Income Taxes (Tables)

12 Months Ended

Dec. 31, 2017

Components of income tax expense (benefit)

Total income taxes was as follows:



Year Ended December 31,	2017			2016			2015
	(in millions)
Provision for income taxes	$	1,228		$	89		$	230
Income tax expense (benefit) included in common equity related to:
Unrealized gains (losses) on investment securities	127			(135		)	(242		)
Unrealized gains (losses) on fair value option liabilities attributable to our own credit spread⁽¹⁾	(115		)	—			—
Unrealized gains (losses) on derivatives designated as cash flow hedges	(5		)	9			2
Employer accounting for post-retirement plans	1			2			—
Total income taxes	$	1,236		$	(35	)	$	(10	)


⁽¹⁾	See Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," for information on the adoption of new accounting guidance on January 1, 2017 related to fair value option liabilities attributable to our own credit spread.

The components of the provision for income taxes were as follows:



Year Ended December 31,	2017		2016			2015
	(in millions)
Current:
Federal	$	795	$	191		$	3
State and local	109		27			35
Foreign	21		11			2
Total current	925		229			40
Deferred	303		(140		)	190
Provision for income taxes	$	1,228	$	89		$	230

Effective Tax Rates

The following table provides an analysis of the difference between effective rates based on the provision for income taxes attributable to pretax income and the statutory U.S. Federal income tax rate:



Year Ended December 31,	2017					2016					2015
	(dollars are in millions)
Tax expense at the U.S. Federal statutory income tax rate	$	367		35.0	%	$	76		35.0	%	$	196		35.0	%
Increase (decrease) in rate resulting from:
State and local taxes, net of Federal benefit	28			2.7		10			4.6		20			3.6
Adjustment of Federal tax rate used to value deferred taxes⁽¹⁾	865			82.4		—			—		—			—
Adjustment of State tax rate used to value deferred taxes⁽²⁾	(15		)	(1.4	)	4			1.8		47			8.4
Other non-deductible / non-taxable items⁽³⁾	1			.1		21			9.6		1			.2
Items affecting prior periods⁽⁴⁾	6			.6		(2		)	(.9	)	(7		)	(1.3	)
Uncertain tax positions	—			—		(4		)	(1.8	)	4			.7
Low income housing and other tax credit investments	(17		)	(1.6	)	(17		)	(7.8	)	(26		)	(4.6	)
Change in valuation allowances reserves	—			—		—			—		(5		)	(.9	)
Stock based compensation⁽⁵⁾	(8		)	(.8	)	—			—		—			—
Other	1			.1		1			.5		—			—
Provision for income taxes	$	1,228		117.1	%	$	89		40.8	%	$	230		41.1	%


⁽¹⁾	For 2017, the amount relates to the effects of revaluing our net deferred tax asset for new Tax Legislation that was enacted on December 22, 2017.


⁽²⁾	For 2017, the amount includes an out of period adjustment to our deferred tax asset balance which decreased tax expense by $9 million. For 2015, the amount mainly relates to the effects of revaluing our net deferred tax asset for New York City Tax Reform that was enacted on April 13, 2015.


⁽³⁾	For 2016, the amount mainly relates to the accrual of non-deductible penalties.


⁽⁴⁾	For 2017, the amount relates to the impact of adjustments associated with filing the 2016 State income tax returns and changes in tax credits as a result of filing the 2016 Federal income tax return.


⁽⁵⁾	As discussed more fully in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," beginning January 1, 2017, all excess tax benefits and tax deficiencies for share-based payment awards are recorded within income tax expense in the consolidated statement of income (loss).

Components of net deferred tax position

The components of the net deferred tax asset are presented in the following table:



At December 31,	2017			2016
	(in millions)
Deferred tax assets:
Allowance for credit losses	$	166		$	392
Employee benefit accruals	75			108
Accrued expenses	72			110
Interests in real estate mortgage investment conduits⁽¹⁾	175			548
Unrealized losses on investment securities	96			275
Partnerships	73			113
Capitalized costs⁽²⁾	724			—
Fair value adjustments	26			—
Other	165			360
Total deferred tax assets	1,572			1,906
Valuation allowance	(6		)	(6		)
Total deferred tax assets, net of valuation allowance	1,566			1,900
Deferred tax liabilities:
Fair value adjustments	—			48
Other	26			49
Total deferred tax liabilities	26			97
Net deferred tax asset	$	1,540		$	1,803

⁽¹⁾

Real estate mortgage investment conduits ("REMICs") are investment vehicles that hold commercial and residential mortgages in trust and issue securities representing an undivided interest in these mortgages. HSBC Bank USA holds portfolios of noneconomic residual interests in a number of REMICs. This item represents tax basis in such interests which has accumulated as a result of tax rules requiring the recognition of income related to such noneconomic residuals. In 2017, a substantial portion of our noneconomic residual interests were sold.


⁽²⁾	Reflects our tax return election to capitalize certain service costs.

Reconciliation of unrecognized tax benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits related to uncertain tax positions is as follows:



	2017			2016			2015
	(in millions)
Balance at January 1,	$	16		$	26		$	14
Additions based on tax positions related to the current year	2			2			4
Additions for tax positions of prior years	—			—			8
Reductions for tax positions of prior years	(1		)	(8		)	—
Reductions related to settlements with taxing authorities	—			(4		)	—
Balance at December 31,	$	17		$	16		$	26