L3HARRIS TECHNOLOGIES, INC. /DE/LHX
L3HARRIS TECHNOLOGIES, INC. /DE/ Income Taxes Disclosure
NOTE 7: INCOME TAXES
U.S. Federal Tax Reform
On July 4, 2025, the OBBBA was enacted, introducing amendments to the U.S. federal income tax code, including permanent reinstatement of immediate expensing for domestic research expenditures, a reduction in the benefit of the R&D tax credit, restoration of full expensing for qualified machinery, equipment and other short-lived assets, and several modifications to existing international tax provisions. Certain provisions are effective for fiscal 2025 and are recognized in the Consolidated Financial Statements and these Notes. Certain other provisions are effective in future fiscal years.
Income Tax Provision
Our provisions for current and deferred income taxes are as follows:
| Fiscal Year | |||||||||||||||||
| (In millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Current: | |||||||||||||||||
| United States | $ | (10) | $ | (166) | $ | 328 | |||||||||||
| International | 77 | 72 | 50 | ||||||||||||||
| State and local | 53 | 5 | 66 | ||||||||||||||
| Total current income taxes | 120 | (89) | 444 | ||||||||||||||
| Deferred: | |||||||||||||||||
| United States | 166 | 244 | (380) | ||||||||||||||
| International | (14) | (34) | 10 | ||||||||||||||
| State and local | 54 | (36) | (51) | ||||||||||||||
| Total deferred income taxes | 206 | 174 | (421) | ||||||||||||||
| Income taxes | $ | 326 | $ | 85 | $ | 23 | |||||||||||
The components of our income before income taxes included in our Consolidated Statement of Operations are as follows:
| Fiscal Year | |||||||||||||||||
| (In millions) | 2025 | 2024 | 2023 | ||||||||||||||
| United States | $ | 1,677 | $ | 1,406 | $ | 1,016 | |||||||||||
| International | 255 | 191 | 205 | ||||||||||||||
| Income before income taxes | $ | 1,932 | $ | 1,597 | $ | 1,221 | |||||||||||
A reconciliation of the U.S. statutory income tax rate to our effective income tax rate is as follows:
| Fiscal Year | |||||||||||
| (In millions) | 2025 | ||||||||||
| U.S. federal statutory income tax rate | $ | 406 | 21.0 | % | |||||||
State and local income taxes, net of federal income tax effect(1)(2) | 70 | 3.6 | |||||||||
| Foreign tax effects: | |||||||||||
| Canada: | |||||||||||
| Statutory tax rate difference between Canada and U.S. | (11) | (0.6) | |||||||||
| Local Provincial Taxes | 22 | 1.1 | |||||||||
| Other | (3) | (0.2) | |||||||||
| Various foreign jurisdictions | 3 | 0.2 | |||||||||
| Effect of cross-border tax laws: | |||||||||||
| Foreign-derived intangible income | (35) | (1.8) | |||||||||
| Tax credits: | |||||||||||
| R&D tax credits | (226) | (11.7) | |||||||||
| Advanced manufacturing credits | (22) | (1.1) | |||||||||
| Other | (2) | (0.1) | |||||||||
| Changes in unrecognized tax benefits | 20 | 1.1 | |||||||||
| Other adjustments: | |||||||||||
| Impact of divestitures and reorganizations | 95 | 4.9 | |||||||||
| Other | 9 | 0.5 | |||||||||
| Effective income tax rate | $ | 326 | 16.9 | % | |||||||
_______________
(1)State taxes in Texas, New Jersey and New Hampshire make up the majority (greater than 50 percent) of the tax effect in this category.
(2)Includes the impact of a change in Texas legislation, which required us to record a $32 million valuation allowance against our Texas R&D credit carryforwards.
| Fiscal Year | |||||||||||
| (In millions) | 2024 | 2023 | |||||||||
| U.S. statutory income tax rate | 21.0 | % | 21.0 | % | |||||||
| State taxes | 2.1 | 1.4 | |||||||||
| International income | 0.4 | — | |||||||||
| Non-deductible goodwill impairment | — | 3.6 | |||||||||
| R&D tax credit | (10.4) | (12.5) | |||||||||
| Foreign-derived intangible income | (2.1) | (4.4) | |||||||||
| Changes in valuation allowance | (2.3) | 0.2 | |||||||||
| Impact of divestitures and reorganizations | 1.2 | (8.5) | |||||||||
Share-based compensation(1) | (0.6) | 0.2 | |||||||||
| Settlement of tax audits | (3.4) | (1.1) | |||||||||
| Other items | (0.6) | 2.0 | |||||||||
| Effective income tax rate | 5.3 | % | 1.9 | % | |||||||
_______________
(1)Includes non-deductible share-based compensation and excess tax benefits from share-based compensation.
As of January 2, 2026, we have outside basis differences in foreign subsidiaries that are considered indefinitely reinvested and are comprised predominantly of purchase accounting adjustments and to a lesser extent, undistributed earnings and other equity adjustments. In the event of a disposition of the foreign subsidiaries or a distribution, we may be subject to incremental U.S. income taxes, subject to an adjustment for foreign tax credits, and withholding taxes or income taxes payable to the foreign jurisdictions. As of January 2, 2026, the determination of the amount of unrecognized deferred tax liability related to the outside basis difference is not practicable.
