Annual report [Section 13 and 15(d), not S-K Item 405]

INCOME TAXES

v3.25.4
INCOME TAXES
 12 Months Ended
Dec. 31, 2025
Income Tax Disclosure [Abstract]  
INCOME TAXES
NOTE 15. INCOME TAXES
The income tax expense (benefit) for 2025, 2024 and 2023 consists of the following (in millions):
2025 2024 2023
Current:
U.S. Federal $ 970  $ 1,093  $ 1,012 
U.S. State and Local 113  172  195 
Non-U.S. 517  410  459 
Total Current 1,600  1,675  1,666 
Deferred:
U.S. Federal (26) 38  150 
U.S. State and Local 7  (30) 20 
Non-U.S. 11  (23) 29 
Total Deferred (8) (15) 199 
Total Income Tax Expense $ 1,592  $ 1,660  $ 1,865 
Income before income taxes includes the following components (in millions):
2025 2024 2023
United States $ 5,240  $ 5,839  $ 6,246 
Non-U.S. 1,924  1,603  2,327 
Total Income Before Income Taxes
 $ 7,164  $ 7,442  $ 8,573 
The table below provides the updated effective tax rate reconciliation. A reconciliation of the statutory federal income tax rate to the effective income tax rate for 2025 consists of the following (in millions, except percentages):
2025
$
%
U.S. Federal Statutory Tax Rate
 $ 1,505  21.0 
State and Local Income Taxes, Net of Federal Income Tax Effect(1)
101  1.4 
Foreign Tax Effects
 168  2.4 
Effect of Cross-Border Tax Laws, Net of Related Credits
 (68) (0.9)
Tax Credits
 (90) (1.3)
Changes in Valuation Allowances
 (91) (1.3)
Nontaxable or Nondeductible Items
 45  0.6 
Other Adjustments
 22  0.3 
Effective Income Tax Rate
 $ 1,592  22.2 
(1) State taxes in California, Illinois, New York, Minnesota, Florida, and Pennsylvania made up the majority (greater than 50 percent) of the tax effect in this category.
As previously disclosed, during 2024 and 2023, a reconciliation of the statutory federal income tax rate to the effective income tax rate consists of the following:
2024 2023
Statutory U.S. federal income tax rate 21.0  % 21.0  %
U.S. state and local income taxes (net of federal benefit)
 1.8  1.9 
Non-U.S. tax rate differential —  (0.6)
FDII and GILTI, net(1)
(1.2) (0.9)
U.S. federal tax credits (0.8) (0.7)
Goodwill and other asset impairments —  0.1 
Net uncertain tax positions 0.2  (0.5)
Other 1.3  1.5 
Effective income tax rate 22.3  % 21.8  %
(1)    Foreign-Derived Intangible Income ("FDII") and Global Intangible Low-Taxed Income ("GILTI").
Our effective tax rate is affected by recurring factors, such as statutory tax rates in the jurisdictions in which we operate and the relative amounts of taxable income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year, but may not be consistent from year to year.
Our effective tax rate was 22.2% in 2025, compared with 22.3% and 21.8% in 2024 and 2023, respectively, primarily due to the effects of the aforementioned recurring factors and the following discrete tax items.
2025 Discrete Items
We recorded pre-tax transformation strategy costs of $593 million during 2025. As a result, we recorded an additional income tax benefit of $141 million. This income tax benefit was generated at a higher average tax rate than the 2025 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes.
We recorded asset impairment charges of $201 million during 2025. As a result, we recorded an additional income tax benefit of $45 million. This income tax benefit was generated at a higher average tax rate than the 2025 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.
We recorded a pre-tax loss of $19 million related to the divestiture of a business within SCS during 2025. As a result, we recorded an additional income tax benefit of $4 million. This income tax benefit was generated at a higher average tax rate than the 2025 U.S. federal statutory tax rate due to the effect of U.S. state and local taxes.
