INCOME TAXES

On December 22, 2017, U.S. tax legislation was enacted containing a broad range of tax reform provisions including a corporate tax rate reduction and changes in the U.S. taxation of non-U.S. earnings. In 2018, measurement period adjustments of $12 million increased the provisionally estimated net benefit of $151 million recognized during the fourth quarter of 2017. A $7 million benefit, resulting from the 2017 tax year return to provision adjustments, revised the estimated impact of the write-down of U.S. net deferred tax liabilities to reflect the reduction in the U.S. corporate tax rate from 35 percent to 21 percent. A $5 million benefit revised the estimated cost of a mandatory deemed repatriation of non-U.S. earnings.

As a result of U.S. tax reform legislation, distributions of profits from non-U.S. subsidiaries are not expected to cause a significant incremental U.S. tax impact in the future. However, these distributions may be subject to non-U.S. withholding taxes if profits are distributed from certain jurisdictions. We have not recorded a deferred tax liability for withholding taxes in non-U.S. jurisdictions where earnings are considered indefinitely reinvested. If management intentions or U.S. tax law changes in the future, there could be an impact on the provision for income taxes to record an incremental tax liability in the period the change occurs.

A reconciliation of the U.S. federal statutory rate to the effective rate for the years ended December 31, was as follows:



(Millions of dollars)
	2019					2018					2017
Taxes computed at U.S. statutory rates	$	132		21.0	%	$	91		21.0	%	$	206		35.0	%
(Decreases) increases in taxes resulting from:
State Income Tax, net of Federal Tax	1			0.2	%	1			0.2	%	2			0.3	%
Subsidiaries' results subject to tax rates other than U.S. statutory rates	32			5.1	%	28			6.5	%	(31		)	(5.3	)%
Income from non-U.S. subsidiaries taxed at U.S. statutory rates, net of foreign tax credits⁽¹⁾	2			0.3	%	—			—	%	(16		)	(2.7	)%
Foreign currency translation taxed at non-U.S. subsidiaries	(1		)	(0.2	)%	(1		)	(0.2	)%	(12		)	(2.0	)%
U.S. deferred tax rate change	—			—	%	(7		)	(1.6	)%	(334		)	(56.6	)%
Mandatory deemed repatriation of non-U.S. earnings	—			—	%	(5		)	(1.2	)%	183			31.0	%
Prior year tax adjustments	9			1.4	%	11			2.5	%	—			—	%
Valuation allowances	21			3.4	%	(7		)	(1.6	)%	—			—	%
Other, net	—			—	%	(3		)	(0.7	)%	(2		)	(0.4	)%
Provision (benefit) for income taxes	$	196		31.2	%	$	108		24.9	%	$	(4	)	(0.7	)%

⁽¹⁾Excludes provisionally estimated net benefit from 2017 U.S. tax reform.

The provision for income taxes includes a prior year net tax charge of $9 million for 2019, compared with $11 million for 2018, to reduce non-U.S. deferred tax assets in certain jurisdictions to balances supporting the expected reversal of temporary differences between tax and U.S. GAAP balances.

The provision for income taxes for 2019 also includes an increase in valuation allowance for non-U.S. deferred tax assets due to a decrease in consistent and/or sustainable profitability to support their recognition in certain jurisdictions, resulting in a $21 million non-cash expense.

The provision for income taxes for 2018 includes a decrease in the valuation allowance for non-U.S. deferred tax assets due to improved U.S. GAAP profits expected to recur in certain jurisdictions, resulting in a $7 million non-cash benefit.

The components of Profit before income taxes for the years ended December 31, were as follows:



(Millions of dollars)
	2019		2018		2017
U.S.	$	257	$	213	$	285
Non-U.S.	371		220		305
Total	$	628	$	433	$	590

Profit before income taxes, as shown above, is based on the location of the entity to which such earnings are attributable. Where an entity’s earnings are subject to taxation, however, may not correlate solely to where an entity is located. Thus, the income tax provision shown below as U.S. or non-U.S. may not correspond to the earnings shown above.

The components of the Provision (benefit) for income taxes were as follows for the years ended December 31:



(Millions of dollars)
	2019			2018			2017
Current income tax provision (benefit):
U.S.	$	13		$	(46	)	$	157
Non-U.S.	161			112			102
State (U.S.)	2			1			1
	176			67			260

Deferred income tax provision (benefit):
U.S.	32			67			(239		)
Non-U.S.	(11		)	(26		)	(28		)
State (U.S.)	(1		)	—			3
	20			41			(264		)

Total Provision (benefit) for income taxes	$	196		$	108		$	(4	)

Current income tax provision is the amount of income taxes reported or expected to be reported on our income tax returns. We join Caterpillar in the filing of a consolidated U.S. Federal income tax return and certain state income tax returns. In accordance with our tax sharing agreement with Caterpillar, we generally pay to or receive from Caterpillar our allocated share of income taxes or credits reflected in these consolidated filings. This amount is calculated on a separate return basis by taking taxable income times the applicable statutory tax rate and includes payment for certain tax attributes earned during the year.