Deferred Income Tax Assets (Liabilities)
The components of deferred income tax assets (liabilities) were as follows:
| (In millions) | January 2, 2026 | January 3, 2025 | |||||||||
| Deferred tax assets, net: | |||||||||||
| Accruals | $ | 407 | $ | 396 | |||||||
Tax loss and credit carryforwards(1) | 222 | 249 | |||||||||
| Operating lease obligation | 231 | 212 | |||||||||
| Capitalized research and experimental expenditures | 1,245 | 1,694 | |||||||||
| Other | 393 | 461 | |||||||||
Valuation allowance(2) | (260) | (238) | |||||||||
| Deferred tax assets, net | 2,238 | 2,774 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Property, plant and equipment | (204) | (216) | |||||||||
| Acquired intangibles | (1,794) | (1,974) | |||||||||
| Operating lease ROU asset | (211) | (188) | |||||||||
Deferred revenue on long-term contracts | (677) | (913) | |||||||||
| Pension and other post-employment benefits | (297) | (196) | |||||||||
| Other | (93) | (109) | |||||||||
| Deferred tax liabilities | (3,276) | (3,596) | |||||||||
| Net deferred tax liabilities | $ | (1,038) | $ | (822) | |||||||
_______________
(1)As of January 2, 2026, primarily includes credit carryforwards of $189 million and operating loss carryforwards of $37 million which have expiration dates ranging from less than one year to no expiration date. A significant portion of the carryforwards are either indefinite or begin expiring in 2035.
(2)Valuation allowance established to offset certain domestic and foreign deferred tax assets due to the uncertainty regarding our ability to realize these assets in the future. The net change in our valuation allowance in fiscal 2025 and 2024 was an increase of $22 million and a decrease of $2 million, respectively.
Net deferred tax assets (liabilities) were classified as follows in our Consolidated Balance Sheet:
| (In millions) | January 2, 2026 | January 3, 2025 | |||||||||
| Deferred income tax assets | $ | 76 | $ | 120 | |||||||
| Deferred income tax liabilities | (1,114) | (942) | |||||||||
| Net deferred tax liabilities | $ | (1,038) | $ | (822) | |||||||
Income Taxes Paid
A reconciliation of income taxes paid, net of refunds received, is as follows:
_______________
| Fiscal Year | |||||
| (In millions) | 2025 | ||||
| Payment / (refund): | |||||
U.S federal(1) | $ | (164) | |||
| Texas | 5 | ||||
| California | 5 | ||||
| New Hampshire | 5 | ||||
| Massachusetts | 5 | ||||
| Florida | 5 | ||||
| Other | 10 | ||||
| Total U.S. state and local | 35 | ||||
| Canada | 57 | ||||
| Italy | 4 | ||||
| United Kingdom | 3 | ||||
| Other | 10 | ||||
| Total foreign | 74 | ||||
| Total income taxes paid, net of refunds received | $ | (55) | |||
(1)In fiscal 2025, we received $355 million in refunds associated with amended returns and carryback claims, partially offset by payments of $191 million for the purchase of transferable tax credits.
We paid $102 million and $715 million in income taxes, net of refunds received, in fiscal 2024 and 2023, respectively.
Tax Uncertainties
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| Fiscal Year | |||||||||||||||||
| (In millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Balance at beginning of fiscal year | $ | 758 | $ | 652 | $ | 613 | |||||||||||
| Additions based on: | |||||||||||||||||
| Tax positions taken during current period | 88 | 120 | 99 | ||||||||||||||
| Tax positions taken during prior period | 21 | 23 | 8 | ||||||||||||||
| Tax positions related to acquired entities | — | 92 | 86 | ||||||||||||||
| Reductions based on: | |||||||||||||||||
| Tax positions taken during prior period | (96) | (113) | (133) | ||||||||||||||
| Lapse in statutes of limitations | (4) | (9) | (11) | ||||||||||||||
| Settlements with tax authorities | (13) | (7) | (10) | ||||||||||||||
Balance at end of fiscal year(1) | $ | 754 | $ | 758 | $ | 652 | |||||||||||
(1)Includes unrecognized tax benefits that would favorably impact our future tax rates in the event that the tax benefits are eventually recognized of $635 million and $666 million as of January 2, 2026 and January 3, 2025, respectively.
We recognized $19 million, $29 million and $20 million in accrued interest and penalties related to unrecognized tax benefits in our income tax provision in fiscal 2025, 2024 and 2023, respectively. Accrued interest and penalties related to unrecognized tax benefits was $128 million and $109 million as of January 2, 2026 and January 3, 2025, respectively. Unrecognized tax benefits, together with the related accrued interest and penalties, are presented within the “Other non-current liabilities” line item in our Consolidated Balance Sheet.
We file numerous separate and consolidated income tax returns and, where appropriate, those of our subsidiaries and affiliates, in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. Pursuant
to the Compliance Assurance Process, the Internal Revenue Service (“IRS”) is examining our federal tax returns for fiscal 2021, 2022, 2023, and 2024. Legacy L3’s federal tax returns for calendar years 2017 and 2018 are currently under IRS examination and refund claims related to calendar years 2012, 2013, 2015 and 2016 have been filed with the IRS. In addition, legacy AJRD refund claims related to calendar year 2019, 2020 and 2021 have been filed with the IRS.
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Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2026 | Feb 12, 2026 | Showing above |
| 2025 | Feb 14, 2025 | |
| 2023 | Feb 20, 2024 | |
| 2022 | Feb 24, 2023 | |
| 2021 | Mar 1, 2021 | |
| 2019 | Aug 22, 2019 | |
| 2018 | Aug 27, 2018 | |
| 2017 | Aug 29, 2017 | |
| 2016 | Aug 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.