We recognized an income tax benefit of $105 million related to the release of the valuation allowance on our U.S. capital loss deferred tax asset. Each quarter, we assess the available positive and negative evidence to determine whether it is more likely than not that the capital losses will be realized. As of December 31, 2024, the negative evidence of cumulative historical capital losses outweighed the limited subjective positive evidence of projections of future capital gains. Throughout 2025, we have released all of this valuation allowance as a result of net capital gains from the property sales transactions discussed in note 4.
2024 Discrete Items
We recognized an income tax benefit of $159 million related to pre-tax defined benefit pension and postretirement medical plan losses of $665 million. This income tax benefit was generated at a higher average tax rate than the 2024 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes.
We recorded pre-tax transformation strategy costs of $322 million. As a result, we recorded an additional income tax benefit of $77 million. This income tax benefit was generated at a higher average tax rate than the 2024 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.
We recorded asset impairment charges of $108 million. As a result, we recorded an additional income tax benefit of $27 million. This income tax benefit was generated at a higher average tax rate than the 2024 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.
We recorded a pre-tax expense of $19 million in connection with a multi-employer pension plan withdrawal. As a result, we recorded an income tax benefit of $5 million. This income tax benefit was generated at a higher average tax rate than the 2024 U.S. federal statutory tax rate due to the effect of U.S. state and local taxes.
We recorded a pre-tax gain of $156 million related to the divestiture of Coyote. As a result, we recorded additional income tax expense of $4 million. This income tax expense was generated at a lower average tax rate than the 2024 U.S. federal statutory tax rate due to the disposition generating capital losses for tax purposes that were not expected to be realized.
We paid $45 million in connection with the settlement of an Expense for a Regulatory Matter. We did not record any additional income tax benefit related to these expenses, which were not deductible for tax purposes.
We recorded pre-tax expense of $94 million in connection with a One-Time Payment for International Regulatory Matter. We did not record any additional income tax benefit related to these expenses which are not deductible for tax purposes.
The recognition of excess tax benefits and deficiencies related to share-based compensation in income tax expense resulted in a net tax expense of $22 million and increased our effective tax rate by 0.3%.
2023 Discrete Items
We recorded pre-tax transformation strategy costs of $435 million. As a result, we recorded an additional income tax benefit of $102 million. This income tax benefit was generated at a higher average tax rate than the 2023 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.
We recognized an income tax benefit of $85 million related to pre-tax defined benefit pension and postretirement medical benefit plan losses of $359 million. This income tax benefit was generated at a higher average tax rate than the 2023 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes.
We recorded goodwill and indefinite-lived intangible asset impairment charges of $236 million. As a result, we recorded an additional income tax benefit of $43 million. This income tax benefit was generated at a lower average tax rate than the 2023 U.S. federal statutory tax rate due to certain impairment charges not being deductible for tax purposes.
We recorded a pre-tax expense of $61 million in connection with a one-time compensation payment made during the year. As a result, we recorded an additional income tax benefit of $15 million. This income tax benefit was generated at a higher average tax rate than the 2023 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.
Other Items
Beginning in 2012, we were granted a tax incentive for certain of our non-U.S. operations. In 2022, the tax incentive was renegotiated and extended through December 31, 2026. The tax incentive was conditional upon our meeting specific employment and investment thresholds. We exited this tax incentive effective January 1, 2025. The impact of this tax incentive decreased non-U.S. tax expense by $24 and $15 million (increased diluted earnings per share by $0.03 and $0.02) for 2024 and 2023, respectively.
