W.W. GRAINGER, INC.GWW

W.W. GRAINGER, INC. Income Taxes Disclosure

10-KFiled Feb 19, 20265 min read
INCOME TAXES
Earnings before income taxes by geographical area consisted of the following (in millions of dollars):
For the Years Ended December 31,
202520242023
U.S.$2,065 $2,265 $2,211 
Foreign365 319 289 
Total
$2,430 $2,584 $2,500 


Income tax expense consisted of the following (in millions of dollars):
For the Years Ended December 31,
202520242023
Current income tax expense:
U.S. Federal
$403 $404 $431 
U.S. State
86 84 100 
Foreign
116 89 81 
Total current
605 577 612 
Deferred income tax (benefit) expense 17 18 (15)
Total income tax expense$622 $595 $597 

Income taxes paid consisted of the following (in millions of dollars):
For the Years Ended December 31,
202520242023
U.S. Federal taxes paid$412 $428 $439 
State and local taxes paid87 88 102 
Foreign taxes paid
Japan85 68 57 
Foreign other26 22 17 
Total income taxes paid$610 $606 $615 
The income tax effects of temporary differences that gave rise to the net deferred tax asset (liability) as of December 31, 2025 and 2024 were as follows (in millions of dollars):
As of December 31,
20252024
Deferred tax assets:
Accrued expenses
$161 $172 
U.S. and foreign loss carryforwards173 82 
Accrued employment-related benefits
33 42 
Tax credit carryforward
18 20 
Other
38 23 
Deferred tax assets
423 339 
           Less valuation allowance(192)(100)
Deferred tax assets – net of valuation allowance$231 $239 
Deferred tax liabilities:
Property, buildings, equipment and other capital assets$(234)$(216)
Intangibles
(55)(55)
Inventory(12)(16)
Other
(13)(14)
Deferred tax liabilities
(314)(301)
Net deferred tax liability$(83)$(62)
The net deferred tax asset (liability) is classified as follows:
Noncurrent assets
$14 $15 
Noncurrent liabilities (foreign)(97)(77)
Net deferred tax liability$(83)$(62)

As of December 31, 2025 and 2024, the Company had $692 million and $328 million, respectively, of gross loss carryforwards related to foreign operations and U.S. transactions. Some of the loss carryforwards may expire at various dates through 2040. The Company has recorded a valuation allowance, which represents a provision for uncertainty as to the realization of the tax benefits of these carryforwards and deferred tax assets that may not be realized.

The Company's valuation allowance changed as follows (in millions of dollars):
For the Years Ended December 31,
20252024
Balance at beginning of period$(100)$(93)
Increases primarily related to foreign NOLs(3)(8)
Releases primarily related to foreign NOLs46 — 
Foreign exchange rate changes— 1 
Decrease related to U.S. foreign tax credits2 2 
Increase related to capital loss carryforwards(137)(1)
Other changes – net— (1)
Balance at end of period$(192)$(100)
A reconciliation of income tax expense with federal income taxes at the statutory rate follows (in millions of dollars):
For the Years Ended December 31,
202520242023
AmountPercentAmountPercentAmountPercent
U.S. Federal statutory tax rate$510 21.0 %$543 21.0 %$525 21.0 %
State and local income taxes, net of federal income tax effect(1)
67 2.8 %67 2.6 %74 3.0 %
Foreign tax effects
Japan
Statutory tax rate difference between Japan and US29 1.2 %24 0.9 %22 0.9 %
Other(4)(0.2)%(1)— %(6)(0.3)%
Other foreign jurisdictions33 1.4 %12 0.4 %18 0.8 %
Effect of cross-border tax laws(24)(1.0)%3 0.1 %(10)(0.4)%
Tax credits(23)(1.0)%(16)(0.6)%(12)(0.5)%
Changes in valuation allowances113 4.6 %(1)— %13 0.5 %
Nontaxable or nondeductible items:
Gain/(Loss) on sale of subsidiaries(2)
(76)(3.1)%— — %(12)(0.5)%
Other(7)(0.3)%(18)(0.7)%(18)(0.7)%
Changes in unrecognized tax benefits— — %(22)(0.8)%3 0.1 %
Other adjustments4 0.2 %4 0.1 %— — %
Effective tax rate$622 25.6 %$595 23.0 %$597 23.9 %
(1)The jurisdictions that contributed to the majority (greater than 50%) of the state and local income taxes, net of federal income tax effect include California, Illinois, Michigan, Minnesota, New York, New Jersey and New York City for each of the years presented.
(2)Reflects the divestiture of Cromwell in the fourth quarter of 2025 and E&R in the fourth quarter of 2023.

The increase to the Company's effective tax rate for the year ended December 31, 2025 was primarily due to the loss from the exit of the U.K. market, for which there was no corresponding tax benefit.

Foreign Undistributed Earnings
The Company considers foreign subsidiary undistributed earnings permanently reinvested in its foreign operations and is not recording a deferred tax liability for any foreign withholding taxes on such amounts. If at some future date the Company ceases to be permanently reinvested in its foreign subsidiaries, the Company may be subject to foreign withholding and other taxes on these undistributed earnings and may need to record a deferred tax liability for any outside basis difference in its investments in its foreign subsidiaries.

Tax Uncertainties
The Company recognizes in the financial statements a provision for tax uncertainties, resulting from application of complex tax regulations in multiple tax jurisdictions.
The changes in the liability for tax uncertainties, excluding interest, are as follows (in millions of dollars):
For the Years Ended December 31,
202520242023
Balance at beginning of year$21 $42 $41 
Additions for tax positions related to the current year3 3 6 
Additions for tax positions of prior years— — 1 
Reductions for tax positions of prior years(1)(1)(1)
Reductions due to statute lapse(2)(22)(3)
Settlements, audit payments, refunds – net— (1)(2)
Balance at end of year$21 $21 $42 

The Company classifies the liability for tax uncertainties in deferred income taxes and tax uncertainties. Included in
this amount is $4 million as of December 31, 2025, of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Any changes in the timing of deductibility of these items would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authorities to an earlier period. In 2025, 2024 and 2023, the changes to tax positions were primarily related to the impact of expiring statutes and current year state and local reserves.
The Company is regularly subject to examination of its federal income tax returns by the Internal Revenue Service (IRS). The IRS effectively settled an audit of the Company’s 2021 and 2022 tax years in 2025. Tax years 2023 and 2024 are open. The Company is also subject to audit by state, local and foreign taxing authorities. Tax years 2012 through 2024 remain subject to state, local and foreign audits.

Historical Timeline

Fiscal YearFiled
2025Feb 19, 2026Showing above
2024Feb 20, 2025
2023Feb 22, 2024
2022Feb 21, 2023
2021Feb 23, 2022
2020Feb 24, 2021
2019Feb 20, 2020
2018Feb 28, 2019
2017Feb 26, 2018
2016Feb 28, 2017
2015Feb 29, 2016

About Income Taxes Disclosures

The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.

Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.

Other Available Disclosures

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