Income Taxes

12 Months Ended

Dec. 31, 2014

Income Tax Disclosure [Abstract]

Income taxes

Income taxes

JPMorgan Chase and its eligible subsidiaries file a consolidated U.S. federal income tax return. JPMorgan Chase uses the asset and liability method to provide income taxes on all transactions recorded in the Consolidated Financial Statements. This method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities for book and tax purposes. Accordingly, a deferred tax asset or liability for each temporary difference is determined based on the tax rates that the Firm expects to be in effect when the underlying items of income and expense are realized. JPMorgan Chase’s expense for income taxes includes the current and deferred portions of that expense. A valuation allowance is established to reduce deferred tax assets to the amount the Firm expects to realize.

Due to the inherent complexities arising from the nature of the Firm’s businesses, and from conducting business and being taxed in a substantial number of jurisdictions, significant judgments and estimates are required to be made. Agreement of tax liabilities between JPMorgan Chase and the many tax jurisdictions in which the Firm files tax returns may not be finalized for several years. Thus, the Firm’s final tax-related assets and liabilities may ultimately be different from those currently reported.

A reconciliation of the applicable statutory U.S. income tax rate to the effective tax rate for each of the years ended December 31, 2014, 2013 and 2012, is presented in the following table.

Effective tax rate
Year ended December 31,	2014		2013		2012
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Increase/(decrease) in tax rate resulting from:
U.S. state and local income taxes, net of U.S. federal income tax benefit	2.7		2.2		1.6
Tax-exempt income	(3.1	)	(3.1	)	(2.9	)
Non-U.S. subsidiary earnings(a)	(2.0	)	(4.9	)	(2.4	)
Business tax credits	(5.4	)	(5.4	)	(4.2	)
Nondeductible legal expense	2.4		8.0		(0.2	)
Other, net	(2.6	)	(1.0	)	(0.5	)
Effective tax rate	27.0	%	30.8	%	26.4	%

(a) Predominantly includes earnings of U.K. subsidiaries that are deemed to be reinvested indefinitely.

The components of income tax expense/(benefit) included in the Consolidated statements of income were as follows for each of the years ended December 31, 2014, 2013, and 2012.

Income tax expense/(benefit)
Year ended December 31, (in millions)	2014		2013			2012
Current income tax expense/(benefit)
U.S. federal	$	1,610	$	(1,316	)	$	3,225
Non-U.S.	1,353		1,308			1,782
U.S. state and local	857		(4		)	1,496
Total current income tax expense/(benefit)	3,820		(12		)	6,503
Deferred income tax expense/(benefit)
U.S. federal	3,738		7,080			2,238
Non-U.S.	71		10			(327		)
U.S. state and local	401		913			(781		)
Total deferred income tax expense/(benefit)	4,210		8,003			1,130
Total income tax expense	$	8,030	$	7,991		$	7,633

Total income tax expense includes $451 million, $531 million and $200 million of tax benefits recorded in 2014, 2013, and 2012, respectively, as a result of tax audit resolutions. In 2013, the relationship between current and deferred income tax expense was largely driven by the reversal of significant deferred tax assets as well as prior-year tax adjustments and audit resolutions.

The preceding table does not reflect the tax effect of certain items that are recorded each period directly in stockholders’ equity and certain tax benefits associated with the Firm’s employee stock-based compensation plans. The tax effect of all items recorded directly to stockholders’ equity resulted in a decrease of $140 million in 2014, an increase of $2.1 billion in 2013, and a decrease of $1.9 billion in 2012.

U.S. federal income taxes have not been provided on the undistributed earnings of certain non-U.S. subsidiaries, to the extent that such earnings have been reinvested abroad for an indefinite period of time. Based on JPMorgan Chase’s ongoing review of the business requirements and capital needs of its non-U.S. subsidiaries, combined with the formation of specific strategies and steps taken to fulfill these requirements and needs, the Firm has determined that the undistributed earnings of certain of its subsidiaries would be indefinitely reinvested to fund current and future growth of the related businesses. As management does not intend to use the earnings of these subsidiaries as a source of funding for its U.S. operations, such earnings will not be distributed to the U.S. in the foreseeable future. For 2014, pretax earnings of $2.6 billion were generated and will be indefinitely reinvested in these subsidiaries. At December 31, 2014, the cumulative amount of undistributed pretax earnings in these subsidiaries were $31.1 billion. If the Firm were to record a deferred tax liability associated with these undistributed earnings, the amount would be $7.0 billion at December 31, 2014.

These undistributed earnings are related to subsidiaries located predominantly in the U.K. where the 2014 statutory tax rate was 21.5%.

Tax expense applicable to securities gains and losses for the years 2014, 2013 and 2012 was $30 million, $261 million, and $822 million, respectively.