Deferred income tax assets and liabilities are comprised of the following as of December 31, 2025 and 2024 (in millions):
2025 2024
Fixed assets and capitalized software $ (5,938) $ (5,914)
Operating lease right-of-use assets (950) (943)
Other (764) (612)
Deferred tax liabilities (7,652) (7,469)
Pension and postretirement benefits 1,433  1,474 
Loss and credit carryforwards 241  308 
Insurance reserves 683  646 
Accrued employee compensation 356  352 
Operating lease liabilities 1,018  1,021 
Other 455  367 
Deferred tax assets 4,186  4,168 
Deferred tax assets valuation allowance (84) (182)
Deferred tax asset (net of valuation allowance) 4,102  3,986 
Net deferred tax asset (liability) $ (3,550) $ (3,483)
Amounts recognized in our consolidated balance sheets:
Deferred tax assets $ 140  $ 112 
Deferred tax liabilities (3,690) (3,595)
Net deferred tax asset (liability) $ (3,550) $ (3,483)
The valuation allowance decreased by $98 million, increased by $63 million, and decreased by $4 million during 2025, 2024 and 2023, respectively.
During 2025, we utilized $379 million of U.S. capital loss carryforwards to offset current year net realized capital gains. We have no remaining U.S. federal capital loss carryforwards as of December 31, 2025.
Further, we have U.S. state and local operating loss and credit carryforwards as follows (in millions):
2025 2024
U.S. state and local operating loss carryforwards $ 976  $ 1,043 
U.S. state and local credit carryforwards $ 66  $ 47 
The U.S. state and local operating loss carryforwards and credits will begin to expire on various dates ranging from 2026 to indefinitely. We also have non-U.S. loss carryforwards of $580 million as of December 31, 2025, the majority of which may be carried forward indefinitely. As indicated in the table above, we have established a valuation allowance for certain U.S. state and non-U.S. carryforwards due to the uncertainty resulting from a lack of previous taxable income within the applicable tax jurisdictions.
The undistributed earnings and profits ("E&P") of certain foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no deferred income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. state and local taxes and withholding taxes payable in various jurisdictions. Determination of the amount of unrecognized deferred income tax liability is not practicable because of the complexities associated with its hypothetical calculation.
The following table summarizes the activity related to our uncertain tax positions (in millions):
Tax Interest Penalties
Balance as of January 1, 2023
 $ 533  $ 104  $ 4 
Additions for tax positions of the current year 26  —  — 
Additions for tax positions of prior years 147  37  1 
Reductions for tax positions of prior years for:
Changes based on facts and circumstances (164) (24) (1)
Settlements during the period (47) (9) — 
Lapses of applicable statute of limitations (3) —  — 
Balance as of December 31, 2023
 492  108  4 
Additions for tax positions of the current year 33  —  — 
Additions for tax positions of prior years 52  33  — 
Reductions for tax positions of prior years for:
Changes based on facts and circumstances (81) (11) (1)
Settlements during the period (33) (5) — 
Lapses of applicable statute of limitations (16) (3) — 
Balance as of December 31, 2024
 447  122  3 
Additions for tax positions of the current year 20  1  — 
Additions for tax positions of prior years 43  41  — 
Reductions for tax positions of prior years for:
Changes based on facts and circumstances (42) (7) — 
Settlements during the period (15) (2) — 
Lapses of applicable statute of limitations (1) —  — 
Balance as of December 31, 2025
 $ 452  $ 155  $ 3 
The total amount of gross uncertain tax positions as of December 31, 2025, 2024, and 2023 that, if recognized, would affect the effective tax rate was $439, $430, and $492 million, respectively. Our continuing policy is to recognize interest and penalties associated with income tax matters as a component of income tax expense.
We file income tax returns in the U.S. federal jurisdiction, most U.S. state and local jurisdictions, and many non-U.S. jurisdictions. We have substantially resolved all U.S. federal income tax matters for tax years prior to 2016.
The following table provides cash taxes paid for income taxes, net of refunds for the year 2025:
2025
U.S. Federal $ 1,329 
U.S. State and Local 157 
Non-U.S.
Canada 106 
Other 320 
Total Non-U.S.
 $ 426 
Total cash paid for income taxes (net of refunds) $ 1,912