Income Taxes

Total income taxes were as follows:



Year Ended December 31,	2016			2015			2014
	(in millions)
Provision (benefit) for income taxes	$	(258	)	$	(471	)	$	224
Income taxes related to adjustments included in common equity:
Unrealized gains on cash flow hedging instruments	9			21			24
Changes in funded status of postretirement benefit plans	(2		)	25			(2		)
Total income taxes	$	(251	)	$	(425	)	$	246

Provision (benefit) for income taxes, all of which were in the United States, were:



Year Ended December 31,	2016			2015			2014
	(in millions)
Current provision (benefit)	$	(278	)	$	56		$	108
Deferred provision (benefit)	20			(527		)	116
Total income provision (benefit)	$	(258	)	$	(471	)	$	224

The significant components of deferred provision (benefit) attributable to income were:



Year Ended December 31,	2016			2015			2014
	(in millions)
Deferred income tax provision excluding the effects of other components	$	895		$	28		$	473
Increase in Federal operating loss carryforwards	(859		)	(479		)	(366		)
Decrease in State valuation allowances	(17		)	(171		)	(53		)
Increase in State operating loss carryforwards and other temporary differences	1			95			42
Decrease in foreign and general business tax credits	—			—			20
Deferred income tax provision (benefit)	$	20		$	(527	)	$	116

The increase in the Federal operating loss carry forward in 2016 is primarily due to tax losses incurred in 2016 that have not yet been utilized by the HNAH Group consolidated tax filing group but are fully expected to be realized within the statutory carryforward period. The tax losses during 2016 were primarily a result of receivables sales as well as the settlement of the securities litigation. See Note 7, "Receivables Held for Sale," and Note 20, "Litigation and Regulatory Matters", for additional information.

For 2016, the decrease in the state valuation allowance is largely due to the decrease in the separate filing state gross timing difference balances which was partially offset by an increase in the valuation allowance on state net operating loss carryforwards. For 2015, the decrease in the State valuation allowance is mainly due to the impact of moving solely to reliance on projected future taxable income to support the recognition of certain State deferred tax assets and the effects of re-valuing our deferred tax assets for New York City Tax Reform enacted April 13, 2015. For 2014, the decreases in State operating loss carryforwards and other temporary differences and the corresponding decreases in valuation allowances relate to changes in estimates as a result of state return filings for the 2013 tax year and amended State tax returns upon the closing of the Federal audits for the 2006 - 2009 tax years. Additionally, the amounts were impacted by the expiration of State net operating losses, and the effects of re-valuing our deferred tax assets for New York State Tax Reform that was enacted March 31, 2014.

A reconciliation of income tax expense (benefit) compared with the amounts at the U.S. Federal statutory rate was as follows:



Year Ended December 31,	2016					2015					2014
	(dollars are in millions)
Tax provision (benefit) at the U.S. Federal statutory income tax rate	$	(285	)	(35.0	)%	$	(303	)	(35.0	)%	$	270		35.0	%
Increase (decrease) in rate resulting from:
State and local taxes, net of Federal benefit	(11		)	(1.3	)	(14		)	(1.6	)	12			1.6
Adjustment with respect to tax for prior periods⁽¹⁾	33			4.0		(16		)	(1.8	)	38			4.9
Adjustment of tax rate used to value deferred taxes⁽²⁾	6			.8		(40		)	(4.6	)	(52		)	(6.7	)
Change in valuation allowance⁽³⁾	29			3.6		(90		)	(10.4	)	(28		)	(3.6	)
Uncertain tax positions⁽⁴⁾	(24		)	(3.0	)	(4		)	(.5	)	(2		)	(.3	)
Other non-deductible/non-taxable items⁽⁵⁾	(7		)	(.8	)	(4		)	(.5	)	(11		)	(1.4	)
Other	1			—		—			(.1	)	(3		)	(.4	)
Total income tax expense (benefit)	$	(258	)	(31.7	)%	$	(471	)	(54.5	)%	$	224		29.1	%

⁽¹⁾

For 2016, the amounts were impacted by a $12 million adjustment related to the Federal audit of the 2013 tax year as well as the impact of a reversal of approximately $15 million associated with an out of period adjustment to our deferred tax asset balance. For 2015, the amount relates to an adjustment to a deferred tax balance sheet account as a result of the Federal audit for the 2012 tax year. For 2014, the amount relates to changes in estimates as a result of filing the Federal and State income tax returns and a change in State tax expense as a result of filing amended State tax returns upon the closing of the Federal audits for the 2006 - 2009 tax years.

⁽²⁾

For 2016, the amount largely relates to the effect of revaluing our deferred tax assets based on the recently filed tax returns. For 2015, the amount mainly relates to the effects of revaluing our deferred tax assets for New York City Tax Reform that was enacted on April 13, 2015. For 2014, the amount primarily relates to the effects of revaluing our deferred tax assets as a result of New York State Tax Reform that was enacted on March 31, 2014.

⁽³⁾

For 2016, the amounts primarily reflect an increase in valuation allowance reserves on certain state net operating loss carryforwards. For 2015, the amount is due to the release of valuation allowance reserves on previously unrecognized State net operating loss carryforwards and temporary differences. For 2014, the amount relates to changes in valuation allowance reserves in States with net operating loss carryforward periods of 12 to 20 years and a release of valuation allowance reserves as a result of filing amended State tax returns upon the closing of the Federal audits for the 2006-2009 tax years.


