ILLINOIS TOOL WORKS INCITW
ILLINOIS TOOL WORKS INC Income Taxes Disclosure
Income Taxes
On July 4, 2025, the One Big Beautiful Bill Act (the "OBBBA") was enacted in the United States, which extended and modified certain provisions of the 2017 Tax Cuts and Jobs Act (the "TCJA"). The provisions of the OBBBA did not have any impact on the Company's operating results, financial position or cash flows for the twelve months ended December 31, 2025, and is not expected to have a material impact on future periods.
Noncurrent income taxes payable— On December 22, 2017, the TCJA was enacted in the United States. The provisions of the TCJA significantly revised the U.S. corporate income tax rules. In connection with the enactment of the TCJA, the Company recorded a one-time additional income tax expense of $676 million in the fourth quarter of 2017 related to a one-time repatriation tax on the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries. A portion of the resulting income taxes payable could be paid in installments over eight years. The final installment of the noncurrent income taxes payable related to the one-time repatriation tax of $151 million was reported in Income taxes payable as of December 31, 2024, and paid when due during the twelve months ended December 31, 2025.
Provision for income taxes— The components of the provision for income taxes for the twelve months ended December 31, 2025, 2024 and 2023 were as follows:
| In millions | 2025 | 2024 | 2023 | ||||||||||||||
| U.S. federal income taxes: | |||||||||||||||||
| Current | $ | 418 | $ | 486 | $ | 455 | |||||||||||
| Deferred | (25) | (576) | (111) | ||||||||||||||
| Total U.S. federal income taxes | 393 | (90) | 344 | ||||||||||||||
| Foreign income taxes: | |||||||||||||||||
| Current | 413 | 515 | 405 | ||||||||||||||
| Deferred | 5 | 487 | 31 | ||||||||||||||
| Total foreign income taxes | 418 | 1,002 | 436 | ||||||||||||||
| State income taxes: | |||||||||||||||||
| Current | 86 | 109 | 94 | ||||||||||||||
| Deferred | 3 | (87) | (8) | ||||||||||||||
| Total state income taxes | 89 | 22 | 86 | ||||||||||||||
| Total provision for income taxes | $ | 900 | $ | 934 | $ | 866 | |||||||||||
Income before taxes for domestic and foreign operations for the twelve months ended December 31, 2025, 2024 and 2023 was as follows:
| In millions | 2025 | 2024 | 2023 | ||||||||||||||
| Domestic | $ | 2,384 | $ | 2,603 | $ | 1,953 | |||||||||||
| Foreign | 1,582 | 1,819 | 1,870 | ||||||||||||||
| Total income before taxes | $ | 3,966 | $ | 4,422 | $ | 3,823 | |||||||||||
Effective with the Company's annual disclosures for the year ended December 31, 2025, the Company prospectively adopted new guidance which requires disclosure of specific categories and greater disaggregation of information presented in the effective tax rate reconciliation. The following table is a reconciliation between the U.S. federal statutory tax rate and the effective tax rate for the twelve months ended December 31, 2025:
| 2025 | |||||||||||
| Dollars in millions | Income Taxes | Tax Rate | |||||||||
| U.S. federal statutory tax rate | $ | 833 | 21.0 | % | |||||||
| State income taxes, net of U.S. federal tax benefit | 70 | 1.8 | |||||||||
| Foreign tax effects | 82 | 2.1 | |||||||||
| Effect of cross-border tax laws: | |||||||||||
| Foreign-derived deduction eligible income | (45) | (1.1) | |||||||||
| Other | (34) | (0.9) | |||||||||
| Tax credits | (12) | (0.3) | |||||||||
Change in valuation allowances | (6) | (0.2) | |||||||||
| Nontaxable or nondeductible items | (2) | — | |||||||||
| Changes in unrecognized tax benefits | 13 | 0.3 | |||||||||
| Other | 1 | — | |||||||||
| Effective tax rate | $ | 900 | 22.7 | % | |||||||
State income taxes in California, Illinois, Pennsylvania, Minnesota, and Florida made up the majority of State income taxes, net of U.S. federal tax benefit for the twelve months ended December 31, 2025.
