Income Taxes

12 Months Ended

Dec. 31, 2016

20. INCOME TAXES

The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included in the Consolidated Statements of Income for the years ended December 31:

($ in millions)		2016	2015	2014
Current income tax expense:
U.S. Federal income taxes	$	598	662	424
State and local income taxes		55	55	34
Foreign income taxes		-	13	8
Total current income tax expense		653	730	466
Deferred income tax (benefit) expense:
U.S. Federal income taxes		(133)	(78)	71
State and local income taxes		(14)	6	9
Foreign income taxes		(1)	1	(1)
Total deferred income tax (benefit) expense		(148)	(71)	79
Applicable income tax expense	$	505	659	545

The following is a reconciliation between the statutory U.S. Federal income tax rate and the Bancorp’s effective tax rate for the years ended December 31:

	2016		2015	2014
Statutory tax rate	35.0	%	35.0	35.0
Increase (decrease) resulting from:
State taxes, net of federal benefit	1.3		1.7	1.4
Tax-exempt income	(2.7)		(1.7)	(1.4)
Low-income housing tax credits	(7.9)		(6.6)	(7.0)
Other tax credits	(0.9)		(0.9)	(1.1)
Other, net	(0.4)		0.3	-
Effective tax rate	24.4	%	27.8	26.9

Other tax credits in the rate reconciliation table include New Markets, Rehabilitation Investment and Qualified Zone Academy Bond tax credits. Tax-exempt income in the rate reconciliation table includes interest on municipal bonds, interest on tax-exempt lending, income on life insurance policies held by the Bancorp, and certain gains on sales of leases that are exempt from federal taxation.

The following table provides a reconciliation of the beginning and ending amounts of the Bancorp’s unrecognized tax benefits:

($ in millions)		2016	2015	2014
Unrecognized tax benefits at January 1	$	13	11	7
Gross increases for tax positions taken during prior period		9	1	2
Gross decreases for tax positions taken during prior period		-	-	-
Gross increases for tax positions taken during current period		2	2	2
Settlements with taxing authorities		-	-	-
Lapse of applicable statute of limitations		-	(1)	-
Unrecognized tax benefits at December 31^(a)	$	24	13	11

(a) Amounts represent unrecognized tax benefits that, if recognized, would affect the annual effective tax rate.

The Bancorp’s unrecognized tax benefits as of December 31, 2016, 2015, and 2014 primarily relate to state income tax exposures from taking tax positions where the Bancorp believes it is likely that, upon examination, a state will take a position contrary to the position taken by the Bancorp.

While it is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the Bancorp’s uncertain tax positions could increase or decrease during the next twelve months, the Bancorp believes it is unlikely that its unrecognized tax benefits will change by a material amount during the next twelve months.

Deferred income taxes are comprised of the following items at December 31:

($ in millions)		2016	2015
Deferred tax assets:
Allowance for loan and lease losses	$	439	445
Deferred compensation		122	118
Reserves		57	61
Reserve for unfunded commitments		56	48
State net operating loss carryforwards		9	10
Other		223	194
Total deferred tax assets	$	906	876
Deferred tax liabilities:
Lease financing	$	940	935
Investments in joint ventures and partnership interests		219	248
MSRs and related economic hedges		202	245
State deferred taxes		64	79
Bank premises and equipment		61	53
Other comprehensive income		34	106
Other		173	218
Total deferred tax liabilities	$	1,693	1,884
Total net deferred tax liability	$	(787)	(1,008)

At December 31, 2016 and 2015, the Bancorp recorded deferred tax assets of $9 million and $10 million, respectively, related to state net operating loss carryforwards. The deferred tax assets relating to state net operating losses (primarily resulting from leasing operations) are presented net of specific valuation allowances of $25 million and $22 million at December 31, 2016 and 2015, respectively. If these carryforwards are not utilized, they will expire in varying amounts through 2035. At December 31, 2016 and 2015, the Bancorp recorded a deferred tax asset of $3 million and $5 million, respectively related to a foreign tax credit carryforward. If not utilized, the majority of the deferred tax asset relating to the foreign tax credit carryforward will expire in 2025.

The Bancorp has determined that a valuation allowance is not needed against the remaining deferred tax assets as of December 31, 2016 or 2015. The Bancorp considered all of the positive and negative evidence available to determine whether it is more likely than not that the deferred tax assets will ultimately be realized and, based upon that evidence, the Bancorp believes it is more likely than not that the deferred tax assets recorded at December 31, 2016 and 2015 will ultimately be realized. The Bancorp reached this conclusion as the Bancorp has taxable income in the carryback period and it is expected that the Bancorp’s remaining deferred tax assets will be realized through the reversal of its existing taxable temporary differences and its projected future taxable income.

The IRS is currently examining the Bancorp’s 2012 and 2013 federal income tax returns. The statute of limitations for the Bancorp’s federal income tax returns remains open for tax years 2012-2016. On occasion, as various state and local taxing jurisdictions examine the returns of the Bancorp and its subsidiaries, the Bancorp may agree to extend the statute of limitations for a reasonable period of time. Otherwise, the statutes of limitations for state income tax returns remain open only for tax years in accordance with each state’s statutes.

Any interest and penalties incurred in connection with income taxes are recorded as a component of income tax expense in the Consolidated Financial Statements. During the year ended December 31, 2016, the Bancorp recognized $1 million of interest expense in connection with income taxes and an immaterial amount of interest expense/benefit for the years ended December 31, 2015 and 2014. At December 31, 2016 and 2015, the Bancorp had accrued interest liabilities, net of the related tax benefits, of $1 million. No material liabilities were recorded for penalties related to income taxes.

Retained earnings at December 31, 2016 and 2015 included $157 million in allocations of earnings for bad debt deductions of former thrift subsidiaries for which no income tax has been provided. Under current tax law, if certain of the Bancorp’s subsidiaries use these bad debt reserves for purposes other than to absorb bad debt losses, they will be subject to federal income tax at the current corporate tax rate.

During 2016, the Bancorp adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, effective as of January 1, 2016. Consistent with existing U.S. GAAP and ASU 2016-09, the Bancorp establishes a deferred tax asset and recognizes a corresponding deferred tax benefit for stock-based awards granted to its employees and directors based on enacted tax rates and the expense recorded for financial reporting purposes. The actual tax deduction for these stock-based awards is determined when the stock-based awards are settled or expired and the tax deductions will typically be greater than or less than the expense previously recognized for financial reporting.

Among other requirements, ASU 2016-09 requires that the tax consequences for the difference between the expense recognized for financial reporting and the Bancorp’s actual tax deduction for the stock-based awards be recognized through income tax expense in the interim periods in which they occur. Prior to the adoption of ASU 2016-09, the tax consequences for the difference between the expense recognized for financial reporting and the actual tax deduction for stock-based awards was recognized either through additional paid-in-capital when the Bancorp accumulated “excess tax benefits” from stock based awards or through income tax expense when the Bancorp depleted its accumulated “excess tax benefits” from stock-based awards.