HUNTINGTON INGALLS INDUSTRIES, INC.HII
HUNTINGTON INGALLS INDUSTRIES, INC. Income Taxes Disclosure
INCOME TAXES
Tax Reform - Public Law 119-21 (the "Act"), signed into law on July 4, 2025, provides for significant changes to the U.S. federal income tax law that impacts corporations, including making certain business deductions permanent, such as bonus depreciation, immediate expensing of domestic research and development ("R&D") expenditures, and providing an election to accelerate the deduction for the remaining unamortized domestic R&D expenditures capitalized during the 2022 through 2024 tax years. These unamortized expenditures can be deducted over or years. The Act contains other provisions that are not expected to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
The Company’s financial statements as of December 31, 2025 include the impact of the following significant items:
Domestic R&D expenditures: The Company recorded a current tax benefit of $115 million based on its intent to expense all current year domestic R&D expenditures and to accelerate the deduction for the remaining unamortized domestic R&D expenditures capitalized during the 2022 through 2024 tax years over a -year period. This
resulted in an increase of approximately $115 million to the Company’s current income taxes receivable and a corresponding increase in its net deferred tax liability.
Bonus Depreciation: While the Company has not completed its analysis of all capital expenditures that may qualify for immediate expensing, the Company recorded an estimated current tax benefit of $16 million based on its intent to fully expense all qualified property acquired and placed into service after January 19, 2025. This resulted in an increase of approximately $16 million to the Company’s current income taxes receivable and a corresponding increase in its net deferred tax liability.
The Company's earnings are primarily domestic, and its effective tax rate on earnings from operations for the year ended December 31, 2025, was 22.1%, compared with 14.5% and 20.2% for 2024 and 2023, respectively.
For the year ended December 31, 2025, the Company's effective tax rate differed from the statutory federal corporate income tax rate primarily as a result of a decrease in the estimated R&D tax credits for the prior period. For the years ended December 31, 2024 and 2023, the Company's effective tax rate differed from the statutory federal corporate income tax rate primarily as a result of R&D tax credits.
Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities and the tax expense or benefit associated with changes in state unrecognized tax benefits in the relevant period. These amounts are recorded within operating income. Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income. For the years ended December 31, 2025, 2024, and 2023, state income taxes in Virginia make up the majority of the state income tax expense.
Federal and foreign income tax expense for the years ended December 31, 2025, 2024, and 2023, consisted of the following:
| Year Ended December 31 | ||||||||||||||||||||
| ($ in millions) | 2025 | 2024 | 2023 | |||||||||||||||||
| Income Taxes on Operations | ||||||||||||||||||||
| Federal and foreign income taxes currently payable (receivable) | $ | (5) | $ | 193 | $ | 273 | ||||||||||||||
| Change in deferred federal and foreign income taxes | 177 | (100) | (101) | |||||||||||||||||
| Total federal and foreign income taxes | $ | 172 | $ | 93 | $ | 172 | ||||||||||||||
Earnings and income tax from foreign operations are not material for any periods presented.
The following table reconciles the Company's actual income tax expense to income tax expense based on the statutory federal corporate income tax rate:
| Year Ended December 31 | ||||||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | ||||||||||||||||||||||||||||||||||||
| ($ in millions) | Dollars | Percent | Dollars | Percent | Dollars | Percent | ||||||||||||||||||||||||||||||||
| U.S. federal statutory tax rate | $ | 163 | 21.0 | % | $ | 135 | 21.0 | % | $ | 179 | 21.0 | % | ||||||||||||||||||||||||||
| Foreign tax effects | — | — | % | 2 | 0.3 | % | — | — | % | |||||||||||||||||||||||||||||
| Effect of cross-border tax laws | (1) | (0.2) | % | (3) | (0.5) | % | (1) | (0.1) | % | |||||||||||||||||||||||||||||
| Tax credits: | ||||||||||||||||||||||||||||||||||||||
| Research and development tax credit | 17 | 2.2 | % | (49) | (7.6) | % | (22) | (2.6) | % | |||||||||||||||||||||||||||||