The following table is a reconciliation between the U.S. federal statutory rate and the effective tax rate for the twelve months ended December 31, 2024 and 2023:
| 2024 | 2023 | ||||||||||
| U.S. federal statutory tax rate | 21.0 | % | 21.0 | % | |||||||
| State income taxes, net of U.S. federal tax benefit | 2.0 | 1.8 | |||||||||
| Differences between U.S. federal statutory and foreign tax rates | 1.0 | 1.1 | |||||||||
| U.S. tax effect of foreign earnings | 0.5 | 0.8 | |||||||||
| Remeasurement of unrecognized tax benefit | 1.6 | 0.6 | |||||||||
| Change in valuation allowances | (2.3) | 0.5 | |||||||||
| Intellectual property reorganization | (1.1) | — | |||||||||
| Audit resolution | 0.1 | (0.2) | |||||||||
| Excess tax benefits from stock-based compensation | (0.3) | (0.5) | |||||||||
Foreign-derived intangible income | (1.2) | (1.4) | |||||||||
| Other, net | (0.2) | (1.1) | |||||||||
| Effective tax rate | 21.1 | % | 22.6 | % | |||||||
The Company's effective tax rate for the twelve months ended December 31, 2025, 2024 and 2023 was 22.7%, 21.1% and 22.6%, respectively. The 2025 effective tax rate included a discrete tax benefit of $21 million in the first quarter of 2025 related to the reversal of a valuation allowance on net operating loss carryforwards. Additionally, the 2025 effective tax rate benefited from a discrete tax benefit in the third quarter of 2025 of $43 million related to the estimated U.S. federal tax liability for 2024, partially offset by a $16 million discrete tax expense related primarily to the resolution of a foreign tax audit. The 2024 effective tax rate benefited from discrete income tax benefits during the third quarter of 2024 of $107 million related to the utilization of capital loss carryforwards upon the sale of Wilsonart and $87 million related to a reorganization of the Company's intellectual property, partially offset by a $73 million discrete tax expense related to the remeasurement of unrecognized tax benefits associated with various intercompany transactions. The 2023 effective tax rate benefited from a discrete income tax benefit of $20 million in the second quarter of 2023 related to amended 2021 U.S. taxes. Additionally, the effective tax rates for 2025, 2024 and 2023 included discrete income tax benefits of $8 million, $14 million, and $20 million, respectively, related to excess tax benefits from stock-based compensation.
Upon repatriation of foreign earnings to the U.S., the Company may be subject to foreign withholding taxes. The accrual for foreign withholding taxes related to the expected repatriation of foreign held cash and equivalents as of December 31, 2025 and 2024 was $47 million and $44 million, respectively.
Deferred foreign withholding taxes have not been provided on undistributed earnings considered permanently invested. As of December 31, 2025, undistributed earnings of certain international subsidiaries that are considered permanently invested were approximately $6 billion. Determination of the related deferred tax liability is not practicable because of the complexities associated with the hypothetical calculation.
Deferred tax assets and liabilities— The components of deferred income tax assets and liabilities as of December 31, 2025 and 2024 were as follows:
| 2025 | 2024 | ||||||||||||||||||||||
| In millions | Asset | Liability | Asset | Liability | |||||||||||||||||||
| Goodwill and intangible assets | $ | 511 | $ | (491) | $ | 553 | $ | (476) | |||||||||||||||
| Inventory reserves and capitalized tax cost | 54 | — | 54 | — | |||||||||||||||||||
| Investments | 19 | (56) | 24 | (53) | |||||||||||||||||||
| Plant and equipment | 23 | (112) | 19 | (108) | |||||||||||||||||||
| Accrued expenses and reserves | 32 | — | 35 | — | |||||||||||||||||||
| Employee benefit accruals | 129 | — | 137 | — | |||||||||||||||||||
| Foreign tax credit carryforwards | 15 | — | 13 | — | |||||||||||||||||||
| Net operating loss carryforwards | 494 | — | 465 | — | |||||||||||||||||||
| Capital loss carryforwards | 78 | — | 81 | — | |||||||||||||||||||
| Allowances for uncollectible accounts | 12 | — | 11 | — | |||||||||||||||||||
| Capitalized research and development | 225 | — | 173 | — | |||||||||||||||||||
| Pension liabilities | — | (60) | — | (43) | |||||||||||||||||||
| Unrealized loss (gain) on foreign debt instruments | 43 | — | — | (98) | |||||||||||||||||||
| Operating leases | 62 | (62) | 56 | (56) | |||||||||||||||||||
| Other | 37 | (53) | 32 | (53) | |||||||||||||||||||
| Gross deferred income tax assets (liabilities) | 1,734 | (834) | 1,653 | (887) | |||||||||||||||||||
| Valuation allowances | (535) | — | (516) | — | |||||||||||||||||||
| Total deferred income tax assets (liabilities) | $ | 1,199 | $ | (834) | $ | 1,137 | $ | (887) | |||||||||||||||
The valuation allowances recorded as of December 31, 2025 and 2024 related primarily to certain net operating loss carryforwards and capital loss carryforwards. As of December 31, 2025, the Company had utilized all realizable foreign tax credit carryforwards.