Income taxes payable were $160 million and $135 million as of December 31, 2019 and 2018, respectively, and are included in Other liabilities in the Consolidated Statements of Financial Position.

Accounting for income taxes under generally accepted accounting principles requires individual tax-paying entities of the Company to offset deferred income tax assets and liabilities within each particular tax jurisdiction and present them as a single amount in the Consolidated Statements of Financial Position. Amounts in different tax jurisdictions cannot be offset against each other. The amounts of deferred income taxes at December 31, included in the following lines in our Consolidated Statements of Financial Position were:



(Millions of dollars)
	2019			2018
Assets:
Other assets	$	118		$	108
Liabilities:
Other liabilities	(680		)	(653		)
Deferred income taxes, net	$	(562	)	$	(545	)

Our consolidated deferred income taxes consisted of the following components as of December 31:



(Millions of dollars)
	2019			2018
Deferred income tax assets:
Allowance for credit losses	$	124		$	111
Tax carryforwards	39			44
	163			155

Deferred income tax liabilities (primarily lease basis differences)	(508		)	(508		)

Valuation allowance for deferred income tax assets	(23		)	(2		)

Deferred income tax on translation adjustment	(194		)	(190		)

Deferred income taxes, net	$	(562	)	$	(545	)

As of December 31, 2019, amounts and expiration dates of net operating loss (NOL) carryforwards in various U.S. state taxing jurisdictions were:



(Millions of dollars)
2020		2021		2022		2023		2024-2039		Unlimited		Total
$	—	$	5	$	5	$	6	$	93	$	5	$	114

The gross deferred income tax asset associated with these NOL carryforwards is $9 million as of December 31, 2019, partially offset by a valuation allowance of $2 million.

In some U.S. state income tax jurisdictions, we join with other Caterpillar entities in filing combined income tax returns. In other U.S. state income tax jurisdictions, we file on a separate, stand-alone basis.

At December 31, 2019, approximately $6 million of U.S. foreign tax credits were available for carryforward. These credits expire in 2028.

As of December 31, 2019, amounts and expiration dates of NOL carryforwards in various non-U.S. taxing jurisdictions were:



(Millions of dollars)
2020		2021		2022		2023		2024-2034		Unlimited		Total
$	—	$	9	$	2	$	6	$	6	$	121	$	144

Valuation allowances of $21 million have been recorded at certain non-U.S. subsidiaries that have not yet demonstrated consistent and/or sustainable profitability to support the recognition of net deferred income tax assets.

A reconciliation of the beginning and ending amounts of gross unrecognized income tax benefits for uncertain income tax positions, including positions impacting only the timing of income tax benefits was as follows:



(Millions of dollars)
	2019		2018		2017
Reconciliation of unrecognized income tax benefits⁽¹⁾:
Balance at beginning of year	$	119	$	—	$	4
Additions for income tax positions related to current year	—		119		—
Reductions for income tax positions related to settlements⁽²⁾	—		—		(4		)
Balance at end of year	$	119	$	119	$	—

Amount that, if recognized, would impact the effective tax rate	$	119	$	119	$	—

⁽¹⁾Foreign currency translation amounts are included within each line as applicable.

⁽²⁾Includes cash payment or other reduction of assets to settle liability.

We classify interest and penalties on income taxes as a component of the provision for income taxes. During the years ended December 31, 2019, 2018 and 2017, we recognized an expense of less than $1 million, a benefit of $1 million and an expense of $2 million in interest and penalties, respectively. As of December 31, 2019 and 2018, the total amount of accrued interest and penalties was less than $1 million.

On January 31, 2018, Caterpillar received a Revenue Agent's Report (RAR) from the IRS indicating the end of field examination of our U.S. tax returns for 2010 to 2012. Tax years prior to 2007 are generally no longer subject to U.S. tax assessment. In our major non-U.S. jurisdictions, tax years are typically subject to examination for three to ten years. Due to the uncertainty related to the timing and potential outcome of audits, we cannot estimate the range of reasonably possible change in unrecognized tax benefits in the next 12 months.