Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes

Income Taxes

8.    Income Taxes

Income Tax Expense

Our income tax expense consisted of the following for the year ended December 31 (in millions):

	2022		2021		2020
Current:
Federal	$	456	$	436	$	114
State		130		132		91
Foreign		43		41		27
		629		609		232
Deferred:
Federal		20		(55)		149
State		30		(22)		10
Foreign		(1)		—		6
		49		(77)		165
Income tax expense	$	678	$	532	$	397

The U.S. federal statutory income tax rate is reconciled to the effective income tax rate for the year ended December 31 as follows:

	2022		2021		2020
Income tax expense at U.S. federal statutory rate	21.00	%	21.00	%	21.00	%
State and local income taxes, net of federal income tax benefit	4.16		4.14		4.46
Federal tax credits	(2.81)		(2.69)		(3.78)
Taxing authority audit settlements and other tax adjustments	0.54		0.53		(0.17)
Tax impact of equity-based compensation transactions	(0.45)		(0.60)		(1.12)
Tax impact of impairments	0.02		(0.29)		(0.35)
Tax rate differential on foreign income	0.27		0.37		0.33
Other	0.51		0.16		0.57
Effective income tax rate	23.24	%	22.62	%	20.94	%

The comparability of our income tax expense for the reported periods has been primarily affected by (i) variations in our income before income taxes; (ii) federal tax credits; (iii) excess tax benefits associated with equity-based compensation transactions; (iv) the realization of state net operating losses and credits; (v) tax audit settlements; (vi) adjustments to our accruals and deferred taxes; (vii) the tax implications of divestitures and (viii) non-deductible transaction costs.

For financial reporting purposes, income before income taxes by source for the year ended December 31 was as follows (in millions):

	2022		2021		2020
Domestic	$	2,779	$	2,211	$	1,780
Foreign		139		138		113
Income before income taxes	$	2,918	$	2,349	$	1,893

Investments Qualifying for Federal Tax Credits — We have significant financial interests in entities established to invest in and manage low-income housing properties. In February 2022, we acquired an additional noncontrolling interest in a limited liability company established to invest in and manage low-income housing properties. Total consideration for this investment is expected to be $253 million, comprised of a $183 million note payable, an initial cash payment of $28 million and $42 million of interest payments expected to be paid over the life of the investment. At the time of the investment, we increased our investments in unconsolidated entities in our Consolidated Balance Sheet by $211 million, representing the principal balance of the note and the initial cash investment. We support the operations of these entities in exchange for a pro-rata share of the tax credits they generate. The low-income housing investments qualify for federal tax credits that we expect to realize through 2033 under Section 42 or Section 45D of the Internal Revenue Code. We also held a residual financial interest in an entity that owned a refined coal facility that qualified for federal tax credits under Section 45 of the Internal Revenue Code through 2019. The entity sold the majority of its assets in the first quarter of 2020, which resulted in a $7 million non-cash impairment of our investment at that time.

We account for our investments in these entities using the equity method of accounting, recognizing our share of each entity’s results of operations and other reductions in the value of our investments in equity in net losses of unconsolidated entities within our Consolidated Statements of Operations. During the years ended December 31, 2022, 2021 and 2020, we recognized net losses of $65 million, $51 million and $73 million (including the $7 million impairment of the refined coal facility noted above), respectively, and a reduction in our income tax expense of $99 million, $74 million and $87 million, respectively, due to tax credits realized from these investments as well as the tax benefits from the pre-tax losses realized. In addition, during the years ended December 31, 2022, 2021 and 2020, we recognized interest expense of $14 million, $9 million and $11 million, respectively, associated with our investments in low-income housing properties. See Note 18 for additional information related to these unconsolidated variable interest entities.

Equity-Based Compensation — During 2022, 2021 and 2020, we recognized a reduction in our income tax expense  of $17 million, $18 million and $27 million, respectively, for excess tax benefits related to the vesting or exercise of equity-based compensation awards.  

State Net Operating Losses and Credits — During 2022, 2021 and 2020, we recognized state net operating losses and credits resulting in a reduction in our income tax expense of $8 million, $15 million and $12 million, respectively.

Tax Audit Settlements — We file income tax returns in the U.S. and Canada, as well as other state and local jurisdictions. We are currently under audit by various taxing authorities, as discussed below, and our audits are in various stages of completion. During the reported periods, we settled various tax audits which resulted in a reduction in our income tax expense of $6 million, $13 million and $10 million for the years ended December 31, 2022, 2021 and 2020, respectively.

We participate in the IRS’s Compliance Assurance Process, which means we work with the IRS throughout the year towards resolving any material issues prior to the filing of our annual tax return. Any unresolved issues as of the tax return filing date are subject to routine examination procedures. In the fourth quarter of 2022, the Company received a notice of tax due for the 2017 tax year related to a remaining disagreement with the IRS. In response to the notice, the Company made a deposit of approximately $103 million with the IRS. The Company expects to seek a refund of the entire amount deposited with the IRS and litigate any denial of the claim for refund. As of December 31, 2022, the IRS deposit, net of reserve for uncertain tax positions, is classified as a component of other long-term assets in the Company’s Consolidated Balance Sheet.