Deferred income tax expense/(benefit) results from differences between assets and liabilities measured for financial reporting purposes versus income tax return purposes. Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely than not. If a deferred tax asset is determined to be unrealizable, a valuation allowance is established. The significant components of deferred tax assets and liabilities are reflected in the following table as of December 31, 2014 and 2013.

Deferred taxes
December 31, (in millions)	2014			2013
Deferred tax assets
Allowance for loan losses	$	5,756		$	6,593
Employee benefits	3,378			4,468
Accrued expenses and other	8,637			9,179
Non-U.S. operations	5,106			5,493
Tax attribute carryforwards	570			748
Gross deferred tax assets	23,447			26,481
Valuation allowance	(820		)	(724		)
Deferred tax assets, net of valuation allowance	$	22,627		$	25,757
Deferred tax liabilities
Depreciation and amortization	$	3,073		$	3,196
Mortgage servicing rights, net of hedges	5,533			5,882
Leasing transactions	2,495			2,352
Non-U.S. operations	4,444			4,705
Other, net	4,891			3,459
Gross deferred tax liabilities	20,436			19,594
Net deferred tax assets	$	2,191		$	6,163

JPMorgan Chase has recorded deferred tax assets of $570 million at December 31, 2014, in connection with U.S. federal net operating loss (“NOL”) carryforwards. At December 31, 2014, total U.S. federal NOL carryforwards were approximately $1.6 billion. If not utilized, the U.S. federal NOL carryforwards will expire between 2025 and 2034.

The valuation allowance at December 31, 2014, was due to losses associated with non-U.S. subsidiaries.

At December 31, 2014, 2013 and 2012, JPMorgan Chase’s unrecognized tax benefits, excluding related interest expense and penalties, were $4.9 billion, $5.5 billion and $7.2 billion, respectively, of which $3.5 billion, $3.7 billion and $4.2 billion, respectively, if recognized, would reduce the annual effective tax rate. Included in the amount of unrecognized tax benefits are certain items that would not affect the effective tax rate if they were recognized in the Consolidated statements of income. These unrecognized items include the tax effect of certain temporary differences, the portion of gross state and local unrecognized tax benefits that would be offset by the benefit from associated U.S. federal income tax deductions, and the portion of gross non-U.S. unrecognized tax benefits that would have offsets in other jurisdictions. JPMorgan Chase is presently under audit by a number of taxing authorities, most notably by the Internal Revenue Service, New York State and City, and the State of California as summarized in the Tax examination status table below. Based upon the status of all of the tax examinations currently in process, it is reasonably possible that over the next 12 months the resolution of these examinations could result in a reduction in the gross balance of unrecognized tax benefits in the range of $0 to approximately $2 billion. Upon settlement of an audit, the gross unrecognized tax benefits would decline either because of tax payments or the recognition of tax benefits.

The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2014, 2013 and 2012.

Unrecognized tax benefits
Year ended December 31, (in millions)	2014			2013			2012
Balance at January 1,	$	5,535		$	7,158		$	7,189
Increases based on tax positions related to the current period	810			542			680
Increases based on tax positions related to prior periods	477			88			234
Decreases based on tax positions related to prior periods	(1,902		)	(2,200		)	(853		)
Decreases related to settlements with taxing authorities	(9		)	(53		)	(50		)
Decreases related to a lapse of applicable statute of limitations	—			—			(42		)
Balance at December 31,	$	4,911		$	5,535		$	7,158

After-tax interest expense/(benefit) and penalties related to income tax liabilities recognized in income tax expense were $17 million, $(184) million and $147 million in 2014, 2013 and 2012, respectively.

At both December 31, 2014 and 2013, in addition to the liability for unrecognized tax benefits, the Firm had accrued $1.2 billion for income tax-related interest and penalties.

JPMorgan Chase is continually under examination by the Internal Revenue Service, by taxing authorities throughout the world, and by many states throughout the U.S. The following table summarizes the status of significant income tax examinations of JPMorgan Chase and its consolidated subsidiaries as of December 31, 2014.

Tax examination status
December 31, 2014	Periods under examination	Status
JPMorgan Chase – U.S.	2003 - 2005	Field examination completed; at Appellate level
JPMorgan Chase – U.S.	2006 - 2010	Field examination
JPMorgan Chase – U.K.	2006 – 2012	Field examination of certain select entities
JPMorgan Chase – New York State and City	2005 – 2007	Field examination
JPMorgan Chase – California	2006 – 2010	Field examination

The following table presents the U.S. and non-U.S. components of income before income tax expense for the years ended December 31, 2014, 2013 and 2012.

Income before income tax expense - U.S. and non-U.S.
Year ended December 31, (in millions)	2014		2013		2012
U.S.	$	22,515	$	17,229	$	24,895
Non-U.S.(a)	7,277		8,685		4,022
Income before income tax expense	$	29,792	$	25,914	$	28,917

(a) For purposes of this table, non-U.S. income is defined as income generated from operations located outside the U.S.