Income Taxes

12 Months Ended

Dec. 31, 2025

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

As further described in Note 1M, New Accounting Pronouncements, we have elected to prospectively adopt the guidance in ASU 2023-09. The following table is a reconciliation of the U.S. federal statutory tax rate of 21 percent to our effective tax rate for the year ended December 31, 2025 in accordance with the guidance in ASU 2023-09.

Reconciliation of the U.S. federal statutory tax rate to effective tax rate:

(Millions of dollars)	2025
Taxes computed at U.S. statutory rates	$	154	21.0	%
Foreign tax effects:
Brazil
Statutory tax rate difference between Brazil and United States	8		1.1	%
Other	8		1.1	%
United Kingdom
Changes in valuation allowances	23		3.1	%
Luxembourg
Changes in valuation allowances	(19)		(2.6)	%
Other foreign jurisdictions	42		5.7	%
Effect of cross-border tax laws
Branch taxation	(13)		(1.7)	%
Foreign tax credits (withholding taxes)	(20)		(2.8)	%
Other cross-border	6		0.8	%
Other adjustments	4		0.6	%
Provision for income taxes and effective rate	$	193	26.3	%

The following table is a reconciliation of the U.S. federal statutory tax rate of 21 percent to our effective tax rate for the years ended December 31, 2024 and December 31, 2023 prior to the adoption of the guidance in ASU 2023-09.

Reconciliation of the U.S. federal statutory tax rate to effective tax rate:

(Millions of dollars)	2024				2023
Taxes computed at U.S. statutory rates	$	112	21.0	%	$	160	21.0	%
(Decreases) increases in taxes resulting from:
State income tax, net of federal tax(1)	1		0.2	%	5		0.5	%
Non-U.S. subsidiaries taxed at other than the U.S. rate	(14)		(2.6)	%	21		2.8	%
Valuation allowances	1		0.2	%	(14)		(1.8)	%
Tax law change for currency translation	(224)		(42.0)	%	—		—	%
Tax loss on divestiture of a non-U.S. subsidiary	48		9.0	%	—		—	%
Dividend withholding tax & indefinite reinvestment change	2		0.4	%	30		4.0	%
Foreign currency translation taxed at non-U.S. subsidiaries	8		1.5	%	(10)		(1.3)	%
Provision for income taxes	$	(66)	(12.4)	%	$	192	25.2	%

(1) Excludes amount included in Tax law change for currency translation line item.

Included in the line item above labeled “Non-U.S. subsidiaries taxed at other than the U.S. rate” are the effects of local and U.S. taxes related to earnings of non-U.S. subsidiaries and other permanent differences between tax and U.S. GAAP results.

The provision for income taxes in 2025 included a non-cash benefit of $19 million from a reduction in the valuation allowance against the deferred tax assets of a non-U.S. subsidiary. The provision for income taxes in 2024 included a $15 million increase in the valuation allowance for a U.S. deferred tax asset related to capital loss carryforwards. The provision for income taxes for 2025 and 2024 included 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 $23 million and $15 million non-cash expense, respectively. The provision for income taxes for 2023 included a decrease in the valuation allowance for non-U.S. deferred tax assets primarily due to a non-cash benefit of $22 million from a non-U.S. subsidiary which has returned to consistent and sustainable profitability. The provision for income taxes for 2023 included 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 an $8 million non-cash expense.

The provision for income taxes for 2024 included a non-cash tax benefit of $224 million due to the reversal of a deferred tax liability resulting from a U.S. tax law change related to currency translation.

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. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested profits is not feasible primarily due to our legal entity operating structure and the complexity of U.S. and local tax laws. 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.

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

(Millions of dollars)	2025		2024		2023
U.S.	$	376	$	173	$	384
Non-U.S.	358		360		376
Total	$	734	$	533	$	760

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 for income taxes for the years ended December 31, were as follows: 

(Millions of dollars)
Current income tax provision:	2025		2024		2023
U.S. Federal	$	(20)	$	117	$	36
Non-U.S.	143		109		150
U.S. State	(2)		2		3
	121		228		189
Deferred income tax provision (benefit):
U.S. Federal	72		(283)		33
Non-U.S.	(2)		9		(31)
U.S. State	2		(20)		1
	72		(294)		3
Total Provision for income taxes	$	193	$	(66)	$	192

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 $186 million and $255 million as of December 31, 2025 and 2024, respectively, and are included in Other liabilities in the Consolidated Statements of Financial Position.

In accordance with the guidance in ASU 2023-09, net income tax and related interest paid in 2025 to the following jurisdictions were as follows:

(Millions of dollars)
U.S. Federal	$	104
U.S. State	1
Non-U.S.(1)
Australia	42
Brazil	26
Canada	22
Other	41
Net income tax and related interest paid	$	236

(1) Includes federal, state and local jurisdictions within each country.

We paid net income tax and related interest of $140 million and $210 million in 2024 and 2023, respectively.

Accounting for income taxes under U.S. GAAP 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)	2025		2024
Assets:
Other assets	$	133	$	114
Liabilities:
Other liabilities	(402)		(330)
Deferred income taxes, net	$	(269)	$	(216)

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

(Millions of dollars)
Deferred income tax assets:	2025		2024
Allowance for credit losses	$	80	$	77
Tax carryforwards	136		122
Revenue timing differences	19		19
	235		218
Deferred income tax liabilities:
Capital assets, including lease basis differences	(438)		(367)
Undistributed profits of non-U.S. subsidiaries	(11)		(15)
	(449)		(382)
Valuation allowance for deferred income tax assets	(57)		(51)
Other, net	2		(1)
Deferred income taxes, net	$	(269)	$	(216)

At December 31, 2025, deferred tax assets for U.S. state losses of $4 million expire on or before 2045.

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.

Deferred tax assets for U.S. federal loss carryforwards total $16 million, of which $1 million expires before 2027 and $15 million expires before 2030. U.S. entities have recorded valuation allowances of $16 million against the U.S. federal loss carryforwards. Deferred tax assets for losses and credit carryforwards of non-U.S. entities of $20 million expire on or before 2042, while the remaining $96 million may be carried over indefinitely. Non-U.S. entities that have not yet demonstrated consistent and/or sustainable profitability to support the recognition of net deferred income tax assets have recorded valuation allowances of $41 million against tax carryforwards and other deferred 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)	2025		2024		2023
Reconciliation of unrecognized income tax benefits(1):
Balance at beginning of year	$	134	$	119	$	127
Additions for income tax positions related to current year	—		15		—
Additions for income tax positions related to prior year	4		—		—
Reductions for income tax positions related to prior year	—		—		(2)
Reductions for income tax positions related to settlements	—		—		(6)
Balance at end of year	$	138	$	134	$	119
Amount that, if recognized, would impact the effective tax rate	$	138	$	134	$	119

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

We classify interest and penalties on income taxes as a component of the provision for income taxes. During the year ended December 31, 2025, interest and penalties were $11 million. For the years ending December 31, 2024 and 2023, interest and penalties were not material. As of December 31, 2025 and 2024, the total amount of accrued interest and penalties was $19 million and $10 million, respectively.

We are subject to the continuous examination of our U.S. federal income tax returns by the IRS, and tax years 2017 to 2019 are currently under examination. In our major non-U.S. jurisdictions, tax years are typically subject to examination for three to ten years.