v3.25.4
Income Taxes
 12 Months Ended
Dec. 31, 2025
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Components of income tax expense (benefit) were:
 Millions of Dollars
 202520242023
Income Tax Expense (Benefit)
Federal
Current$390 662 661 
Deferred114 (282)830 
Foreign
Current261 78 394 
Deferred57 95 (23)
State and local
Current63 11 335 
Deferred7 (64)33 
$892 500 2,230 


On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (IRA) that includes, among other provisions, changes to the U.S. corporate income tax system, including provisions that allow a company to purchase transferable tax credits. In 2024 and 2023, we executed agreements to purchase eligible tax credits for a total of $485 million and $262 million, respectively. In 2024 and 2023, we paid $551 million and $196 million to our counterparties, respectively. These tax credits were used to offset estimated tax payments in 2024 and 2023.

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Major components of deferred tax liabilities and assets at December 31 were:
 Millions of Dollars
 20252024
Deferred Tax Liabilities
Properties, plants and equipment, and intangibles$3,743 3,493 
Investment in joint ventures*1,094 1,864 
Investment in subsidiaries**3,188 2,511 
Other342 318 
Total deferred tax liabilities8,367 8,186 
Deferred Tax Assets
Benefit plan accruals296 355 
Loss and credit carryforwards 209 162 
Asset retirement obligations and accrued environmental costs422 299 
Other financial accruals and deferrals72 91 
Inventory8 82 
Other246 299 
Total deferred tax assets1,253 1,288 
Less: valuation allowance160 137 
Net deferred tax assets1,093 1,151 
Net deferred tax liabilities$7,274 7,035 
*2024 includes activity associated with our 50% equity interest in WRB.
**Includes activity associated with our consolidated investments in Phillips 66 Partners and DCP LP. 2025 also includes activity associated with our consolidated investment in WRB, see Note 9—Investments, Loans and Long-Term Receivables for additional information.
At December 31, 2025, the loss and credit carryforward deferred tax assets were primarily related to a foreign tax credit carryforward in the United States of $150 million; a state tax net operating loss carryforward of $49 million; and capital loss and net operating loss carryforwards in the United Kingdom of $10 million. State net operating loss carryforwards begin to expire in 2040. Foreign tax credit carryforwards, which have a full valuation allowance against them, begin to expire in 2029. The other loss and credit carryforwards, all of which relate to foreign operations, and have a full valuation allowance against them, have indefinite lives.

Valuation allowances have been established to reduce deferred tax assets to an amount that will, more likely than not, be realized. During the year ended December 31, 2025, our total valuation allowance balance increased by $23 million. Based on our historical taxable income, expectations for the future and available tax planning strategies, management expects the remaining net deferred tax assets will be realized as offsets to reversing deferred tax liabilities and the tax consequences of future taxable income.

Earnings of our foreign subsidiaries and foreign joint ventures after December 31, 2017, are generally not subject to incremental income taxes in the United States or withholding taxes in foreign countries upon repatriation. As such, we only assert that the earnings of one of our foreign subsidiaries are indefinitely reinvested. At December 31, 2025 and 2024, the unrecorded deferred tax liability related to the undistributed earnings of this foreign subsidiary was not material.

A deferred income tax liability has not been recognized on the excess of the book basis over the tax basis of an investment in a controlled foreign subsidiary that is essentially permanent in duration. Recognition of a deferred tax liability will only be required if it becomes apparent that this subsidiary will be sold or liquidated in the foreseeable future. At December 31, 2025, the temporary difference resulting from the investment book basis exceeding the tax basis was $1,766 million. Determination of the unrecognized deferred income tax liability related to this temporary difference is not practicable given the variables involved in performing such a calculation.

We file tax returns in the U.S. federal jurisdiction and in many foreign and state jurisdictions. Unrecognized tax benefits reflect the difference between positions taken on income tax returns and the amounts recognized in the financial statements.

