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:



	2019			2018			2017

Statutory tax rate		21.0	%		21.0			35.0
Increase (decrease) resulting from:
State taxes, net of federal benefit		2.8			2.1			1.5
Tax-exempt income		(1.2	)		(0.8	)		(1.1	)
LIHTC investment and other tax benefits		(5.0	)		(6.8	)		(6.9	)
LIHTC investment proportional amortization		4.4			5.6			7.4
Other tax credits		(0.2	)		(0.1	)		(0.4	)
U.S. tax legislation impact on deferred taxes		-			-			(8.5	)
Other, net		(0.2	)		(0.3	)		(0.2	)

Effective tax rate		21.6	%		20.7			26.8

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 made

broad and complex changes to the U.S. tax code including, but not limited to, reducing the federal statutory corporate tax rate from 35 percent to 21 percent 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 was 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 $253 million.

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



($ in millions)	2019		2018		2017

Unrecognized tax benefits at January 1	$	55		34		24
Gross increases for tax positions taken during prior period		25		20		17
Gross decreases for tax positions taken during prior period		(3)		(1)		(1)
Gross increases for tax positions taken during current period		6		8		3
Settlements with taxing authorities		(9)		(5)		(7)
Lapse of applicable statute of limitations		(9)		(1)		(2)

Unrecognized tax benefits at December 31 (a)	$	65		55		34

(a)	With the exception of $6 and $5 in 2019 and 2018, respectively, all 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, 2019, 2018 and 2017 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)	2019		2018
Deferred tax assets:
Allowance for loan and lease losses	$	252		232
Deferred compensation		103		79
Other comprehensive income		-		42
Reserve for unfunded commitments		30		28
Reserves		32		28
State net operating loss carryforwards		9		7
Other		154		112
Total deferred tax assets	$	580		528
Deferred tax liabilities:
Lease financing	$	650		599
Investments in joint ventures and partnership interests		25		131
MSRs and related economic hedges		144		107
State deferred taxes		47		73
Bank premises and equipment		73		60
Other comprehensive income		352		-
Other		127		102
Total deferred tax liabilities	$	1,418		1,072
Total net deferred tax liability	$	(838)		(544)

At December 31, 2019 and 2018, the Bancorp recorded deferred tax assets of $9 million and $7 million, respectively, related to state net operating loss carryforwards. The deferred tax assets relating to state net operating losses are presented net of specific valuation allowances of $17 million and $25 million at December 31, 2019 and 2018, respectively. If these carryforwards are not utilized, they will expire in varying amounts through 2038.

The Bancorp has determined that a valuation allowance is not needed against the remaining deferred tax assets as of December 31, 2019 or 2018. 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, 2019 and 2018 will ultimately be realized. The Bancorp reached this conclusion as 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 2015 federal income tax return and is currently examining the Bancorp’s 2016 federal income tax return. The statute of limitations for the Bancorp’s federal income tax returns remains open for tax years 2016-2019.

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, 2019, 2018 and 2017, the Bancorp recognized $1 million, $1 million and $2 million, respectively, of interest expense in connection with income taxes. At December 31, 2019 and 2018, the Bancorp had accrued interest liabilities, net of the related tax benefits, of $4 million and $3 million, respectively. No material liabilities were recorded for penalties related to income taxes.

Retained earnings at December 31, 2019 and 2018 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.