As of December 31, 2025, the Company had net operating loss carryforwards available to offset future taxable income in the U.S. and certain foreign jurisdictions, which expire as follows:
| Gross | |||||
| In millions | Carryforwards | ||||
| 2026 | $ | 1 | |||
| 2027 | — | ||||
| 2028 | 1 | ||||
| 2029 | 3 | ||||
| 2030 | — | ||||
| 2031 | — | ||||
| 2032-2050 | 899 | ||||
| Do not expire | 992 | ||||
| Total gross carryforwards related to net operating losses | $ | 1,896 | |||
Cash paid for income taxes, net of refunds— Effective with the Company's annual disclosures for the year ended December 31, 2025, the Company prospectively adopted new guidance which requires disaggregation of income taxes paid by jurisdiction. The following table presents income taxes paid by jurisdiction, net of refunds, for the twelve months ended December 31, 2025:
| In millions | 2025 | ||||
| U.S. federal | $ | 516 | |||
| State | 78 | ||||
| Foreign | 458 | ||||
| Total cash paid for income taxes, net of refunds | $ | 1,052 | |||
Jurisdictions representing greater than 5% of total cash paid for income taxes, net of refunds, for the twelve months ended December 31, 2025 included China and Germany, which were $92 million and $74 million, respectively.
Unrecognized tax benefits— The changes in the amount of unrecognized tax benefits for the twelve months ended December 31, 2025, 2024 and 2023 were as follows:
| In millions | 2025 | 2024 | 2023 | ||||||||||||||
| Beginning balance | $ | 359 | $ | 329 | $ | 314 | |||||||||||
| Additions based on tax positions related to the current year | 7 | 35 | 21 | ||||||||||||||
| Additions for tax positions of prior years | 27 | 37 | 48 | ||||||||||||||
| Reductions for tax positions of prior years | (18) | (30) | (33) | ||||||||||||||
| Settlements | (82) | — | (23) | ||||||||||||||
| Foreign currency translation | 17 | (12) | 2 | ||||||||||||||
| Ending balance | $ | 310 | $ | 359 | $ | 329 | |||||||||||
Included in the balance as of December 31, 2025 were approximately $281 million of unrecognized tax benefits that, if recognized, would impact the Company's effective tax rate.
The Company and its subsidiaries file tax returns in the U.S. and various state, local and foreign jurisdictions. These tax returns are routinely audited by the tax authorities in these jurisdictions including the Internal Revenue Service, His Majesty's Revenue and Customs, German Fiscal Authority, French Fiscal Authority, and Australian Tax Office, and a number of these audits are currently ongoing, which may increase the amount of the unrecognized tax benefits in future periods.
The following table summarizes the open tax years for the Company's major jurisdictions:
| Jurisdiction | Open Tax Years | ||||
| United States – Federal | 2019-2025 | ||||
| United Kingdom | 2017-2025 | ||||
| Germany | 2019-2025 | ||||
| France | 2023-2025 | ||||
| Australia | 2015-2025 | ||||
The Company recognizes interest and penalties related to income tax matters in income tax expense. The accrual for interest and penalties as of December 31, 2025 and 2024 was $75 million and $69 million, respectively.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 13, 2026 | Showing above |
| 2024 | Feb 14, 2025 | |
| 2023 | Feb 9, 2024 | |
| 2022 | Feb 10, 2023 | |
| 2021 | Feb 11, 2022 | |
| 2020 | Feb 12, 2021 | |
| 2019 | Feb 14, 2020 | |
| 2018 | Feb 15, 2019 | |
| 2017 | Feb 15, 2018 | |
| 2016 | Feb 10, 2017 | |
| 2015 | Feb 12, 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.