NOTE 14 - INCOME TAXES

The components of the Provision for income taxes included in the Consolidated Statements of Income for the years ended December 31 are presented in the following table:



(Dollars in millions)	2017		2016		2015
Current income tax provision:
Federal		$129		$667		$707
State	59		27		36
Total	188		694		743
Deferred income tax provision/(benefit):
Federal	275		59		27
State	69		52		(6		)
Total	344		111		21
Total provision for income taxes		$532		$805		$764

The 2017 Tax Act, enacted on December 22, 2017, reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. At December 31, 2017, the Company recorded a net income tax benefit for the estimated effects of the 2017 Tax Act as a component of the provision for income taxes, which was due primarily to a $333 million tax benefit for the remeasurement of the Company's estimated DTAs and DTLs to reflect the new federal income tax rate of 21%. However, as additional information becomes available and additional analysis is completed, the estimate of the DTAs and DTLs may change, which could impact the remeasurement of these deferred tax balances. Any adjustment to the remeasurement amount would be recorded as an adjustment to the provision for income taxes in 2018 in the period the amounts are determined.

The provision for income taxes does not reflect the tax effects of unrealized gains and losses and other income and expenses recorded in AOCI, with the exception of the remeasurement of the related DTAs and DTLs due to the enactment of the 2017 Tax Act. For additional information regarding AOCI, see Note 21, “Accumulated Other Comprehensive Loss.”

A reconciliation of the income tax provision, using the statutory federal income tax rate of 35%, to the Company’s actual provision for income taxes and the effective tax rate during the years ended December 31 are presented in the following table:



	2017					2016					2015
(Dollars in millions)	Amount			% of Pre-Tax Income		Amount			% of Pre-Tax Income		Amount			% of Pre-Tax Income
Income tax provision at federal statutory rate		$982		35.0	%		$939		35.0	%		$944		35.0	%
Increase/(decrease) resulting from:
State income taxes, net	66			2.4		53			2.0		25			0.9
Tax-exempt interest	(90		)	(3.2	)	(86		)	(3.2	)	(88		)	(3.3	)
Changes in UTBs (including interest), net	26			0.9		6			0.2		(31		)	(1.1	)
Income tax credits, net of amortization ¹	(117		)	(4.2	)	(86		)	(3.2	)	(69		)	(2.6	)
Estimated impact of the remeasurement of DTAs and DTLs and other tax reform-related items ²	(303		)	(10.8	)	—			—		—			—
Other ³	(32		)	(1.1	)	(21		)	(0.8	)	(17		)	(0.6	)
Total provision for income taxes and effective tax rate		$532		19.0	%		$805		30.0	%		$764		28.3	%

¹Excludes income tax benefits of $43 million, $2 million, and $6 million for the years ended December 31, 2017, 2016, and 2015, respectively, related to tax credits, which were recognized as a reduction to the related investment asset.

²Includes reasonable estimates as of December 31, 2017, which could be adjusted as additional analysis is completed in 2018.

³Includes excess tax benefits of $25 million and $15 million for the years ended December 31, 2017 and 2016, respectively, related to the Company's adoption of ASU 2016-09.

Deferred income tax assets and liabilities result from differences between the timing of the recognition of assets and liabilities for financial reporting purposes and for income tax purposes. These assets and liabilities are measured using the enacted federal and state tax rates expected to apply in the periods in which the DTAs or DTLs are expected to be realized. The net deferred income tax liability is recorded in Other liabilities in the Consolidated Balance Sheets.

At December 31, 2017, the Company remeasured its DTAs and DTLs using the newly enacted federal income tax rate of 21%, which is the rate that is expected to apply in the periods in which these assets and liabilities are expected to be realized in the future.

The significant DTAs and DTLs at December 31, net of the federal impact for state taxes, are presented in the following table:



(Dollars in millions)	2017 ¹			2016 ²
DTAs:
ALLL		$412			$639
Net unrealized losses in AOCI	302			472
State NOLs and other carryforwards	227			170
Accruals and reserves	180			343
Other	17			19
Total gross DTAs	1,138			1,643
Valuation allowance	(143		)	(80		)
Total DTAs	995			1,563
DTLs:
Leasing	459			659
Servicing rights	290			370
Employee compensation and benefits	210			179
Deferred income	193			22
Goodwill and other intangible assets	155			233
Fixed assets	111			113
Loans	104			176
Other	41			43
Total DTLs	1,563			1,795
Net DTL		($568	)		($232	)

¹The Company's DTAs and DTLs for December 31, 2017 were calculated using the enacted federal income rate of 21%.

²The Company's DTAs and DTLs for December 31, 2016 were calculated using the enacted federal income rate of 35%.

The DTAs include state NOLs and other state carryforwards that will expire, if not utilized, in varying amounts from 2018 to 2037. At December 31, 2017 and 2016, the Company had a valuation allowance recorded against its state carryforwards and certain state DTAs of $143 million and $80 million, respectively. The increase in the valuation allowance was due primarily to an increase in the valuation allowance recorded for STM's state NOLs as well as the reduction in the federal benefit of the state valuation allowance due to the reduction in the federal income tax rate. A valuation allowance is not required for the federal and the remaining state DTAs because the Company believes it is more-likely-than-not that these assets will be realized.

The following table provides a rollforward of the Company's gross federal and state UTBs, excluding interest and penalties, during the years ended December 31:



(Dollars in millions)	2017			2016
Balance at January 1		$111			$100
Increases in UTBs related to prior years	22			18
Decreases in UTBs related to prior years	(5		)	(4		)
Increases in UTBs related to the current year	13			13
Decreases in UTBs related to settlements	—			(16		)
Balance at December 31		$141			$111

The amount of UTBs that would favorably affect the Company's effective tax rate, if recognized, was $112 million at December 31, 2017.

Interest and penalties related to UTBs are recorded in the Provision for income taxes in the Consolidated Statements of Income. The Company had a gross liability of $17 million and $8 million for interest and penalties related to its UTBs at December 31, 2017 and 2016, respectively. During the years ended December 31, 2017 and 2016, the Company recognized a gross expense of $10 million and a gross benefit of less than $1 million, respectively, related to interest and penalties on the UTBs.

The Company files U.S. federal, state, and local income tax returns. The Company's federal income tax returns are no longer subject to examination by the IRS for taxable years prior to 2012. With limited exceptions, the Company is no longer subject to examination by state and local taxing authorities for taxable years prior to 2012. It is reasonably possible that the liability for UTBs could decrease by as much as $30 million during the next 12 months due to completion of tax authority examinations and the expiration of statutes of limitations. It is uncertain how much, if any, of this potential decrease will impact the Company’s effective tax rate.