Income Taxes

Earnings (losses) before income taxes and provision for income taxes consisted of the following for the years ended December 31, 2020, 2019 and 2018:

(in millions) 2020 2019 2018

Earnings (losses) before income taxes:

United States $ 6,842 $ 266 $ 9,441

Outside United States 48 500 (100)

Total $ 6,890 $ 766 $ 9,341

Provision (benefit) for income taxes:

Current:

Federal $ 2,025 $ 1,686 $ 1,911

State and local 553 470 519

Outside United States 22 3 1

2,600 2,159 2,431

Deferred:

Federal (130) (78) (18)

State and local (34) (19) (42)

Outside United States — 2 3

(164) (95) (57)

Total provision for income taxes $ 2,436 $ 2,064 $ 2,374

Altria’s U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The U.S. federal income tax statute of limitations remains open for the year 2016 and forward, with years 2016 through 2018 currently under examination by the Internal Revenue Service (“IRS”) as part of an audit conducted in the ordinary course of business. State statutes of limitations generally remain open for the year 2016 and forward. Certain of Altria’s state tax returns are currently under examination by various states as part of routine audits conducted in the ordinary course of business.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018 was as follows:

(in millions) 2020 2019 2018

Balance at beginning of year $ 64 $ 85 $ 66

Additions for tax positions of prior years 12 32 22

Reductions for tax positions of prior years (2) (16) (1)

Tax settlements — (37) (2)

Balance at end of year $ 74 $ 64 $ 85

(1)

(2)

(1) (2)

Unrecognized tax benefits and Altria’s consolidated liability for tax contingencies at December 31, 2020 and 2019 were as follows:

(in millions) 2020 2019

Unrecognized tax benefits $ 74 $ 64

Accrued interest and penalties 15 11

Tax credits and other indirect benefits (1) (1)

Liability for tax contingencies $ 88 $ 74

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2020 was $47 million, along with $27 million affecting deferred taxes. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2019 was $40 million, along with $24 million affecting deferred taxes.

Altria recognizes accrued interest and penalties associated with uncertain tax positions as part of the tax provision.

For the years ended December 31, 2020, 2019 and 2018, Altria recognized in its consolidated statements of earnings (losses) $4 million, $6 million and $5 million, respectively, of gross interest expense associated with uncertain tax positions.

Altria is subject to income taxation in many jurisdictions. Unrecognized tax benefits reflect the difference between tax positions taken or expected to be taken on income tax returns and the amounts recognized in the financial statements. Resolution of the related tax positions with the relevant tax authorities may take many years to complete, and such timing is not entirely within the control of Altria. It is reasonably possible that within the next 12 months certain examinations will be resolved, which could result in a decrease in unrecognized tax benefits of approximately $8 million.

A reconciliation between actual income taxes and amounts computed by applying the federal statutory rate to earnings (losses) before income taxes for the years ended December 31, 2020, 2019 and 2018 is as follows:

2020 2019 2018

(dollars in millions) $ % $ % $ %

U.S. federal statutory rate $ 1,447 21.0 % $ 161 21.0 % $ 1,962 21.0 %

Increase (decrease) resulting from:

State and local income taxes, net of federal tax benefit 410 6.0 356 46.5 377 4.0

Tax basis in foreign investments 23 0.3 84 11.0 140 1.5

Deemed repatriation tax — — — — 14 0.1

Uncertain tax positions 9 0.1 (40) (5.2) 8 0.1

Investment in ABI (16) (0.2) (210) (27.4) (104) (1.1)

Investment in JUUL 537 7.8 1,808 236.0 15 0.2

Investment in Cronos 20 0.3 (66) (8.6) — —

Other 6 0.1 (29) (3.8) (38) (0.4)

Effective tax rate $ 2,436 35.4 % $ 2,064 269.5 % $ 2,374 25.4 %

Other in 2019 is primarily deferred profit sharing dividends tax benefit of $21 million and immaterial miscellaneous items.

The tax provision in 2020 included tax expense of $612 million for a valuation allowance on a deferred tax asset related to Altria’s impairment of its investment in JUUL in the third quarter of 2020, partially offset by a $24 million tax benefit reflecting the release of a portion of the valuation allowance related to a reduction of a deferred tax asset associated with an increase in the estimated fair value of JUUL in the fourth quarter of 2020.

