. At this time, the Company is not able to estimate the range by which these potential events could impact 3M’s unrecognized tax benefits within the next 12 months.

The Company recognizes the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (UTB) is as follows:

Federal, State and Foreign Tax

(Millions)	2020		2019		2018
Gross UTB Balance at January 1	$	1,167	$	647	$	530
Additions based on tax positions related to the current year		74		76		129
Additions for tax positions of prior years		106		132		146
Additions related to recent acquisitions		—		396		—
Reductions for tax positions of prior years		(173)		(56)		(123)
Settlements		(8)		(4)		(17)
Reductions due to lapse of applicable statute of limitations		(53)		(24)		(18)
Gross UTB Balance at December 31	$	1,113	$	1,167	$	647
Net UTB that would impact the effective tax rate at December 31	$	1,145	$	1,178	$	655

The total amount of UTB, if recognized, would affect the effective tax rate by $1,145 million as of December 31, 2020, $1,178 million as of December 31, 2019, and $655 million as of December 31, 2018. The ending net UTB results from adjusting the gross balance for deferred items, interest and penalties, and deductible taxes. The net UTB is included as components of Other Assets, Accrued Income Taxes, and Other Liabilities within the Consolidated Balance Sheet.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company recognized in the consolidated statement of income on a gross basis approximately $21 million of expense, $33 million of expense, and $12 million of expense in 2020, 2019, and 2018, respectively. The amount of interest and penalties recognized may be an expense or benefit due to new or remeasured unrecognized tax benefit accruals. At December 31, 2020, and December 31, 2019, accrued interest and penalties in the consolidated balance sheet on a gross basis were $126 million and $102 million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

As a result of certain employment commitments and capital investments made by 3M, income from certain manufacturing activities in the following countries is subject to reduced tax rates or, in some cases, is exempt from tax for years through the following: China (2022), Switzerland (2023), Singapore (2025), and Brazil (2029). The income tax benefits attributable to the tax status of these subsidiaries are estimated to be $163 million (28 cents per diluted share) in 2020, $127 million (22 cents per diluted share) in 2019, and $227 million (38 cents per diluted share) in 2018.

As of December 31, 2020, the Company has approximately $15 billion of undistributed earnings in its foreign subsidiaries. During the third quarter of 2020, 3M determined that approximately $5 billion of these earnings are no longer considered permanently reinvested. The incremental tax cost to repatriate these earnings to the US is immaterial. The Company has not provided deferred taxes on approximately $10 billion of undistributed earnings from non-U.S. subsidiaries as of December 31, 2020 which are indefinitely reinvested in operations. Because of the multiple avenues by which to repatriate the earnings to minimize tax cost, and because a large portion of these earnings are not liquid, it is not practical to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.

In March 2020, in response to the impact of the COVID-19 pandemic in the U.S. and across the globe, the United States Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act. In December 2020, Congress passed a second relief package, Consolidated Appropriations Act, 2021. The enactment period impacts to 3M were immaterial to income tax expense.