VALERO ENERGY CORP/TXVLO

VALERO ENERGY CORP/TX Income Taxes Disclosure

10-KFiled Feb 25, 20269 min read
15.    INCOME TAXES

Income Statement Components
Income before income tax expense was as follows (in millions):
Year Ended December 31,
202520242023
U.S. operations$899 $2,685 $9,335 
Foreign operations2,106 1,013 2,433 
Income before income tax expense$3,005 $3,698 $11,768 

Statutory income tax rates applicable to the countries in which we operate during each of the years ended December 31, 2025, 2024, and 2023 were as follows:
Statutory Income
Tax Rates
U.S.21 %
Canada15 %
U.K. (a)25 %
Ireland13 %
Mexico30 %
Peru30 %
________________________
(a)Statutory income tax rate was increased to 25 percent from 19 percent effective April 1, 2023.
The following is a reconciliation of income tax expense computed by applying statutory income tax rates to actual income tax expense (dollars in millions):
Year Ended December 31,
202520242023
AmountPercentAmountPercentAmountPercent
U.S. federal statutory income tax rate$631 21.0 %$777 21.0 %$2,471 21.0 %
Domestic federal:
Tax credits
Foreign tax credits(61)(2.0)%(46)(1.2)%(149)(1.3)%
Biofuels tax credits (a)(4)(0.1)%(248)(6.7)%— — %
Other(1)— %(1)— %(1)— %
Nontaxable and nondeductible items
Nontaxable production tax credits (b)(66)(2.2)%— — %— — %
Nontaxable blender’s tax credits (c)— — %(127)(3.4)%(125)(1.1)%
Tax on biofuels tax credits1 — %52 1.4 %— — %
Other (d)13 0.4 %14 0.4 %34 0.3 %
Cross-border tax laws4 0.1 %7 0.2 %27 0.2 %
Changes in valuation allowances63 2.1 %49 1.3 %149 1.3 %
Other reconciling items
Tax effects of income associated with
noncontrolling interests
25 0.8 %(50)(1.3)%(84)(0.7)%
Other(3)(0.1)%(43)(1.2)%34 0.3 %
Domestic state and local income taxes, net of
federal effect (e)
22 0.7 %19 0.5 %122 1.0 %
Foreign tax effects:
Canada
Provincial and local income taxes90 3.0 %101 2.7 %161 1.4 %
Statutory income tax rate differential(47)(1.5)%(52)(1.4)%(84)(0.7)%
Withholding taxes41 1.4 %59 1.6 %45 0.4 %
Other— — %(2)(0.1)%21 0.2 %
Mexico
Changes in valuation allowances(61)(2.0)%57 1.5 %— — %
Statutory income tax rate differential42 1.4 %(26)(0.7)%15 0.1 %
Other1 — %(4)(0.1)%35 0.3 %
U.K.
Statutory income tax rate differential33 1.1 %14 0.4 %19 0.2 %
Other1 — %1 — %(13)(0.1)%
Other foreign8 0.3 %(4)(0.1)%(7)(0.1)%
Worldwide changes in unrecognized tax benefits27 0.9 %145 3.9 %(51)(0.4)%
Income tax expense
$759 25.3 %$692 18.7 %$2,619 22.3 %
________________________
(a)As permitted under Section 40(b) of the Code, producers of second-generation biofuels that are registered with the Internal Revenue Service (IRS) were eligible for an income tax credit of up to $1.01 per gallon of qualified biofuel that was produced and sold in the U.S. through December 31, 2024. We recorded a gross tax benefit in December 2024 related to these tax credits for the cellulosic ethanol produced by our Ethanol segment from 2020 through 2024, excluding the effects of unrecognized tax benefits, which are presented separately.
(b)As permitted under Section 45Z of the Code, a clean fuel production credit was available through December 31, 2025 for qualifying sales of low-carbon transportation fuels that were produced in the U.S. This credit was extended through December 31, 2029, with specific qualifications under the OBBB, as defined and described beginning on page 123.
(c)As permitted under Section 6426 of the Code, blenders of certain renewable fuels were eligible for a refundable tax credit of $1.00 per gallon of qualified fuel mixtures produced and either sold or used as fuel through December 31, 2024.
(d)Tax effects of share-based payment awards are included in this category.
(e)State and local income taxes in California and Texas composed the majority of the tax effect in this category.
Components of income tax expense were as follows (in millions):
Year Ended December 31,
202520242023
Current tax expense:
U.S. federal$574 $464 $1,804 
U.S. state and local52 37 157 
Foreign330 278 555 
Total current tax expense
956 779 2,516 
Deferred tax expense (benefit):
U.S. federal(364)(99)25 
U.S. state and local(11)(13)(12)
Foreign178 25 90 
Total deferred tax expense (benefit)
(197)(87)103 
Total income tax expense:
U.S. federal210 365 1,829 
U.S. state and local41 24 145 
Foreign508 303 645 
Total income tax expense
$759 $692 $2,619 

