Annual report pursuant to Section 13 and 15(d)

Income Taxes

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Income Taxes
 12 Months Ended
Dec. 25, 2021
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Income before income taxes consists of the following:
December 25, 2021 December 26, 2020 December 28, 2019
  (In millions)
U.S. $ 3,528  $ 1,213  $ 334 
Non-U.S. 147  67  38 
Total pre-tax income including equity income (loss) in investee $ 3,675  $ 1,280  $ 372 
The income tax provision (benefit) consists of:
December 25, 2021 December 26, 2020 December 28, 2019
  (In millions)
Current:
U.S. Federal $ 112  $ —  $ (13)
U.S. State and Local 11  5  1 
Non-U.S. 82  8  50 
Total 205  13  38 
Deferred:
U.S. Federal 320  (1,193) — 
U.S. State and Local (7) (28) — 
Non-U.S. (5) (2) (7)
Total 308  (1,223) (7)
Income tax provision (benefit) $ 513  $ (1,210) $ 31 
The table below displays the reconciliation between statutory federal income taxes and the total income tax provision (benefit).
December 25, 2021 December 26, 2020 December 28, 2019
  (In millions)
Statutory federal income tax expense at 21% $ 772  $ 269  $ 78 
State taxes (benefit) 1  (6) 1 
Foreign withholding taxes 7  10  22 
Foreign rate detriment / (benefit) 71  (3) 2 
Valuation allowance change 3  (1,301) (59)
Research credits (78) (57) — 
Excess tax benefits relating to share-based compensation (125) (116) — 
Tax Reform Act —  —  (13)
Foreign Derived Intangible Income deduction (147) —  — 
Other 9  (6) — 
Income tax provision (benefit) $ 513  $ (1,210) $ 31 
The Company recorded an income tax provision of $513 million in 2021 and an income tax benefit of $1.2 billion in 2020, representing effective tax rates of 14% and (95)% respectively. The income tax provision of $513 million was a result of higher income in the U.S. and increase in foreign taxes, partially offset by $147 million of foreign-derived intangible income benefit, $78 million of research and development tax credits, and $125 million of excess tax benefit for stock-based compensation net of non-deductible officers’ compensation.
The income tax benefit in 2020 was primarily due to $1.3 billion of tax benefit from the valuation allowance release in the U.S. This benefit was partially offset by approximately $10 million of withholding tax expense related to cross-border transactions, $13 million of state and foreign taxes and $75 million increase in valuation allowance against certain state and foreign tax credits, which are reflected as part of the state taxes and foreign rate benefit in the reconciliation table above.
The income tax provision in 2019 was primarily due to $22 million of withholding tax related to cross-border transactions and $22 million of tax in foreign locations, partially offset by a $13 million benefit for a reduction of U.S. income taxes accrued in the prior year.
Deferred income taxes reflect the net tax effects of tax carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the balances for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 25, 2021 and December 26, 2020 were as follows:
December 25,
2021		 December 26,
2020
  (In millions)
Deferred tax assets:
Net operating loss carryovers $ 920  $ 1,029 
Accruals and reserves not currently deductible 631  514 
Employee benefits not currently deductible 164  122 
Federal and state tax credit carryovers 319  569 
Foreign research and development ITC credits 547  489 
Capitalized costs 121  174 
Lease liability 124  72 
Other 27  29 
Total deferred tax assets 2,853  2,998 
Less: valuation allowance (1,735) (1,576)
Total deferred tax assets, net of valuation allowance 1,118  1,422 
Deferred tax liabilities:
Acquired intangibles and goodwill (50) (1)
Right-of-use assets (110) (62)
Discount of convertible notes —  (2)
Undistributed foreign earnings (24) (114)
Other (15) (9)
Total deferred tax liabilities (199) (188)
Net deferred tax assets $ 919  $ 1,234 
The movement in the deferred tax valuation allowance was as follows:
December 25, 2021 December 26, 2020 December 28, 2019
  (In millions)
Balance at beginning of year $ 1,576  $ 2,867  $ 2,443 
Charges (reductions) to income tax expense/other accounts* 3  (1,301) (61)
Net (deductions) recoveries+
156  10  485 
Balance at end of year $ 1,735  $ 1,576  $ 2,867 
*
Amounts recorded against other accounts are not material
+ The 2019 and 2021 net recoveries were primarily related to net originating deferred tax assets and newly generated tax credits
Deferred tax liabilities are included in Other long-term liabilities on the consolidated balance sheets. The breakdown between deferred tax assets and deferred tax liabilities as of December 25, 2021 and December 26, 2020 is as follows:
December 25,
2021		 December 26,
2020
  (In millions)
Deferred tax assets $ 931  $ 1,245 
Deferred tax liabilities (12) (11)
Net deferred tax assets $ 919  $ 1,234 
Through the end of fiscal year 2021, the Company continued to maintain a valuation allowance of approximately $1.7 billion for certain federal, state, and foreign tax attributes. The federal valuation allowance maintained is due to limitations under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules. Certain state and foreign valuation allowance maintained is due to lack of sufficient sources of future taxable income.
The Company’s United States federal and state net operating losses carryforwards as of December 25, 2021, were $1.9 billion and $265 million, respectively. Net operating losses may be subject to limitations by the Internal Revenue Code and similar provisions. The United States federal net operating losses will expire between 2034 and 2037, and the state net operating losses will expire at various dates through 2039. The federal tax credits of $441.8 million will expire at various dates between 2022 and 2041. The state tax credits of $288 million will expire at various dates between 2022 through 2036 except for California R&D credit, which does not expire. The Company also has $552 million of credit carryforward in Canada that will expire between 2026 and 2040.
Under current U.S. tax law the impact of future distributions of undistributed earnings that are indefinitely reinvested are anticipated to be withholding taxes from local jurisdictions and non-conforming U.S. state jurisdictions. The amount of cumulative undistributed earnings that are permanently reinvested that could be subject to withholding taxes are $364 million as of December 25, 2021.
A reconciliation of the Company's gross unrecognized tax benefits was as follows:
December 25, 2021 December 26, 2020 December 28, 2019
  (In millions)
Balance at beginning of year $ 119  $ 65  $ 49 
Increases for tax positions taken in prior years 14  41  5 
Decreases for tax positions taken in prior years (9) (15) — 
Increases for tax positions taken in the current year 156  30  15 
Decreases for settlements with taxing authorities (5) (1) (3)
Decreases for lapsing of the statute of limitations —  (1) (1)
Balance at end of year $ 275  $ 119  $ 65 
The amount of unrecognized tax benefits that would impact the effective tax rate was $215 million, $77 million and $17 million as of December 25, 2021, December 26, 2020 and December 28, 2019, respectively. The Company had $39 million of accrued penalties and interest related to unrecognized tax benefits as of December 25, 2021. The Company had no material amounts of accrued interest and accrued penalties related to unrecognized tax benefits as of December 26, 2020 and December 28, 2019.
It is possible the Company may have tax audits close in the next 12 months that could materially change the balance of the uncertain tax benefits; however, the timing of tax audit closures and settlements are highly uncertain. The Company and its subsidiaries have several foreign and U.S. state audits in process at any one point in time. The Company has provided for uncertain tax positions that require a liability under the adopted method to account for uncertainty in income taxes.
The Company is subject to taxation in the United States and foreign jurisdictions. Earnings from non-U.S. activities are subject to local country income tax. The material jurisdiction in which the Company is subject to potential examination by the taxing authority is the United States, which is open for years from 2008 onwards due to the net operating losses.