| Other | (4) | (0.5) | % | (2) | (0.3) | % | (2) | (0.2) | % | |||||||||||||||||||||||||||||
| Nontaxable or nondeductible items | 7 | 0.9 | % | 1 | 0.2 | % | 6 | 0.7 | % | |||||||||||||||||||||||||||||
| Changes in unrecognized tax benefits | — | — | % | 18 | 2.8 | % | 10 | 1.2 | % | |||||||||||||||||||||||||||||
| Interest accrual on tax refunds | (7) | (0.9) | % | (8) | (1.2) | % | (6) | (0.7) | % | |||||||||||||||||||||||||||||
| Other adjustments | (3) | (0.4) | % | (1) | (0.2) | % | 8 | 0.9 | % | |||||||||||||||||||||||||||||
| Effective income tax rate | $ | 172 | 22.1 | % | $ | 93 | 14.5 | % | $ | 172 | 20.2 | % | ||||||||||||||||||||||||||
Cash paid for income taxes (net of refunds) consisted of the following:
| December 31 | ||||||||||||||||||||
| ($ in millions) | 2025 | 2024 | 2023 | |||||||||||||||||
| Federal | $ | 70 | $ | 182 | $ | 273 | ||||||||||||||
State: | ||||||||||||||||||||
| Virginia | 19 | 56 | 30 | |||||||||||||||||
| Other | 7 | 17 | 26 | |||||||||||||||||
| Total state | 26 | 73 | 56 | |||||||||||||||||
| Foreign | — | — | 1 | |||||||||||||||||
| Cash paid for income taxes (net of refunds) | $ | 96 | $ | 255 | $ | 330 | ||||||||||||||
Unrecognized Tax Benefits - Unrecognized tax benefits represent the gross value of the Company's uncertain tax positions that have not been reflected in the consolidated statements of operations and comprehensive income. If the income tax benefits from federal tax positions are ultimately realized, such realization would affect the Company's income tax expense, while the realization of state tax benefits would be recorded in general and administrative expenses.
The changes in unrecognized tax benefits (exclusive of interest and penalties) for the years ended December 31, 2025, 2024, and 2023 are summarized in the following table:
| December 31 | ||||||||||||||||||||
| ($ in millions) | 2025 | 2024 | 2023 | |||||||||||||||||
| Unrecognized tax benefits at beginning of the year | $ | 110 | $ | 98 | $ | 90 | ||||||||||||||
| Additions based on tax positions related to the current year | 5 | 13 | 11 | |||||||||||||||||
| Additions based on tax positions related to prior years | 1 | 4 | — | |||||||||||||||||
| Reductions based on tax positions related to prior years | (7) | — | — | |||||||||||||||||
| Lapse of statute of limitations | (4) | (5) | (3) | |||||||||||||||||
| Net change in unrecognized tax benefits | (5) | 12 | 8 | |||||||||||||||||
| Unrecognized tax benefits at end of the year | $ | 105 | $ | 110 | 98 | |||||||||||||||
Assuming sustainment of these positions, as of December 31, 2025, 2024, and 2023, the reversal of $86 million, $91 million, and $76 million, respectively, of the accrued amounts would favorably affect the Company's effective federal income tax rate in future periods.
The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense. As a result of the unrecognized tax benefits noted above, income tax expense increased by $6 million in 2025 for interest and penalties, resulting in an interest and penalty liability of $20 million as of December 31, 2025. In 2024, income tax expense increased $5 million for interest, resulting in an interest liability of $14 million as of December 31, 2024. In 2023, income tax expense increased $4 million for interest, resulting in an interest liability of $9 million as of December 31, 2023.
The following table summarizes the tax years that are either currently under examination or remain open under the applicable statute of limitations and subject to examination by the major tax jurisdictions in which the Company operates:
| Jurisdiction | Years | |||||||||||||||||||
United States - Federal(1) | 2016 | - | 2024 | |||||||||||||||||
| Connecticut | 2022 | - | 2024 | |||||||||||||||||
| Mississippi | 2022 | - | 2024 | |||||||||||||||||
| Virginia | 2022 | - | 2024 | |||||||||||||||||
(1) Returns for the 2016, 2018, 2019, 2021, and 2022 tax years were filed under the Compliance Assurance Process ("CAP") program and accepted by the Internal Revenue Service ("IRS") with the exception of the R&D tax credit. The 2017 tax year was also filed under the CAP program and was accepted by the IRS with the exception of the manufacturing deduction and the R&D tax credit. The 2023 tax year was filed under the CAP program and accepted by the IRS with the exception of the R&D tax credit and capitalized R&D expenses. The statute of limitations for the 2020 and 2021 tax years has been extended to June 30, 2027.