Income Taxes Paid
Income taxes paid, net of any refunds, to U.S. and foreign taxing authorities were as follows (in millions):
Year Ended December 31,
202520242023
U.S. federal (a)$287 $664 $1,985 
U.S. state and local16 37 173 
Foreign:
Canada
Federal173 66 683 
Quebec78 34 385 
U.K.128 — 199 
Other17 42 69 
Total foreign396 142 1,336 
Income taxes paid, net
$699 $843 $3,494 
________________________
(a)In 2025, the U.S. federal income taxes paid are shown net of the utilization of foreign tax credits and clean fuel production credits.
Deferred Income Tax Assets and Liabilities
The tax effects of significant temporary differences representing deferred income tax assets and liabilities were as follows (in millions):
December 31,
20252024
Deferred income tax assets:
Tax credit carryforwards$924 $858 
Net operating losses (NOLs)632 689 
Inventories159 197 
Finance lease obligations633 607 
Operating lease liabilities210 212 
Other226 195 
Total deferred income tax assets2,784 2,758 
Valuation allowance(1,507)(1,484)
Net deferred income tax assets1,277 1,274 
Deferred income tax liabilities:
Property, plant, and equipment4,871 5,131 
Deferred turnaround costs428 450 
Operating lease ROU assets199 211 
Investments437 417 
Other488 332 
Total deferred income tax liabilities6,423 6,541 
Net deferred income tax liabilities$5,146 $5,267 

We had the following income tax credit and loss carryforwards as of December 31, 2025 (in millions):
AmountExpiration
U.S. state income tax credits (gross amount)$84 2026 through 2040
U.S. state income tax credits (gross amount)3 Unlimited
U.S. foreign tax credits855 2027 through 2035
U.S. state income tax NOLs (gross amount)12,289 2026 through 2040

We have recorded a valuation allowance as of December 31, 2025 and 2024 due to uncertainties related to our ability to utilize some of our deferred income tax assets primarily associated with our U.S. foreign tax credits and certain U.S. state income tax credits and NOLs before they expire. The valuation allowance is based on our estimates of future taxable income in the various jurisdictions in which we operate and the period over which deferred income tax assets will be recoverable. The valuation allowance increased by a net change of $23 million in 2025 primarily due to the generation of foreign tax credits that cannot be realized.
Unrecognized Tax Benefits
Changes in Unrecognized Tax Benefits
The following is a reconciliation of the changes in unrecognized tax benefits, excluding related interest and penalties (in millions):
Year Ended December 31,
202520242023
Balance as of beginning of year$316 $186 $284 
Additions for tax positions related to the current year4 52 18 
Additions for tax positions related to prior years13 106 4 
Reductions for tax positions related to prior years(12)(19)(73)
Reductions for tax positions related to the lapse of
applicable statute of limitations
(6)(7)(9)
Settlements— (2)(38)
Balance as of end of year$315 $316 $186 

As of December 31, 2025 and 2024, there was $252 million and $236 million, respectively, of unrecognized tax benefits that, if recognized, would reduce our annual effective tax rate.

Interest and penalties incurred during the years ended December 31, 2025, 2024, and 2023 were not material. Accrued interest and penalties as of December 31, 2025 and 2024 were not material.

Tax Returns Under Audit
U.S. Federal
As of December 31, 2025, our U.S. federal income tax returns for 2017 through 2020 were under audit by the IRS. We continue to work with the IRS to resolve these audits and we believe that they will be resolved for amounts consistent with our recorded amounts of unrecognized tax benefits associated with these audits.