In addition, we are in the examination phase of an IRS audit for the 2022 tax year and expect the audit to be completed within the next 18 months. We are also currently undergoing audits by various state and local jurisdictions for tax years that date back to 2014.

Adjustments to Accruals and Related Deferred Taxes — Adjustments to our accruals and related deferred taxes primarily due to the filing of our income tax returns, analysis of our deferred tax balances and uncertain tax positions, and changes in state and foreign laws resulted in an increase in our income tax expense of $1 million and $17 million for the years ended December 31, 2022 and 2021, respectively, and a reduction in our income tax expense of $3 million for the year ended December 31, 2020.

Tax Implications of Divestitures — During 2021, we recognized a pre-tax gain from the recognition of cumulative translation adjustments on the divestiture of certain non-strategic Canadian operations. This gain was not taxable, which benefited our effective income tax rate for the year ended December 31, 2021.

Non-Deductible Transaction Costs — During 2020, we recognized the detrimental tax impact of $27 million of non-deductible transaction costs related to our acquisition of Advanced Disposal. The tax rules require the capitalization of certain facilitative costs on the acquisition of stock of a company resulting in the applicable costs not being deductible for tax purposes.

Tax Legislation — The Inflation Reduction Act of 2022 (“IRA”) was signed into law by President Biden on August 16, 2022 and contains a number of tax-related provisions. The provisions of the IRA related to alternative fuel tax credits secure approximately $55 million of annual pre-tax benefit (to be recorded as a reduction in our operating expense) from tax credits through 2024. Additionally, we will incur an excise tax of 1% for future common stock repurchases, which will be reflected in the cost of purchasing the underlying shares as a component of treasury stock. The IRA contains a number of additional provisions related to tax incentives for investments in renewable energy production, carbon capture, and other climate actions, as well as the overall measurement of corporate income taxes. We are in the process of evaluating the IRA and identifying all potential impacts that may be applicable.

Unremitted Earnings in Foreign Subsidiaries — In the third quarter of 2020, we modified our permanent reinvestment assertion and began providing additional income taxes for the undistributed current year earnings of our foreign subsidiaries. No additional income taxes have been provided for any remaining undistributed foreign earnings prior to 2020 not subject to the one-time, mandatory transition tax, or any additional outside basis difference, as these amounts continue to be indefinitely reinvested in foreign operations.

Deferred Tax Assets (Liabilities)

The components of net deferred tax liabilities as of December 31 are as follows (in millions):

	2022		2021
Deferred tax assets:
Net operating loss, capital loss and tax credit carry-forwards	$	155	$	189
Landfill and environmental remediation liabilities		216		238
Operating lease liabilities		131		135
Miscellaneous and other reserves, net		117		113
Subtotal		619		675
Valuation allowance		(143)		(158)
Deferred tax liabilities:
Property and equipment		(1,061)		(1,064)
Goodwill and other intangibles		(1,034)		(1,027)
Operating lease right-of-use assets		(114)		(120)
Net deferred tax liabilities	$	(1,733)	$	(1,694)

As of December 31, 2022, we had $6 million of federal net operating loss carry-forwards with expiration dates through 2026 and $2.5 billion of state net operating loss carry-forwards with expiration dates through 2042. We also had $27 million of federal capital loss carry-forwards with expiration dates through 2026, $39 million of foreign tax credit carry-forwards with expiration dates through 2032 and $8 million of state tax credit carry-forwards with expiration dates through 2038.

We have established valuation allowances for uncertainties in realizing the benefit of certain tax loss and credit carry-forwards and other deferred tax assets. While we expect to realize the deferred tax assets, net of the valuation allowances, changes in estimates of future taxable income or in tax laws may alter this expectation.

Liabilities for Uncertain Tax Positions

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, including accrued interest, is as follows (in millions):

	2022		2021		2020
Balance as of January 1	$	64	$	37	$	40
Additions based on tax positions related to the current year		5		22		5
Additions based on tax positions of prior years		—		18		—
Accrued interest		1		3		2
Settlements		—		(12)		—
Lapse of statute of limitations		(6)		(4)		(10)
Balance as of December 31	$	64	$	64	$	37

These liabilities are included as a component of other long-term liabilities or as an offset to other long-term assets in our Consolidated Balance Sheets because the Company does not anticipate that settlement of the liabilities will require

payment of cash within the next 12 months. As of December 31, 2022, we had $53 million of net unrecognized tax benefits that, if recognized in future periods, would impact our effective income tax rate.

We recognize interest expense related to unrecognized tax benefits in our income tax expense, which was not material for the reported periods. We did not have any material accrued liabilities or expense for penalties related to unrecognized tax benefits for the reported periods.