The tax provision in 2019 included tax expense of $2,024 million for a valuation allowance on a deferred tax asset related to Altria’s impairment of its investment in JUUL, tax expense of $84 million resulting from a partial reversal of the tax basis benefit associated with the deemed repatriation tax recorded in 2017 and tax expense of $38 million for a valuation allowance against foreign tax credits not realizable. These amounts were partially offset by a tax benefit of $105 million for amended tax returns and audit adjustments relating to a prior year, a tax benefit of $100 million for accruals no longer required and a net tax benefit of $79 million related to Altria’s Investment in Cronos, including a valuation allowance release on a deferred tax asset.

The tax provision in 2018 included tax expense of $188 million related to the Tax Reform Act as follows: (i) tax expense of $140 million resulting from a partial reversal of the tax basis benefit associated with the deemed repatriation tax recorded in 2017; (ii) tax expense of $34 million for a valuation allowance on foreign tax credit carryforwards that are not realizable as a result of updates to the provisional estimates recorded in 2017; and (iii) tax expense of $14 million for an adjustment to the provisional estimates for the repatriation tax recorded in 2017.

Substantially all of the 2018 amounts related to the tax basis adjustment, valuation allowance on foreign tax credits and repatriation tax relate to Altria’s share of ABI’s accumulated earnings and associated taxes. The adjustments recorded in 2018 to the provisional

(1)

(1)

estimates recorded in 2017 were based on (i) additional guidance related to, or interpretation of, the Tax Reform Act and associated tax laws and (ii) additional information received from ABI, including information regarding ABI’s accumulated earnings and associated taxes for the 2016 and 2017 tax years. The accounting for the repatriation tax was completed in 2018; therefore, no further adjustments to the provisional estimates were required.

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following at December 31, 2020 and 2019:

(in millions) 2020 2019

Deferred income tax assets:

Accrued postretirement and postemployment benefits $ 524 $ 491

Settlement charges 888 833

Accrued pension costs 148 131

Investment in JUUL 2,642 2,047

Investment in Cronos 128 197

Net operating losses and tax credit carryforwards 81 92

Total deferred income tax assets 4,411 3,791

Deferred income tax liabilities:

Property, plant and equipment (273) (255)

Intangible assets (2,806) (2,758)

Investment in ABI (2,819) (3,115)

Finance assets, net (117) (204)

Other (12) (158)

Total deferred income tax liabilities (6,027) (6,490)

Valuation allowances (2,817) (2,324)

Net deferred income tax liabilities $ (4,433) $ (5,023)

At December 31, 2020, Altria had estimated gross state tax net operating losses of $808 million that, if unused, will expire in 2021 through 2040.

A reconciliation of the beginning and ending valuation allowances for the years ended December 31, 2020, 2019 and 2018 was as follows:

(in millions) 2020 2019 2018

Balance at beginning of year $ 2,324 $ 71 $ —

Additions to valuation allowance related to Altria’s initial Investment in Cronos — 352 —

Additions to valuation allowance charged to income tax expense 692 2,063 71

Reductions to valuation allowance credited to income tax benefit (200) (159) —

Foreign currency translation 1 (3) —

Balance at end of year $ 2,817 $ 2,324 $ 71

Altria determines the realizability of deferred tax assets based on the weight of available evidence, that it is more-likely-than-not that the deferred tax asset will not be realized. In reaching this determination, Altria considers all available positive and negative evidence, including the character of the loss, carryback and carryforward considerations, future reversals of temporary differences and available tax planning strategies.

The 2020 valuation allowance was primarily attributable to deferred tax assets recorded in connection with the impairments of Altria’s investment in JUUL of

$2,610 million, and its Investment in Cronos of $121 million.

The 2019 valuation allowance was primarily attributable to the deferred tax asset recorded in connection with the impairment of Altria’s investment in JUUL.

Altria recorded a full valuation allowance of $2,024 million against this deferred tax asset. For a discussion regarding the impairment of Altria’s investment in JUUL, see Note 6. Investments in Equity Securities.

The 2018 valuation allowance was primarily related to foreign tax credit and state net operating loss carryforwards that more-likely-than-not will not be realized.