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INCOME TAXES
 12 Months Ended
May 31, 2026
Income Tax Disclosure [Abstract]  
INCOME TAXES
NOTE 7 — INCOME TAXES
Income before income taxes is as follows:
YEAR ENDED MAY 31,
(Dollars in millions)
202620252024
Income before income taxes:
United States$2,680 $3,220 $5,588 
Foreign1,220 665 1,112 
TOTAL INCOME BEFORE INCOME TAXES$3,900 $3,885 $6,700 
The provision for income taxes is as follows:
YEAR ENDED MAY 31,
(Dollars in millions)
202620252024
Current:
United States
Federal$443 $358 $782 
State100 121 201 
Foreign345 475 514 
Total Current888 954 1,497 
Deferred:
United States
Federal(262)(135)(422)
State10 (12)(61)
Foreign156 (141)(14)
Total Deferred(96)(288)(497)
TOTAL INCOME TAX EXPENSE$792 $666 $1,000 
The Company adopted ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, on a prospective basis beginning with fiscal 2026. The following table presents a reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate pursuant to ASU 2023-09:
(Dollars in millions)
YEAR ENDED MAY 31, 2026
U.S. federal statutory tax rate$819 21.0 %
State and local income taxes, net of federal income tax effects(1)
94 2.4 %
Foreign tax effects
China
Withholding taxes
83 2.1 %
Other
13 0.3 %
Mexico59 1.5 %
Other foreign jurisdictions
107 2.7 %
Effect of cross-border tax laws
Foreign-derived intangible income benefit(113)-2.9 %
Current Subpart F income179 4.6 %
Deferred Subpart F income, including foreign tax credits(120)-3.1 %
Foreign tax credits(353)-9.1 %
Other
11 0.3 %
Tax credits
Research and development tax credits(65)-1.7 %
Other credits
(1)— %
Nontaxable or nondeductible items
Stock-based compensation44 1.1 %
Other(28)-0.7 %
Changes in unrecognized tax benefits
52 1.3 %
Other adjustments
11 0.3 %
EFFECTIVE INCOME TAX RATE$792 20.3 %
(1)The state and local jurisdictions that contribute to the majority (greater than 50%) of the tax effect in this category include Pennsylvania, New York, California, New York City and Georgia for fiscal 2026.
The following table presents the required disclosures prior to the Company's adoption of ASU 2023-09 and reconciles the U.S. statutory federal income tax rate to the effective income tax rate as follows:
 YEAR ENDED MAY 31,
20252024
Federal income tax rate21.0 %21.0 %
State taxes, net of federal benefit2.0 %1.4 %
Foreign earnings1.1 %-2.5 %
U.S. tax regulations - foreign currency losses
-3.4 %0.0 %
Foreign-derived intangible income benefit-5.3 %-4.8 %
Stock-based compensation
1.5 %-0.5 %
Income tax audits and contingency reserves2.7 %1.8 %
U.S. research and development tax credit-2.1 %-2.1 %
Other, net-0.4 %0.6 %
EFFECTIVE INCOME TAX RATE17.1 %14.9 %
The increase in the Company's effective tax rate for fiscal 2026 compared to fiscal 2025 was primarily due to a one-time, non-cash deferred tax benefit recognized in the third quarter of fiscal 2025 provided by finalized U.S. tax regulations. On December 10, 2024, the U.S. Department of Treasury published final regulations related to Internal Revenue Code ("IRC") Section 987 foreign currency gains and losses derived from translation of the operations, assets and liabilities of non-U.S. qualified business units. These regulations required a pre-transition foreign currency gain or loss to be included in the determination of future taxable income or loss. During the third quarter of fiscal 2025, the Company recognized a non-cash deferred income tax benefit of $133 million related to pre-transition foreign currency losses expected to reduce taxable income in future periods.
The increase in the Company's effective tax rate for fiscal 2025 compared to fiscal 2024 was primarily due to changes in the Company's earnings mix, decreased benefits from stock-based compensation and one-time benefits recognized in fiscal 2024, including the impact of temporary relief provided by the Internal Revenue Service ("IRS") relating to U.S. foreign tax credit regulations. These impacts were partially offset by a one-time, non-cash deferred tax benefit recognized in the third quarter of fiscal 2025 provided by U.S. tax regulations related to IRC Section 987 foreign currency gains and losses.
On July 4, 2025, the U.S. government enacted The One Big Beautiful Bill Act of 2025 which includes, among other provisions, changes to the U.S. corporate income tax system including the allowance of immediate expensing of qualifying research and development expenses and permanent extensions of certain provisions within the Tax Cuts and Jobs Act. Certain provisions were effective for the Company beginning June 1, 2025. These tax law changes did not have a material impact on the Company's Consolidated Financial Statements for fiscal 2026.