The following table is a reconciliation of the changes in our unrecognized income tax benefits balance:

 Millions of Dollars
 202520242023
Balance at January 1$88 116 54 
Additions for tax positions of current year— — — 
Additions for tax positions of prior years— — 66 
Reductions for tax positions of prior years— (28)(4)
Balance at December 31$88 88 116 


Included in the balance of unrecognized income tax benefits at December 31, 2025, 2024 and 2023, were $87 million, $87 million and $100 million, respectively, which, if recognized, would affect our effective income tax rate.

At December 31, 2025, 2024 and 2023, accrued liabilities for interest and penalties, net of accrued income taxes, totaled $1 million, $1 million and $8 million, respectively. These accruals had no impact on our results for the year ended December 31, 2025, increased our results for the year ended December 31, 2024, by $7 million and decreased our results for the year ended December 31, 2023, by $1 million.

Audits in significant jurisdictions are generally complete as follows: United Kingdom (2022), Germany (2017) and United States (2020). Certain issues remain in dispute for audited years, and unrecognized income tax benefits for years still subject to or currently undergoing an audit are subject to change. As a consequence, the balance in unrecognized income tax benefits can be expected to fluctuate from period to period. Although it is reasonably possible such changes could be significant when compared with our total unrecognized income tax benefits, the amount of change is not estimable.
The amounts of U.S. and foreign income before income taxes, with a reconciliation of income tax at the federal statutory rate to the recorded income tax expense (benefit), were:
 202520242023
 AmountPercentAmountPercentAmountPercent
Income before income taxes
United States$1,035 19.1 %1,796 67.1 7,887 83.3 
Foreign4,385 80.9 879 32.9 1,582 16.7 
$5,420 100.0 %2,675 100.0 9,469 100.0 
Federal statutory income tax1,138 21.0 562 21.0 1,989 21.0 
State income tax, net of federal income tax benefit*57 1.1 (43)(1.6)290 3.1 
Foreign tax effects
United Kingdom
Statutory tax rate difference between United Kingdom and United States59 1.1 — — — — 
Non-taxable gain on disposition**(251)(4.6)— — — — 
Other(2)— — — — — 
Germany
Statutory tax rate difference between Germany and United States308 5.7 — — — — 
Non-taxable gain on disposition***(740)(13.7)— — — — 
Other12 0.2 — — — — 
Other foreign jurisdictions11 0.1 (11)(0.4)39 0.4 
Tax law and rate changes— — — — — — 
Effect of cross-border tax laws
Disposition of Coop**220 4.1 36 1.4 — — 
Other59 1.1 (11)(0.4)(43)(0.5)
Tax credits(1)— (2)(0.1)(2)— 
Changes in valuation allowances21 0.4 17 0.6 22 0.2 
Non-taxable or non-deductible items
Discount on purchased credits— — (36)(1.3)— — 
Other(7)(0.1)(12)(0.5)(74)(0.8)
Changes in unrecognized tax benefits— — 4 0.1 16 0.2 
Other8 0.1 (4)(0.1)(7)— 
$892 16.5 %500 18.7 2,230 23.6 
Note - items that do not meet the 5% threshold for disaggregation have not been separately stated.
* The states that contribute to the majority (greater than 50 percent) of the tax effect in this category include Illinois, Oklahoma, New Jersey, California, and Louisiana for 2025 and 2024, and California, New Jersey, Oklahoma, and Illinois for 2023.
** Related to the disposition of our ownership interest in Coop. See Note 9—Investments, Loans and Long-Term Receivables for additional information.
*** Related to the disposition of 65% of our interest in Germany and Austria Marketing. See Note 9—Investments, Loans and Long-Term Receivables for additional information.
Income tax expense of $47 million for the year ended December 31, 2025 and income tax benefits of $14 million and $113 million for the years ended December 31, 2024 and 2023, respectively, are reflected in “Capital in Excess of Par” on the consolidated statement of changes in equity.