In 2023, we settled the audits related to our U.S. federal income tax returns for 2012 through 2015, with the exception of one issue regarding the timing of deductibility of certain costs at our refineries. The settlement related to these audits resulted in a favorable reduction in our unrecognized tax benefits. During 2024, we filed formal claims for refund with the IRS for the disagreed-upon issue. As of December 31, 2025, this disagreed-upon issue remains unresolved. We do not expect that the ultimate disposition of this issue will result in a material change to our financial position, results of operations, or cash flows.

U.S. State
As of December 31, 2025, our California tax returns for 2011 through 2016 were under audit by the state of California. During 2024, we settled the audits related to our California income tax returns for 2017 through 2019 for amounts consistent with our recorded amounts for unrecognized tax benefits. We do not expect that the ultimate disposition of the remaining audits will result in a material change to our financial position, results of operations, or cash flows. We believe that these audits will be resolved for amounts consistent with our recorded amounts for unrecognized tax benefits associated with these audits.
Foreign
As of December 31, 2025, certain of our Canadian subsidiaries’ federal tax returns for 2013 through 2015 and 2017 through 2022 were under audit by the Canada Revenue Agency, and our Quebec provincial tax returns for 2013 through 2015 and 2017 through 2019 were under audit by Revenu Québec. As of December 31, 2025, the 2020 and 2021 tax returns for one of our Mexican subsidiaries were under audit by Servicio de Administración Tributaria (SAT), and we continue to engage with SAT to resolve these audits. We do not expect that the ultimate disposition of these audits by the foreign tax authorities will result in a material change to our financial position, results of operations, or cash flows.

Other Disclosures
Undistributed Earnings of Foreign Subsidiaries
As of December 31, 2025, there are certain cumulative undistributed earnings of our foreign subsidiaries that are considered permanently reinvested in the relevant foreign countries. We are able to distribute cash via a dividend from our foreign subsidiaries with a full dividends received deduction in the U.S. However, there is a cost to repatriate the undistributed earnings of certain of our foreign subsidiaries to us, including, but not limited to, withholding taxes imposed by certain foreign jurisdictions, U.S. state income taxes, and U.S. federal income tax on foreign exchange gains. During 2025, we accrued $42 million of withholding and other taxes on the $1.1 billion of earnings that are no longer considered permanently reinvested, but it is not practicable to estimate the amount of additional tax that would be payable on the undistributed earnings that are considered permanently reinvested.

Repatriation Tax Liability
Our repatriation tax liability relates to our recognition of a one-time transition tax on the deemed repatriation of previously undistributed accumulated earnings and profits of our foreign subsidiaries and was previously included in other long-term liabilities. This transition tax, which was reflected in income taxes payable as of December 31, 2024, was remitted to the IRS over the eight-year period provided in the Code, with the final installment paid in 2025.

One Big Beautiful Bill Act
On July 4, 2025, legislation commonly known as the One Big Beautiful Bill Act (OBBB) was enacted, which resulted in a broad range of changes to the Code. The most significant provisions affecting us include the following:
•extension of the clean fuel production credit through December 31, 2029;
•requirement that fuel produced after December 31, 2025 must be exclusively derived from feedstocks produced or grown in the U.S., Mexico, or Canada in order for such fuel to be eligible for the clean fuel production credit;
•elimination of the special clean fuel production credit rate for SAF produced after December 31, 2025;
•permanent reinstatement of the provision that allows companies to expense 100 percent of the cost of qualified property acquired and placed in service after January 19, 2025; and
•modification of several international tax provisions, including those relating to net controlled foreign corporation tested income (formerly global intangible low-taxed income) and foreign-derived deduction eligible income (formerly foreign-derived intangible income), each beginning January 1, 2026.
These changes and other provisions of this legislation did not have a material effect on our financial position, results of operations, and cash flows in 2025. However, we will continue to evaluate the effects of the OBBB on our financial position, results of operations, and cash flows in the future.

Historical Timeline

Fiscal YearFiled
2025Feb 25, 2026Showing above
2024Feb 26, 2025
2023Feb 22, 2024
2022Feb 23, 2023
2021Feb 22, 2022
2020Feb 23, 2021
2019Feb 26, 2020
2018Feb 28, 2019
2017Feb 28, 2018
2016Feb 23, 2017
2015Feb 25, 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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