Income Taxes

12 Months Ended

Dec. 31, 2018

INCOME TAXES

The components of income tax expense are as follows:

Table 87: Components of Income Tax Expense



Year ended December 31 In millions	2018		2017 (a)			2016
Current
Federal	$	773	$	454		$	871
State	176		51			71
Total current	949		505			942
Deferred
Federal	123		(474		)	301
State	10		71			25
Total deferred	133		(403		)	326
Total	$	1,082	$	102		$	1,268

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

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

Table 88: Deferred Tax Assets and Liabilities



December 31 – in millions	2018			2017
Deferred tax assets
Allowance for loan and lease losses	$	637		$	631
Compensation and benefits	279			223
Partnership investments	184			173
Loss and credit carryforward	366			301
Accrued expenses	207			284
Other	193			131
Total gross deferred tax assets	1,866			1,743
Valuation allowance	(37		)	(40		)
Total deferred tax assets	1,829			1,703
Deferred tax liabilities
Leasing	1,169			1,034
Goodwill and intangibles	196			197
Fixed assets	379			206
Mortgage servicing rights	179			146
Net unrealized gains on securities and financial instruments				155
BlackRock basis difference	1,726			1,594
Other	119			345
Total deferred tax liabilities	3,768			3,677
Net deferred tax liability	$	1,939		$	1,974

As the result of the Tax Cuts and Jobs Act signed into law on December 22, 2017, we recognized a benefit of $1.2 billion primarily attributable to the revaluation of net deferred tax liabilities at December 31, 2017. To the extent our accounting of certain income tax effects was complete, these tax effects had been included in the 2017 financial statements. However, to the extent our accounting for certain income tax effects was incomplete, but was reasonably estimated, the estimated effects were included as provisional amounts in the 2017 financial statements. Additional data and analysis was collected during the preparation of our 2017 income tax returns along with additional clarification through legislative amendments, governmental agency regulations and interpretations of the Tax Cuts and Jobs Act. During the one-year measurement period, which ended in December 2018, no changes were made to the provisional amounts after 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 89: Reconciliation of Statutory and Effective Tax Rates



Year ended December 31	2018		2017		2016
Statutory tax rate	21.0	%	35.0	%	35.0	%
Increases (decreases) resulting from:
State taxes net of federal benefit	2.3		1.5		1.2
Tax-exempt interest	(1.4	)	(2.5	)	(2.4	)
Life insurance	(.9	)	(1.8	)	(1.9	)
Dividend received deduction	(.9	)	(1.8	)	(1.8	)
Tax credits	(3.4	)	(4.2	)	(4.4	)
Federal deferred tax revaluation (a)	(1.7	)	(21.7	)
Unrecognized tax benefits	1.1		(.1	)	(.1	)
Other	.7		(2.5	)	(1.5	)
Effective tax rate (b)	16.8	%	1.9	%	24.1	%


(a)	Reflects the impact of tax planning activities during the third quarter of 2018.


(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 and 2018 results benefited from the federal tax legislation.

The net operating loss carryforwards at December 31, 2018 and 2017 follow:

Table 90: Net Operating Loss Carryforwards



Dollars in millions	December 31, 2018		December 31, 2017		Expiration
Net Operating Loss Carryforwards:
Federal	$	521	$	640	2032
State	$	1,577	$	1,776	2019-2036

The majority of the tax credit carryforwards expire in 2038 and were $323 million at December 31, 2018 and were insignificant at December 31, 2017. Some federal and 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, 2018.

Retained earnings included $.1 billion at both December 31, 2018 and 2017 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 91: Change in Unrecognized Tax Benefits



In millions	2018			2017			2016
Balance of gross unrecognized tax benefits at January 1	$	18		$	22		$	26
Increases:
Positions taken during a prior period	212			4			14
Decreases:
Positions taken during a prior period	(16		)	(3		)	(14		)
Settlements with taxing authorities	(7		)	(4		)
Reductions resulting from lapse of statute of limitations				(1		)	(4		)
Balance of gross unrecognized tax benefits at December 31	$	207		$	18		$	22
Favorable (unfavorable) impact if recognized	$	76		$	17		$	18

It is reasonably possible that the balance of unrecognized tax benefits could increase or decrease in the next twelve months due to ongoing or completion of examinations by various tax authorities or the expiration of statutes of limitations.

We are subject to U.S. federal income tax as well as income tax in most states and some foreign jurisdictions. Table 92 summarizes the status of significant IRS examinations.

Table 92: IRS Tax Examination Status



	Years under examination	Status at December 31
Federal	2014 – 2015	Completed
	2016 – 2017	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 2013. For all open audits, any potential adjustments have been considered in establishing our unrecognized tax benefits as of December 31, 2018.

Our policy is to classify interest and penalties associated with income taxes as income tax expense. For 2018 and 2017, the amount of gross interest and penalties was insignificant. At December 31, 2018 and 2017, the related amounts of accrued interest and penalties were also insignificant.