MCKESSON CORP

6. Income Taxes

Income tax expense related to continuing operations consists of the following:

Fluctuations in the Company’s reported income tax rates are primarily due to changes in the business mix of earnings between various taxing jurisdictions, including the impact of non-cash pre-tax charges related to the remeasurement of the Canadian retail disposal group to fair value less costs to sell as described in Financial Note 2, "Business Acquisitions and Divestitures," and recognized discrete tax items.

The reconciliation of income tax expense and the amount computed by applying the statutory federal income tax rate of 21.0% to income before income taxes was as follows:

During the year ended March 31, 2025, the Company recognized a net discrete tax benefit of $258 million related to the sales of certain intellectual property between McKesson wholly-owned legal entities based in foreign tax jurisdictions. The transferor entities of the intellectual property were not subject to income tax on their transaction. The recipient entities of the intellectual property are entitled to amortize the fair value of the assets for tax purposes. As a result of these transactions, and in accordance with ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, net discrete tax benefits of $44 million and $214 million were recognized in the second and fourth quarters of fiscal 2025, respectively.

During the year ended March 31, 2024, the Company recognized a net discrete tax benefit of $157 million related to the release of a valuation allowance based on management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized.

During the year ended March 31, 2024, the Company also repatriated certain intellectual property between McKesson wholly-owned legal entities that are based in different tax jurisdictions. The transferor entity of the intellectual property was not subject to income tax on this transaction. The recipient entity of the intellectual property is entitled to amortize the fair value of the assets for tax purposes. As a result of this repatriation and in accordance with ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, a net discrete tax benefit of $147 million was recognized in the first quarter of fiscal 2024. In addition, the Company sold certain intellectual property between McKesson wholly-owned legal entities that are based in different tax jurisdictions, where the transferor entity was subject to income tax and the recipient entity is entitled to amortize the fair value of the assets for tax purposes. As a result of this sale, a net discrete tax expense of $43 million was recognized in the fourth quarter of fiscal 2024.

During the year ended March 31, 2023, the Company recognized discrete tax benefits primarily consisting of $115 million related to statute of limitation expirations and tax settlements in various taxing jurisdictions and $58 million related to the tax impact of share-based compensation.

Deferred tax balances consisted of the following:

The Company assesses the available positive and negative evidence to determine whether deferred tax assets are more likely than not to be realized. As a result of this assessment, valuation allowances have been recorded on certain deferred tax assets in various tax jurisdictions. The valuation allowances were approximately $644 million and $653 million in fiscal 2025 and fiscal 2024, respectively, and primarily relate to net operating and capital losses.

The Company has federal, state, and foreign net operating loss carryforwards of $40 million, $4.1 billion, and $1.3 billion at March 31, 2025, respectively. Federal and state net operating losses will expire at various dates from 2026 through 2045. Substantially all its foreign net operating losses have indefinite lives. In addition, the Company has foreign capital loss carryforwards of $1.3 billion with indefinite lives.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits for the last three fiscal years:

As of March 31, 2025, the Company had $1.5 billion in unrecognized tax benefits, of which $1.4 billion would reduce income tax expense and the effective tax rate, if recognized. The increases in unrecognized tax benefits in both fiscal 2025 and fiscal 2024 primarily relate to additions associated with recurring items.

During the next twelve months, the Company does not anticipate any material reduction in its unrecognized tax benefits based on the information currently available. However, this may change as the Company continues to have ongoing discussions with various taxing authorities throughout the year.

During the fourth quarter of fiscal 2023, the Internal Revenue Service (“IRS”) communicated proposed adjustments to taxable income reported in the Company’s fiscal 2018 and fiscal 2019 U.S. Federal Corporate Income Tax returns. The adjustments would increase the Company’s federal income tax liability in the range of $600 million to $700 million. The Company disagrees with the proposed adjustments and intends to pursue resolution through the administrative process with the IRS Independent Office of Appeals and, if necessary, through judicial remedies. During the first quarter of fiscal 2024, the Company filed a formal protest with the IRS. The Company does not anticipate a final resolution of these matters in the next twelve months. Although the final resolution of these matters is uncertain, the Company believes in the merits of its tax positions and believes that it has adequately reserved for any adjustments to the provision of income taxes that may ultimately result. However, if the IRS prevails in these matters, the assessed tax and interest could have a material adverse effect on the Company’s financial position, results of operations, and cash flows in future periods.

The Company reports interest and penalties on income taxes as income tax expense. It recognized income tax expense of $80 million, $84 million, and $31 million in fiscal 2025, fiscal 2024, and fiscal 2023, respectively, representing interest and penalties, in its Consolidated Statements of Operations. As of March 31, 2025 and 2024, the Company accrued cumulatively $302 million and $222 million, respectively, in interest and penalties on unrecognized tax benefits in its Consolidated Balance Sheets.

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, and various foreign jurisdictions. The Company is generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal 2016 through the current fiscal year.

Undistributed earnings of the Company’s foreign operations of approximately $4.0 billion were considered indefinitely reinvested on March 31, 2025. Following the enactment of the 2017 Tax Act, the repatriation of cash to the U.S. is generally no longer taxable for federal income tax purposes. However, the repatriation of cash held outside the U.S. could be subject to applicable foreign withholding taxes and state income taxes. The Company may remit foreign earnings to the U.S. to the extent it is tax efficient to do so. It does not expect the tax impact from remitting these earnings to be material.

7. Noncontrolling Interests

Noncontrolling Interests

Noncontrolling interests represent third-party equity interests in the Company’s consolidated entities primarily related to ClarusONE, Vantage, and SCRI Oncology. After June 15, 2021, noncontrolling interests also represented minority shareholder equity interests in McKesson Europe. The Company’s noncontrolling interest in McKesson Europe was included in the divestiture of the E.U. disposal group in October 2022, as discussed in Financial Note 2, “Business Acquisitions and Divestitures.”

Noncontrolling interests in the Company’s Consolidated Balance Sheets were $380 million and $372 million at March 31, 2025 and 2024, respectively. For the years ended March 31, 2025, 2024, and 2023, the Company allocated a total of $186 million, $158 million, and $162 million of net income to noncontrolling interests, respectively.

Changes in noncontrolling interests for the years ended March 31, 2025, 2024, and 2023 were as follows:

8. Earnings Per Common Share

Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. The computation of diluted earning per common share is similar to that of basic earnings per common share, except that the former reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. Potentially dilutive securities include outstanding stock options, restricted stock units, and performance-based and other restricted stock units.

Less thanone million of potentially dilutive securities for fiscal 2025, fiscal 2024, and fiscal 2023 were excluded from the computation of diluted earnings per common share as they were anti-dilutive.

The computations for basic and diluted earnings or loss per common share were as follows:

(1)Includes dilutive effect from restricted stock units and performance-based restricted stock units.

(2)Certain computations may reflect rounding adjustments.