Income Taxes

The components of income tax expense (benefit) for 2014, 2013 and 2012 are presented in the table below.




Income Tax Expense (Benefit)

(Dollars in millions)	2014		2013			2012
Current income tax expense
U.S. federal	$	443	$	180		$	458
U.S. state and local	340		786			592
Non-U.S.	513		513			569
Total current expense	1,296		1,479			1,619
Deferred income tax expense (benefit)
U.S. federal	583		2,056			(3,433		)
U.S. state and local	85		(94		)	(55		)
Non-U.S.	58		1,300			753
Total deferred expense (benefit)	726		3,262			(2,735		)
Total income tax expense (benefit)	$	2,022	$	4,741		$	(1,116	)

Total income tax expense (benefit) does not reflect the deferred tax effects of unrealized gains and losses on AFS debt and marketable equity securities, foreign currency translation adjustments, derivatives and employee benefit plan adjustments that are included in accumulated OCI. These tax effects resulted in an expense of $3.4 billion in 2014 and $1.3 billion in 2012, and a benefit of $2.7 billion in 2013, recorded in accumulated OCI. In addition, total income tax expense (benefit) does not reflect tax effects associated with the Corporation’s employee stock plans which decreased common stock and additional paid-in capital $35 million, $128 million and $277 million in 2014, 2013 and 2012, respectively.

Income tax expense (benefit) for 2014, 2013 and 2012 varied from the amount computed by applying the statutory income tax rate to income before income taxes. A reconciliation of the expected U.S. federal income tax expense, calculated by applying the federal statutory tax rate of 35 percent, to the Corporation’s actual income tax expense (benefit), and the effective tax rates for 2014, 2013 and 2012 are presented in the table below.




Reconciliation of Income Tax Expense (Benefit)

	2014					2013					2012
(Dollars in millions)	Amount			Percent		Amount			Percent		Amount			Percent
Expected U.S. federal income tax expense	$	2,399		35.0	%	$	5,660		35.0	%	$	1,075		35.0	%
Increase (decrease) in taxes resulting from:				(0.001	)%				(0.001	)%				(0.001	)%
State tax expense, net of federal benefit	276			4.0		450			2.8		349			11.4
Affordable housing credits/other credits	(950		)	(13.8	)	(863		)	(5.3	)	(783		)	(25.5	)
Changes in prior period UTBs, including interest	(741		)	(10.8	)	(255		)	(1.6	)	(198		)	(6.4	)
Tax-exempt income, including dividends	(533		)	(7.8	)	(524		)	(3.2	)	(576		)	(18.8	)
Non-U.S. tax rate differential ⁽¹⁾	(507		)	(7.4	)	(940		)	(5.8	)	(1,968		)	(64.1	)
Nondeductible expenses	1,982			28.9		104			0.6		231			7.5
Leveraged lease tax differential	53			0.8		26			0.2		83			2.7
Non-U.S. statutory rate reductions	—			—		1,133			7.0		788			25.7
Other	43			0.6		(50		)	(0.4	)	(117		)	(3.8	)
Total income tax expense (benefit)	$	2,022		29.5	%	$	4,741		29.3	%	$	(1,116	)	(36.3	)%


⁽¹⁾	Includes in 2012, a $1.7 billion income tax benefit attributable to the excess of foreign tax credits recognized in the U.S. upon repatriation of the earnings of certain non-U.S. subsidiaries over the related U.S. tax liability.

The reconciliation of the beginning unrecognized tax benefits (UTB) balance to the ending balance is presented in the table below.




Reconciliation of the Change in Unrecognized Tax Benefits

(Dollars in millions)	2014			2013			2012
Balance, January 1	$	3,068		$	3,677		$	4,203
Increases related to positions taken during the current year	75			98			352
Increases related to positions taken during prior years⁽¹⁾	519			254			142
Decreases related to positions taken during prior years ⁽¹⁾	(973		)	(508		)	(711		)
Settlements	(1,594		)	(448		)	(205		)
Expiration of statute of limitations	(27		)	(5		)	(104		)
Balance, December 31	$	1,068		$	3,068		$	3,677


⁽¹⁾	The sum per year of positions taken during prior years differs from the $741 million, $255 million and $198 million in the Reconciliation of Income Tax Expense (Benefit) table due to temporary items, state items and jurisdictional offsets, as well as the inclusion of interest in the Reconciliation of Income Tax Expense (Benefit) table.

At December 31, 2014, 2013 and 2012, the balance of the Corporation’s UTBs which would, if recognized, affect the Corporation’s effective tax rate was $0.7 billion, $2.5 billion and $3.1 billion, respectively. Included in the UTB balance are some items the recognition of which would not affect the effective tax rate, such as the tax effect of certain temporary differences, the portion of gross state UTBs that would be offset by the tax benefit of the associated federal deduction and the portion of gross non-U.S. UTBs that would be offset by tax reductions in other jurisdictions.

