Income Taxes

12 Months Ended

Dec. 31, 2023

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):

	2023		2022		2021
Current:
Federal	$	477	$	456	$	436
State		151		130		132
Foreign		34		43		41
		662		629		609
Deferred:
Federal		73		20		(55)
State		2		30		(22)
Foreign		8		(1)		—
		83		49		(77)
Income tax expense	$	745	$	678	$	532

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

	2023		2022		2021
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	4.15		4.16		4.14
Federal tax credits	(3.23)		(2.81)		(2.69)
Taxing authority audit settlements and other tax adjustments	(0.02)		0.54		0.53
Tax impact of equity-based compensation transactions	(0.35)		(0.45)		(0.60)
Tax impact of impairments	1.87		0.02		(0.29)
Tax rate differential on foreign income	0.21		0.27		0.37
Other	1.03		0.51		0.16
Effective income tax rate	24.66	%	23.24	%	22.62	%

The comparability of our income tax expense for the reported periods has been primarily affected by (i) federal tax credits; (ii) the tax implications of impairments; (iii) an unfavorable increase in permanent differences between taxable income and accounting income associated with our treatment of landfill closure and post-closure costs; (iv) variations in our income before income taxes; (v) the realization of state net operating losses and credits; (vi) excess tax benefits associated with equity‑based compensation transactions and (vii) tax audit settlements.

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

	2023		2022		2021
Domestic	$	2,878	$	2,779	$	2,211
Foreign		143		139		138
Income before income taxes	$	3,021	$	2,918	$	2,349

Investments Qualifying for Federal Tax Credits — We have significant financial interests in entities established to invest in and manage low-income housing properties. In October 2023, 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 $260 million, comprised of a $183 million note payable, an initial cash payment of $20 million and $57 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 $203 million, representing the principal balance of the note and the initial cash payment. 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 2035 under Section 42 or Section 45D of the Internal Revenue Code.

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, 2023, 2022 and 2021, we recognized net losses of $66 million, $65 million and $51 million, respectively, and a reduction in our income tax expense of $108 million, $99 million and $74 million, respectively, primarily due to federal 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, 2023, 2022 and 2021, we recognized interest expense of $15 million, $14 million and $9 million, respectively, associated with our investments in low-income housing properties. See Note 18 for additional information related to these unconsolidated variable interest entities.

Tax Implications of Impairments — The non-cash impairment charges recognized during 2023 are not expected to be deductible for tax purposes. The impact of these non-deductible charges and the resulting difference between book and taxable income is an increase in income tax expense of $50 million. The non-cash impairment charges recognized during 2022 and 2021 were deductible for tax purposes. See Note 11 for more information related to our impairment charges.

Permanent Differences —During 2023, 2022 and 2021 we recognized additional income tax expense of $34 million, $14 million and $2 million, respectively, related to permanent differences between taxable income and accounting income. This increase is largely due to an increase in taxable interest income associated with the Company’s election to deduct landfill closure and post-closure costs for income tax purposes when incurred and accrued. The increase in taxable interest income is due to the increase in the applicable federal rate published by the IRS.

State Net Operating Losses and Credits — During 2023, 2022 and 2021, we recognized state net operating losses and credits resulting in a reduction in our income tax expense of $20 million, $8 million and $15 million, respectively.

Equity-Based Compensation — During 2023, 2022 and 2021, we recognized a reduction in our income tax expense of $14 million, $17 million and $18 million, respectively, for excess tax benefits related to the vesting or exercise of equity-based compensation awards.

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 $5 million, $6 million and $13 million for the years ended December 31, 2023, 2022 and 2021, 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, 2023 and 2022, the IRS deposit, net of reserve for uncertain tax positions, was classified as a component of other long-term assets in the Company’s Consolidated Balance Sheets.

In addition, we are in the examination phase of IRS audits for the 2022 and 2023 tax years and expect the audits 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.

Deferred Tax Assets (Liabilities)

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

	2023		2022
Deferred tax assets:
Net operating loss, capital loss and tax credit carry-forwards	$	137	$	155
Landfill and environmental remediation liabilities		195		216
Operating lease liabilities		128		131
Miscellaneous and other reserves, net		143		117
Subtotal		603		619
Valuation allowance		(181)		(143)
Deferred tax liabilities:
Property and equipment		(1,091)		(1,061)
Goodwill and other intangibles		(1,046)		(1,034)
Operating lease right-of-use assets		(111)		(114)
Net deferred tax liabilities	$	(1,826)	$	(1,733)

As of December 31, 2023, we had $2 million of federal net operating loss carry-forwards with expiration dates through 2026 and $2.3 billion of state net operating loss carry-forwards with expiration dates through 2043. We also had $8 million of federal capital loss carry-forwards with expiration dates through 2025, $39 million of foreign tax credit carry-forwards with expiration dates through 2033 and $9 million of state tax credit carry-forwards with expiration dates through 2039.

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):

	2023		2022		2021
Balance as of January 1	$	64	$	64	$	37
Additions based on tax positions related to the current year		6		5		22
Additions based on tax positions of prior years		—		—		18
Accrued interest		2		1		3
Settlements		—		—		(12)
Lapse of statute of limitations		(6)		(6)		(4)
Balance as of December 31	$	66	$	64	$	64

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, 2023, we had $54 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.