Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

In response to the COVID-19 outbreak, global legislation concerning income taxes was passed throughout 2020. The Company assessed the applicability of the stimulus elements within the global legislation, and it did not have a material impact on the Company’s consolidated financial statements in 2020 or 2021. The primary benefit to the Company was the delay of payment of U.S. federal and state income taxes as well as U.S. federal payroll withholding taxes until subsequent periods.

During 2019, the Company recorded an increase to the tax provision of $74.3 million related to the reversal of all net tax benefits recognized in previous tax years from federal renewable energy tax credit funds with DC Solar Solutions, Inc. and certain of its affiliates. The facts relating to the Company’s investments in the funds continue to be developed. There were no adjustments recognized in the Company’s tax provision for this matter in 2020 or 2021.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using the enacted tax rates and laws that are currently in effect.

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2021, 2020 and 2019 were as follows:

	2021		2020		2019
Deferred tax assets:
Environmental and other similar items	$	73.2	$	82.9	$	83.5
Employee related and benefit items	170.3		166.6		129.3
Operating lease liabilities	463.1		448.9		430.6
Other items	192.0		232.8		204.0
Total deferred tax assets	898.6		931.2		847.4
Deferred tax liabilities:
Intangible assets and Property, plant, and equipment	1,053.7		1,156.4		1,232.6
LIFO inventories	68.6		87.6		80.5
Operating lease right-of-use assets	448.4		434.0		417.8
Other items	33.3		31.7		28.1
Total deferred tax liabilities	1,604.0		1,709.7		1,759.0
Net deferred tax liabilities	$	705.4	$	778.5	$	911.6

As of December 31, 2021, the Company’s net deferred income tax liability relates primarily to deferred tax liabilities recorded for intangible assets acquired through the Valspar acquisition.

Netted against the Company’s other deferred tax assets were valuation allowances of $97.2 million, $104.6 million and $84.6 million at December 31, 2021, 2020 and 2019, respectively. The decrease in the valuation allowance in 2021 is primarily due to the utilization of certain foreign tax credits during the year. The Company has $17.6 million of domestic net operating loss carryforwards acquired through acquisitions that have expiration dates through the tax year 2037, foreign tax credits of $15.3 million that expire in calendar years 2028 through 2031 and foreign net operating losses of $327.5 million. The foreign net operating losses are related to various jurisdictions that provide for both indefinite carryforward periods and others with carryforward periods that range from the tax years 2021 to 2041.

Significant components of the provisions for income taxes were as follows:

	2021		2020		2019
Current:
Federal	$	331.2	$	457.7	$	440.1
Foreign	86.5		92.0		71.1
State and local	46.8		84.4		60.4
Total current	464.5		634.1		571.6
Deferred:
Federal	(36.5)		(102.7)		(83.7)
Foreign	(40.4)		(19.0)		(32.3)
State and local	(3.4)		(23.6)		(15.1)
Total deferred	(80.3)		(145.3)		(131.1)
Total provisions for income taxes	$	384.2	$	488.8	$	440.5

Under provisions of the Tax Cuts and Jobs Act (Tax Act), the Company received an income tax benefit of $12.2 million, $12.0 million and $10.4 million in 2021, 2020 and 2019, respectively, related to foreign derived intangible income and incurred income tax expense of $2.7 million, $7.0 million and $7.9 million in 2021, 2020 and 2019, respectively, related to Global Intangible Low Taxed Income (GILTI). The Company has made an accounting policy election to record GILTI as a period cost.

Significant components of income before income taxes as used for income tax purposes, were as follows:

	2021		2020		2019
Domestic	$	2,106.8	$	2,317.9	$	1,899.6
Foreign	141.8		201.3		82.2
	$	2,248.6	$	2,519.2	$	1,981.8

A reconciliation of the statutory federal income tax rate to the effective tax rate follows: 

	2021		2020		2019
Statutory federal income tax rate	21.0	%	21.0	%	21.0	%
Effect of:
State and local income taxes	2.2		2.5		2.3
Investment vehicles	(0.8)		(0.8)		(1.3)
Employee share-based payments	(4.8)		(3.8)		(3.3)
Research and development credits	(0.6)		(0.5)		(1.1)
Amended returns and refunds	0.2		0.3		0.1
Tax credit reversal	—		—		3.7
Other - net	(0.1)		0.7		0.8
Reported effective tax rate	17.1	%	19.4	%	22.2	%

The decrease in the effective tax rate for 2021 compared to 2020 was primarily due to an increase in tax benefits related to employee share-based payments and the net favorable impact of various other tax benefits received by the Company in 2021 compared to 2020.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The IRS is currently auditing the Company’s 2013, 2014, 2015 and 2016 income tax returns. As a result of these audits, certain adjustments have been assessed. The Company has filed a protest, submitted additional information for consideration, and is currently in the appeals process with the IRS. The Company continues to evaluate the adjustments and believes that it is adequately reserved for any potential exposure. As of December 31, 2021, the U.S. federal statute of limitations has not expired for the 2013 through 2020 tax years.

As of December 31, 2021, the Company is subject to non-U.S. income tax examinations for the tax years of 2014 through 2020. In addition, the Company is subject to state and local income tax examinations for the tax years 1998 through 2021.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	2021		2020		2019
Balance at beginning of year	$	227.0	$	203.0	$	89.5
Additions based on tax positions related to the current year	14.0		13.8		14.9
Additions for tax positions of prior years	23.1		16.4		107.9
Reductions for tax positions of prior years	(22.1)		(3.3)		(3.6)
Settlements	(5.6)		(2.0)		—
Lapses of statutes of limitations	(7.9)		(0.9)		(5.7)
Balance at end of year	$	228.5	$	227.0	$	203.0

The increase in unrecognized tax benefits was primarily related to the reversal of benefits recognized in previous tax years from federal research and development credits, partially offset by a number of positions taken on prior year income tax returns filed in the U.S. and various foreign jurisdictions that were no longer deemed to be at risk. At December 31, 2021, 2020 and 2019, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $218.9 million, $216.3 million and $195.3 million, respectively.

Included in the balance of unrecognized tax benefits at December 31, 2021 is $13.7 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits comprised primarily of items related to federal audits of partnership investments and expiring statutes in federal, foreign and state jurisdictions.

The Company classifies all income tax related interest and penalties as income tax expense. During the year ended December 31, 2021, there was a decrease in income tax interest and penalties of $2.7 million. During the years ended December 31, 2020 and 2019, there was an increase in income tax interest and penalties of $4.0 million and $1.6 million, respectively. The Company accrued $26.4 million, $30.3 million and $26.2 million at December 31, 2021, 2020 and 2019, respectively, for the potential payment of interest and penalties.