⁽⁴⁾	For 2016, the amount primarily relates to the resolution of an uncertain items related to the Federal Audit of the 2013 tax year. The amount for 2016 also reflects the conclusion of certain State audits. For 2015 and 2014, the amounts primarily relate to the conclusion of State audits and expiration of State statutes of limitations.


⁽⁵⁾	For 2016, 2015 and 2014, the amount primarily relates to tax exempt income and, for 2015 and 2014, nondeductible penalties.

The components of the net deferred tax asset are presented in the following table:



	December 31, 2016			December 31, 2015
	(in millions)
Deferred Tax Assets:
Receivables held for sale	$	387		$	541
Federal and State unused tax benefit carryforwards	2,577			1,719
Market value adjustment related to derivatives and long-term debt carried at fair value	16			275
Interests in Real Estate Mortgage Investment Conduits⁽¹⁾	380			345
Accrued expenses not currently deductible	78			480
Other	204			379
Total deferred tax assets	3,642			3,739
Valuation allowance	(690		)	(707		)
Total deferred tax assets net of valuation allowance	2,952			3,032
Deferred Tax Liabilities:
Fee income	26			54
Other	29			55
Total deferred tax liabilities	55			109
Net deferred tax asset	$	2,897		$	2,923

⁽¹⁾

Real Estate Mortgage Investment Conduits ("REMIC") are investment vehicles that hold commercial and residential mortgages in trust and issue securities representing an undivided interest in these mortgages. We hold portfolios of noneconomic residual interests in a number of REMICs through one of our subsidiaries. This item represents the tax basis in such interests which has accumulated as a result of tax rules requiring the recognition of income related to such noneconomic residuals.

The deferred tax valuation allowance is attributed to the following deferred tax assets that, based on the available evidence, is more-likely-than-not that the deferred tax asset will not be realized:



	December 31, 2016		December 31, 2015
	(in millions)
State unused tax benefit carryforwards	$	634	$	651
Deferred capital loss on sale to affiliates	56		56
Total	$	690	$	707

The State deferred tax assets against which a valuation allowance is maintained primarily relate to unused tax benefits associated with our run-off business for which recovery is highly unlikely.

A reconciliation of the beginning and ending amount of unrecognized tax benefits related to uncertain tax positions is as follows:



	2016			2015			2014
	(in millions)
Balance at beginning of year	$	86		$	93		$	111
Additions for tax positions of prior years	4			1			3
Reductions for tax positions of prior years	(2		)	(3		)	(3		)
Settlements	(60		)	(1		)	(18		)
Reductions for lapse of statute of limitations	(8		)	(4		)	—
Balance at end of year	$	20		$	86		$	93

The total amount of unrecognized tax benefits related to uncertain tax positions that, if recognized, would affect the effective tax rate was $13 million, $57 million and $61 million at December 31, 2016, 2015 and 2014, respectively. Included in the unrecognized tax benefits are certain items the recognition of which would not affect the effective tax rate, such as the tax effect of temporary differences and the amount of State taxes that would be deductible for U.S. Federal purposes. It is reasonably possible that there could be a change in the amount of our unrecognized tax benefits within the next 12 months due to settlements or statutory expirations in various State and local tax jurisdictions.

It is our policy to recognize accrued interest related to uncertain tax positions in interest income in the consolidated statement of income (loss) and to recognize penalties, if any, related to uncertain tax positions as a component of other servicing and administrative expenses in the consolidated statement of income (loss). Accruals for the payment of interest and penalties associated with uncertain tax positions totaled $9 million and $14 million at December 31, 2016 and December 31, 2015, respectively. Accrual for the payment of interest and penalties associated with uncertain tax positions decreased by $7 million during 2016.

Deferred tax assets and liabilities are recognized for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, for net operating and other losses and for State tax credits. Our net deferred tax assets, including deferred tax liabilities and valuation allowances, totaled $2,897 million and $2,923 million as of December 31, 2016 and December 31, 2015, respectively.

See Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," for further discussion regarding our accounting policy relating to the evaluation, recognition and measurement of the HNAH Group and HSBC Finance Corporation's deferred tax assets and liabilities. In evaluating the need for a valuation allowance at December 31, 2016, it has been determined that HNAH Group projections of future taxable income from U.S. operations based on management approved business plans provide sufficient and appropriate support for the recognition of our net deferred tax assets as noted above. At December 31, 2016, we have valuation allowances against certain State deferred tax assets and certain Federal tax loss carry forwards for which the aforementioned projections of future taxable income do not provide appropriate support.

The Internal Revenue Service's concluded its examination of our 2012 and 2013 Federal income tax returns in 2016. We remain subject to State and local income tax examinations for years 2008 and forward. We are currently under audit by various State and local tax jurisdictions. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and the closing of statutes of limitation. Such adjustments are reflected in the tax provision.

At December 31, 2016, for Federal tax purposes, we had net operating loss carryforwards of $5,271 million of which $1,554 million expire in 2033, $696 million expire in 2034, $491 million expire in 2035 and $2,530 million expire in 2036.

At December 31, 2016, for State tax purposes, we had apportioned and pre-tax rate effected net operating loss carryforwards of $14,417 million for which we have pre-tax valuation allowances totaling $12,831 million. These State net operating loss carryforwards expire as follows: $291 million in 2016 - 2020; $1,757 million in 2021 - 2025; $8,134 million in 2026 - 2030; and $4,235 million in 2031 and forward.

At December 31, 2016, for State tax purposes, we had general business tax credit carryforwards of $11 million for which we have valuation allowances totaling $7 million. These State credits expire as follows: $1 million expire in 2016 - 2019 and $10 million have no expiration period.