IRS Audits - The Company was part of the IRS CAP program for the 2014 through 2023 tax years. Tax years through 2015 have been closed with the IRS. In calendar years 2020, 2021, and 2022, the Company filed refund claims for the R&D tax credit for tax years 2016-2019. Since these are refund claims, any adjustments to the amount claimed would not result in cash tax payments to the IRS. In addition, the Company has claimed R&D tax credits on its original filed returns since 2020. The status of the pending R&D tax credits is provided below.
2016-2019 claims and 2020-2021 credits - The Company reached an administrative resolution with the IRS on the 2016-2019 R&D tax credit refund claims and the R&D tax credit for the 2020-2021 tax years. After the IRS administrative review of the agreement is completed, it will be submitted to the Joint Committee on Taxation for approval.
2022-2023 credits - The IRS initiated audits for the 2022 and 2023 tax years, with minimal activity to date. The 2022 audit is limited to the R&D tax credit. The 2023 audit is limited to the R&D tax credit and capitalized R&D expenses.
The Company believes that its unrecognized tax benefits are adequate and will cover the expected impact of the agreement with the IRS. While the Company believes it has adequately provided for all unrecognized tax benefits, the Company might ultimately settle any disputed item for amounts greater than or less than the Company's accrued position. Accordingly, additional provisions for federal and state income tax related matters could be recorded in the future, and may be material, as revised estimates are made or the underlying matters are effectively settled or otherwise resolved.
Deferred Income Taxes - Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes. As described above, deferred tax assets and liabilities are calculated as of the balance sheet date using current tax laws and rates expected to be in effect when the deferred tax items reverse in future periods. Net deferred tax liabilities are classified as long-term deferred tax liabilities in the consolidated statements of financial position.
The tax effects of significant temporary differences and carry-forwards that resulted in year-end deferred tax balances, as presented in the consolidated statements of financial position, were as follows:
| December 31 | ||||||||||||||
| ($ in millions) | 2025 | 2024 | ||||||||||||
| Deferred Tax Assets | ||||||||||||||
| Workers' compensation | $ | 154 | $ | 150 | ||||||||||
| Operating lease liabilities | 71 | 67 | ||||||||||||
| Reserves not currently deductible for tax purposes | 72 | 71 | ||||||||||||
| Stock compensation | 9 | 8 | ||||||||||||
| Net operating losses, tax credit and other carry-forwards | 30 | 33 | ||||||||||||
| Capitalized research and development expenses | 152 | 315 | ||||||||||||
| Other | 15 | 11 | ||||||||||||
| Gross deferred tax assets | 503 | 655 | ||||||||||||
| Less valuation allowance | 25 | 26 | ||||||||||||
| Net deferred tax assets | 478 | 629 | ||||||||||||
| Deferred Tax Liabilities | ||||||||||||||
| Depreciation and amortization | 465 | 457 | ||||||||||||
| Contract accounting differences | 57 | 47 | ||||||||||||
| Purchased intangibles | 198 | 212 | ||||||||||||
| Operating lease assets | 67 | 62 | ||||||||||||
| Retirement benefits | 248 | 216 | ||||||||||||
| Other | 15 | 13 | ||||||||||||
| Gross deferred tax liabilities | 1,050 | 1,007 | ||||||||||||
| Total net deferred tax liabilities | $ | (572) | $ | (378) | ||||||||||
As of December 31, 2025, the Company had state income tax credit carry-forwards of approximately $14 million, which expire from 2026 through 2028. A deferred tax asset of approximately $11 million (net of federal benefit) related to these state income tax credit carry-forwards has been recorded, with a valuation allowance of $7 million against such deferred tax asset as of December 31, 2025. State net operating loss carry-forwards are individually and cumulatively immaterial to the Company’s deferred tax balances and expire from 2030 through 2044.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 5, 2026 | Showing above |
| 2024 | Feb 6, 2025 | |
| 2023 | Feb 1, 2024 | |
| 2022 | Feb 9, 2023 | |
| 2021 | Feb 10, 2022 | |
| 2020 | Feb 11, 2021 | |
| 2019 | Feb 13, 2020 | |
| 2018 | Feb 14, 2019 | |
| 2017 | Feb 15, 2018 | |
| 2016 | Feb 16, 2017 | |
| 2015 | Feb 18, 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.