Deferred income tax assets and liabilities comprise the following as of: 
MAY 31,
(Dollars in millions)
20262025
Deferred tax assets:
Inventories
$90 $98 
Sales return reserves
175 205 
Deferred compensation
449 387 
Stock-based compensation313 285 
Reserves and accrued liabilities
70 143 
Operating lease liabilities427 458 
Intangibles198 217 
Capitalized research and development expenditures 996 923 
Net operating loss carry-forwards96 75 
Subpart F deferred tax421 315 
Other
267 212 
Total deferred tax assets3,502 3,318 
Valuation allowance(192)(51)
Total deferred tax assets after valuation allowance3,310 3,267 
Deferred tax liabilities:
Foreign withholding tax on undistributed earnings of foreign subsidiaries(129)(119)
Property, plant and equipment
(231)(225)
Right-of-use assets(343)(377)
Other
(14)(4)
Total deferred tax liabilities(717)(725)
NET DEFERRED TAX ASSET(1)
$2,593 $2,542 
(1)Of the total $2,593 million net deferred tax asset for the period ended May 31, 2026, $2,731 million was included within Deferred income taxes and other assets and $(138) million was included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets. Of the total $2,542 million net deferred tax asset for the period ended May 31, 2025, $2,668 million was included within Deferred income taxes and other assets and $(126) million was included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets.
Deferred tax assets as of May 31, 2026 and 2025, were reduced by a valuation allowance provided for U.S. federal capital loss carryforwards and other tax attributes, certain state deferred tax assets, and other tax benefits generated by certain foreign entities with operating losses. The total valuation allowance increased to $192 million as of May 31, 2026 from $51 million as of May 31, 2025 as a result of valuation allowances established on certain foreign net operating loss carryforwards, specific state deferred tax assets, and an increase in the U.S. federal capital loss carryforward, which is subject to a full valuation allowance.
The Company has available tax-effected state and foreign loss carry-forwards of $96 million as of May 31, 2026. If not utilized, $89 million of tax-effected losses will expire in the periods between fiscal 2028 and 2045. Approximately $7 million of tax-effected losses do not expire.
The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits as of:
 MAY 31,
(Dollars in millions)
202620252024
Unrecognized tax benefits, beginning of the period$1,026 $990 $936 
Gross increases related to prior period tax positions14 11 35 
Gross decreases related to prior period tax positions
(17)(10)(13)
Gross increases related to current period tax positions
52 81 77 
Settlements(112)(5)(22)
Lapse of statute of limitations(20)(45)(24)
Changes due to currency translation10 4 1 
UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD$953 $1,026 $990 
As of May 31, 2026, total gross unrecognized tax benefits, excluding related interest and penalties, were $953 million, of which $742 million would affect the Company's effective tax rate if recognized in future periods. The majority of the total gross unrecognized tax benefits were long-term in nature and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets.
The Company recognizes interest and penalties related to income tax matters in Income tax expense. As of May 31, 2026 and 2025, accrued interest and penalties related to uncertain tax positions were $438 million and $376 million, respectively (excluding federal benefit) and were included within Deferred income taxes and other liabilities on the Consolidated Balance Sheets.
The Company is subject to taxation in the U.S., as well as various state and foreign jurisdictions. The Company is currently under audit by the U.S. IRS for fiscal years 2017 through 2023. The Company has closed all U.S. federal income tax matters through fiscal 2016, with the exception of certain transfer pricing adjustments. In certain major foreign jurisdictions, tax years after 2015 remain subject to examination.
Although the timing and outcome of resolution of the U.S. federal income tax audit for fiscal years 2017 through 2019 is uncertain, the Company estimates total gross unrecognized tax benefits could decrease by up to $184 million as a result of the expected resolution with the IRS of certain previously agreed U.S. federal income tax matters related to transfer pricing adjustments, research and development credits and other items. The Company will continue to monitor developments of its U.S. federal income tax audit for fiscal years 2017 through 2019.
In January 2019, the European Commission opened a formal investigation to examine whether the Netherlands has breached State Aid rules when granting certain tax rulings to the Company. The Company believes the investigation is without merit. If this matter is adversely resolved, the Netherlands may be required to assess additional amounts with respect to prior periods, and the Company's income taxes related to prior periods in the Netherlands could increase.
A portion of the Company's foreign operations benefit from a tax holiday, which is set to expire in 2031. This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The tax benefit attributable to this tax holiday, before taking into consideration other U.S. indirect tax provisions, was $254 million, $271 million and $338 million for the fiscal years ended May 31, 2026, 2025 and 2024, respectively. The benefit of the tax holiday on diluted earnings per common share, before taking into consideration other U.S. indirect tax provisions, was $0.17, $0.18 and $0.22 for fiscal 2026, 2025 and 2024, respectively.
A summary of cash paid for income taxes (net of refunds received) in fiscal 2026 pursuant to ASU 2023-09 is as follows:
YEAR ENDED MAY 31,
(Dollars in millions)
2026
Federal(1)
$642 
State
126 
Foreign502 
China
85 
Mexico82 
Netherlands77 
Other
258 
TOTAL CASH PAID FOR INCOME TAXES
$1,270 
(1)Of the $642 million cash paid for U.S. federal income taxes, $268 million related to the final installment of transition tax on deemed repatriation of undistributed earnings of foreign subsidiaries related to the Tax Cuts and Jobs Act and $260 million related to estimated payments for the expected resolution with the IRS of certain U.S. federal income tax matters for fiscal years 2017 through 2019.
Cash paid for income taxes (net of refunds received) was $1,226 million and $1,299 million in fiscal 2025 and 2024, respectively.