Income Taxes

12 Months Ended

Dec. 31, 2017

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)		2017	2016	2015
Current income tax expense:
U.S. Federal income taxes	$	763	598	662
State and local income taxes		68	55	55
Foreign income taxes		(3)	-	13
Total current income tax expense		828	653	730
Deferred income tax benefit:
U.S. Federal income taxes		(252)	(133)	(78)
State and local income taxes		1	(14)	6
Foreign income taxes		-	(1)	1
Total deferred income tax benefit		(251)	(148)	(71)
Applicable income tax expense	$	577	505	659

The following is a reconciliation between the federal statutory corporate tax rate and the Bancorp’s effective tax rate for the years ended December 31:

	2017		2016	2015
Federal statutory corporate tax rate	35.0	%	35.0	35.0
Increase (decrease) resulting from:
State taxes, net of federal benefit	1.6		1.3	1.7
Tax-exempt income	(1.2)		(2.7)	(1.7)
Low-income housing tax credits	(6.0)		(7.9)	(6.6)
Other tax credits	(0.5)		(0.9)	(0.9)
U.S. tax legislation impact on deferred taxes	(7.9)		-	-
Other, net	(0.2)		(0.4)	0.3
Effective tax rate	20.8	%	24.4	27.8

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.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the TCJA. The TCJA makes broad and complex changes to the U.S. tax code including, but not limited to, reducing the top federal statutory corporate tax rate from 35 percent to 21 percent effective for tax years beginning after December 31, 2017. U.S. GAAP requires the Bancorp to recognize the tax effects of changes in tax laws and rates on its deferred taxes in the period in which the law is enacted. As a result, for the year ended December 31, 2017, the Bancorp remeasured its deferred tax assets and liabilities and recognized an income tax benefit of approximately $220 million.

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

($ in millions)		2017	2016	2015
Unrecognized tax benefits at January 1	$	24	13	11
Gross increases for tax positions taken during prior period		17	9	1
Gross decreases for tax positions taken during prior period		(1)	-	-
Gross increases for tax positions taken during current period		3	2	2
Settlements with taxing authorities		(7)	-	-
Lapse of applicable statute of limitations		(2)	-	(1)
Unrecognized tax benefits at December 31^(a)	$	34	24	13

(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, 2017, 2016 and 2015 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)		2017	2016
Deferred tax assets:
Allowance for loan and lease losses	$	251	439
Deferred compensation		77	122
Reserve for unfunded commitments		34	56
Reserves		29	57
State net operating loss carryforwards		9	9
Other		102	223
Total deferred tax assets	$	502	906
Deferred tax liabilities:
Lease financing	$	616	940
MSRs and related economic hedges		111	202
State deferred taxes		64	64
Bank premises and equipment		42	61
Investments in joint ventures and partnership interests		34	219
Other comprehensive income		21	34
Other		137	173
Total deferred tax liabilities	$	1,025	1,693
Total net deferred tax liability	$	(523)	(787)

At both December 31, 2017 and 2016, the Bancorp recorded deferred tax assets of $9 million, 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 $27 million and $25 million at December 31, 2017 and 2016, respectively. If these carryforwards are not utilized, they will expire in varying amounts through 2037. At December 31, 2017 and 2016, the Bancorp recorded a deferred tax asset of $2 million and $3 million, respectively, related to a foreign tax credit carryforward. If not utilized, the deferred tax asset relating to the foreign tax credit carryforward will begin to expire in 2025.

The Bancorp has determined that a valuation allowance is not needed against the remaining deferred tax assets as of December 31, 2017 or 2016. 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, 2017 and 2016 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 has concluded its examination of the Bancorp’s 2012 and 2013 federal income tax returns and is currently examining the Bancorp’s 2014 federal income tax return. The statute of limitations for the Bancorp’s federal income tax returns remains open for tax years 2012-2017. 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 years ended December 31, 2017 and 2016, the Bancorp recognized $2 million and $1 million, respectively, of interest expense in connection with income taxes and an immaterial amount of interest benefit for the year ended December 31, 2015. At December 31, 2017 and 2016, the Bancorp had accrued interest liabilities, net of the related tax benefits, of $3 million and $1 million, respectively. No material liabilities were recorded for penalties related to income taxes.

Retained earnings at December 31, 2017 and 2016 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 federal statutory corporate tax rate.