Income Taxes

12 Months Ended

Dec. 31, 2017

INCOME TAXES

The components of income tax expense are as follows:

Table 91: Components of Income Tax Expense



Year ended December 31 In millions	2017			2016		2015
Current
Federal	$	454		$	871	$	927
State	51			71		33
Total current	505			942		960
Deferred
Federal	(474		)	301		320
State	71			25		84
Total deferred	(403		)	326		404
Total (a)	$	102		$	1,268	$	1,364

(a) The 2017 results benefited from the new federal tax legislation that was enacted on December 22, 2017.

Significant components of deferred tax assets and liabilities are as follows:

Table 92: Deferred Tax Assets and Liabilities



December 31 – in millions	2017 (a)			2016
Deferred tax assets
Allowance for loan and lease losses	$	631		$	976
Compensation and benefits	223			548
Partnership investments	173			307
Loss and credit carryforward	301			460
Accrued expenses	284			505
Other	131			252
Total gross deferred tax assets	1,743			3,048
Valuation allowance	(40		)	(75		)
Total deferred tax assets	1,703			2,973
Deferred tax liabilities
Leasing	1,034			1,374
Goodwill and intangibles	197			312
Fixed assets	206			391
Mortgage servicing rights	146			246
Net unrealized gains on securities and financial instruments	155			284
BlackRock basis difference	1,594			2,361
Other	345			371
Total deferred tax liabilities	3,677			5,339
Net deferred tax liability	$	1,974		$	2,366

(a) Reflected the impact of new federal tax legislation that was enacted on December 22, 2017. Certain tax legislation amounts are considered reasonable estimates as of December 31, 2017.

As the result of the Tax Cuts and Jobs Act signed into law on December 22, 2017, PNC recognized a benefit of $1.2 billion primarily attributable to the revaluation of net deferred tax liabilities. To the extent our accounting of certain income tax effects is complete, these tax effects have been included in the financial statements. However, to the extent our accounting for certain income tax effects is incomplete, but can be reasonably estimated, the estimated effects are included as provisional amounts in the financial statements.

Based on current estimates, any adjustments to provisional amounts are not expected to be material during the measurement period. However, additional data and analysis is being collected in the preparation of our 2017 income tax returns which upon completion will validate or cause provisional amounts to be adjusted. Furthermore the newly enacted law is unclear in certain aspects, and may require additional clarification through legislative amendments or governmental agency regulations or interpretations.

During the one year measurement period, which will end in December 2018, the provisional amounts may be adjusted upon obtaining, preparing and analyzing additional information about facts and circumstances that existed at the enactment date.

A reconciliation between the statutory and effective tax rates follows:

Table 93: Reconciliation of Statutory and Effective Tax Rates



Year ended December 31	2017		2016		2015
Statutory tax rate	35.0	%	35.0	%	35.0	%
Increases (decreases) resulting from:
State taxes net of federal benefit	1.5		1.2		1.4
Tax-exempt interest	(2.5	)	(2.4	)	(2.3	)
Life insurance	(1.8	)	(1.9	)	(1.7	)
Dividend received deduction	(1.8	)	(1.8	)	(1.7	)
Tax credits	(4.2	)	(4.4	)	(3.9	)
Federal deferred tax revaluation	(21.7	)
Other	(2.6	)	(1.6	)	(2.0	)	(a)
Effective tax rate (b)	1.9	%	24.1	%	24.8	%


(a)	Includes tax benefits associated with settlement of acquired entity tax contingencies.


(b)	The effective tax rates are generally lower than the statutory rate due to the relationship of pretax income to tax credits and earnings that are not subject to tax. The 2017 results benefited from the new federal tax legislation. Certain tax legislation amounts are considered reasonable estimates as of December 31, 2017.

The net operating loss carryforwards at December 31, 2017 and 2016 follow:

Table 94: Net Operating Loss Carryforwards



Dollars in millions	December 31, 2017		December 31, 2016		Expiration
Net Operating Loss Carryforwards:
Federal	$	640	$	759	2032
State	$	1,776	$	2,345	2018 – 2036

The majority of the tax credit carryforwards expire in 2032 and were insignificant at December 31, 2017 and December 31, 2016. All federal and most state net operating loss and credit carryforwards are from acquired entities and utilization is subject to various statutory limitations. We anticipate that we will be able to fully utilize our carryforwards for federal tax purposes, but we have recorded an insignificant valuation allowance against certain state tax carryforwards as of December 31, 2017. If select uncertain tax positions were successfully challenged by a state, the state net operating losses listed in Table 94 could be reduced by an insignificant amount.

As a result of the Tax Cuts and Jobs Act, an insignificant amount of taxes have been accrued on unremitted foreign earnings. There are no remaining foreign earnings for which U.S. deferred taxes have not been provided.

Retained earnings included $.1 billion at both December 31, 2017 and December 31, 2016 in allocations for bad debt deductions of former thrift subsidiaries for which no income tax has been provided. Under current law, if certain 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.

A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows:

Table 95: Change in Unrecognized Tax Benefits



In millions	2017			2016			2015
Balance of gross unrecognized tax benefits at January 1	$	22		$	26		$	77
Increases:
Positions taken during a prior period	4			14			17
Decreases:
Positions taken during a prior period	(3		)	(14		)	(9		)
Settlements with taxing authorities	(4		)				(52		)
Reductions resulting from lapse of statute of limitations	(1		)	(4		)	(7		)
Balance of gross unrecognized tax benefits at December 31	$	18		$	22		$	26
Favorable (unfavorable) impact if recognized	$	17		$	18		$	20

It is reasonably possible that the balance of unrecognized tax benefits could increase or decrease in the next twelve months due to completion of tax authorities’ exams or the expiration of statutes of limitations; however, the estimated amount is insignificant.

We are subject to U.S. federal income tax as well as income tax in most states and some foreign jurisdictions. Table 96 summarizes the status of significant IRS examinations of us.

Table 96: IRS Tax Examination Status



	Years under examination	Status at December 31
Federal	2014 – 2015	Completed
	2016	Under Exam

In addition, we are under continuous examinations by various state taxing authorities. With few exceptions, we are no longer subject to state and local and foreign income tax examinations by taxing authorities for periods before 2012. For all open audits, any potential adjustments have been considered in establishing our unrecognized tax benefits as of December 31, 2017.

Our policy is to classify interest and penalties associated with income taxes as income tax expense. For 2017 and 2016, the amount of gross interest and penalties was insignificant. At December 31, 2017 and December 31, 2016, the related amounts of accrued interest and penalties was also insignificant.