Tax credit carryforwards, valuation allowance

  
Valuation allowances are provided to reduce the amounts of our deferred tax assets to an amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts.The valuation allowance increased in 2021, primarily driven by the Company’s expectation that some state R&D credits will not be utilized and certain foreign and acquired net operating losses will expire unused.As of December 31, 2021, we had $75 million of federal tax credit carryforwards available to reduce future federal income taxes and have provided no valuation allowance for those federal tax credit carryforwards. The federal tax credit carryforwards expire between 2023 and 2040. We had $798 million of state tax credit carryforwards available to reduce future state income taxes and have provided a valuation allowance for $709 million of those state tax credit carryforwards.As of December 31, 2021, we had $606 million of federal NOL carryforwards available to reduce future federal income taxes and have provided a valuation allowance for $6 million of those federal NOL carryforwards. For the federal NOL carryforwards for which no valuation allowance has been provided, $426 million have no expiration; the remainder begin to expire between 2022 and 2037. We had $391 million of state NOL carryforwards available to reduce future state income taxes and have provided a valuation allowance for $330 million of those state NOL carryforwards. We had $2.0 billion of foreign NOL carryforwards available to reduce future foreign income taxes and have provided a valuation allowance for $561 million of those foreign NOL carryforwards. For the foreign NOLs with no valuation allowance provided, $800 million has no expiry; and the remainder will expire between 2022 and 2031.The reconciliations of the total gross amounts of UTBs were as follows (in millions):

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Years ended December 31, |
|  | 2021 |  | 2020 |  | 2019 |
| Beginning balance | $ | 3,352  |  |  | $ | 3,287  |  |  | $ | 3,061  |  |
| Additions based on tax positions related to the current year | 171  |  |  | 165  |  |  | 215  |  |
| Additions based on tax positions related to prior years | 35  |  |  | 3  |  |  | 22  |  |
| Reductions for tax positions of prior years | (4) |  |  | (35) |  |  | (11) |  |
|  |  |  |  |  |  |
| Settlements  | (8) |  |  | (68) |  |  | —  |  |
| Ending balance | $ | 3,546  |  |  | $ | 3,352  |  |  | $ | 3,287  |  |

  
Substantially all of the UTBs as of December 31, 2021, if recognized, would affect our effective tax rate. During the year ended December 31, 2020, we effectively settled certain issues with the IRS. As a result, we remeasured our UTBs accordingly.Interest and penalties related to UTBs are included in our provision for income taxes. During the years ended December 31, 2021, 2020 and 2019, we recognized $98 million, $116 million and $198 million, respectively, of interest and penalties through the income tax provision in the Consolidated Statements of Income. The decrease in interest expense for the year ended December 31, 2021, was primarily due to lower interest rates during 2021 and settlement of a prior year audit. As of December 31, 2021 and 2020, accrued interest and penalties associated with UTBs were $881 million and $783 million, respectively.F-22