The Corporation files income tax returns in more than 100 state and non-U.S. jurisdictions each year. The IRS and other tax authorities in countries and states in which the Corporation has significant business operations examine tax returns periodically (continuously in some jurisdictions). The Tax Examination Status table summarizes the status of significant examinations (U.S. federal unless otherwise noted) for the Corporation and various subsidiaries as of December 31, 2014.




Tax Examination Status

	Years under Examination	Status at December 31 2014
U.S. ⁽¹⁾	2010 – 2011	IRS Appeals
U.S.	2012 – 2013	Field examination
New York	2008 – 2012	Field examination
U.K.	2012	Field examination


⁽¹⁾	Field examination completed during 2014. The Corporation filed a protest related to certain adjustments with the IRS administrative appeals division.

During 2014, the Corporation settled and effectively resolved the federal examinations related to years 2005 through 2009 and all open Merrill Lynch years through 2008, as well as various state and local examinations for multiple years.

It is reasonably possible that the UTB balance may decrease by as much as $0.4 billion during the next 12 months, since resolved items will be removed from the balance whether their resolution results in payment or recognition.

During 2014, 2013 and 2012, the Corporation recognized a benefit of $196 million and expense of $127 million and $99 million, respectively, for interest and penalties, net-of-tax, in income tax expense. At December 31, 2014 and 2013, the Corporation’s accrual for interest and penalties that related to income taxes, net of taxes and remittances, was $455 million and $888 million.

Significant components of the Corporation’s net deferred tax assets and liabilities at December 31, 2014 and 2013 are presented in the table below.




Deferred Tax Assets and Liabilities

	December 31
(Dollars in millions)	2014			2013
Deferred tax assets
Net operating loss carryforwards	$	9,787		$	10,967
Accrued expenses	5,916			6,749
Tax credit carryforwards	5,614			9,689
Security, loan and debt valuations	5,190			4,264
Allowance for credit losses	5,047			6,100
Employee compensation and retirement benefits	3,665			2,729
State income taxes	2,034			2,643
Available-for-sale securities	—			1,918
Other	1,688			722
Gross deferred tax assets	38,941			45,781
Valuation allowance	(1,111		)	(1,940		)
Total deferred tax assets, net of valuation allowance	37,830			43,841

Deferred tax liabilities
Equipment lease financing	2,880			3,106
Intangibles	1,349			1,529
Mortgage servicing rights	1,041			1,547
Available-for-sale securities	828			—
Fee income	816			798
Long-term borrowings	587			3,033
Other	2,075			1,472
Gross deferred tax liabilities	9,576			11,485
Net deferred tax assets	$	28,254		$	32,356

The table below summarizes the deferred tax assets and related valuation allowances recognized for the net operating loss (NOL) and tax credit carryforwards at December 31, 2014.




Net Operating Loss and Tax Credit Carryforward Deferred Tax Assets

(Dollars in millions)	Deferred Tax Asset		Valuation Allowance			Net Deferred Tax Asset		First Year Expiring
Net operating losses – U.S.	$	3,065	$	—		$	3,065	After 2027
Net operating losses – U.K.	6,276		—			6,276		None ⁽¹⁾
Net operating losses – other non-U.S.	446		(316		)	130		Various
Net operating losses – U.S. states ⁽²⁾	1,168		(460		)	708		Various
General business credits	3,383		—			3,383		After 2029
Foreign tax credits	2,231		(68		)	2,163		After 2022


⁽¹⁾	The U.K. net operating losses may be carried forward indefinitely.


⁽²⁾	The net operating losses and related valuation allowances for U.S. states before considering the benefit of federal deductions were $1.8 billion and $708 million.

Management concluded that no valuation allowance was necessary to reduce the U.K. NOL carryforwards and U.S. NOL and general business credit carryforwards since estimated future taxable income will be sufficient to utilize these assets prior to their expiration. The majority of the Corporation’s U.K. net deferred tax assets, which consist primarily of NOLs, are expected to be realized by certain subsidiaries over an extended number of years. Management’s conclusion is supported by financial results and forecasts, the reorganization of certain business activities and the indefinite period to carry forward NOLs. However, significant changes to those estimates, such as changes that would be caused by a substantial and prolonged worsening of the condition of Europe’s capital markets, or a change in applicable laws, could lead management to reassess its U.K. valuation allowance conclusions.

At December 31, 2014, U.S. federal income taxes had not been provided on $17.2 billion of undistributed earnings of non-U.S. subsidiaries that management has determined have been reinvested for an indefinite period of time. If the Corporation were to record a deferred tax liability associated with these undistributed earnings, the amount would be approximately $4.5 billion at December 31, 2014.