Income Taxes (Tables)

12 Months Ended

Dec. 31, 2019

Components of income tax expense (benefit)

Total income taxes was as follows:



Year Ended December 31,	2019			2018			2017
	(in millions)
Provision for income taxes	$	157		$	266		$	1,228
Income tax expense (benefit) included in common equity related to:
Unrealized gains (losses) on investment securities	128			(68		)	127
Unrealized gains (losses) on fair value option liabilities attributable to our own credit spread	(98		)	103			(115		)
Unrealized gains (losses) on derivatives designated as cash flow hedges	3			12			(5		)
Employer accounting for post-retirement plans	(5		)	3			1
Cumulative effect adjustment to initially apply new accounting guidance for stranded tax effects resulting from Tax Legislation⁽¹⁾	—			91			—
Total income taxes	$	185		$	407		$	1,236


⁽¹⁾	Reflects the adoption of new accounting guidance in 2018 which resulted in a cumulative effect adjustment as of January 1, 2018 to reclassify the stranded tax effects resulting from the change in the Federal corporate income tax rate discussed above from accumulated other comprehensive loss to retained earnings.

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



Year Ended December 31,	2019			2018		2017
	(in millions)
Current:
Federal	$	(3	)	$	68	$	795
State and local	35			41		109
Foreign	16			6		21
Total current	48			115		925
Deferred	109			151		303
Provision for income taxes	$	157		$	266	$	1,228

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,	2019					2018					2017
	(dollars are in millions)
Tax expense at the U.S. Federal statutory income tax rate	$	57		21.0	%	$	123		21.0	%	$	367		35.0	%
Increase (decrease) in rate resulting from:
State and local taxes, net of Federal benefit	23			8.5		40			6.8		28			2.7
Adjustment of Federal tax rate used to value deferred taxes⁽¹⁾	—			—		(31		)	(5.3	)	865			82.4
Adjustment of State tax rate used to value deferred taxes⁽²⁾	—			—		2			.3		(15		)	(1.4	)
Non-deductible FDIC assessment fees	5			1.9		27			4.6		—			—
Non-deductible goodwill impairment⁽³⁾	77			28.5		—			—		—			—
Other non-deductible / non-taxable items⁽⁴⁾	—			—		107			18.3		1			.1
Items affecting prior periods⁽⁵⁾	7			2.6		(1		)	(.2	)	6			.6
Uncertain tax positions	5			1.9		6			1.0		—			—
Low income housing and other tax credit investments	(13		)	(4.8	)	(5		)	(.9	)	(17		)	(1.6	)
Stock-based compensation	(2		)	(.7	)	(2		)	(.2	)	(8		)	(.8	)
Other	(2		)	(.8	)	—			—		1			.1
Provision for income taxes	$	157		58.1	%	$	266		45.4	%	$	1,228		117.1	%


⁽¹⁾	For 2018, the amount primarily relates to tax return adjustments on certain deferred tax assets impacted by the Federal tax rate change. For 2017, the amount relates to the effects of revaluing our net deferred tax asset for new Tax Legislation that was enacted in December 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.


⁽³⁾	Represents non-deductible goodwill impairment related to our Retail Banking and Wealth Management reporting unit in 2019.


⁽⁴⁾	For 2018, the amount primarily relates to non-deductible penalties related to legal matters.

⁽⁵⁾

For 2019, the amount primarily relates to changes in estimates as a result of filing the 2018 Federal income tax return and a reduction in a State and local capital loss carryback claim, partially offset by prior year State audit adjustments. 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.

Components of net deferred tax position

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



At December 31,	2019			2018
	(in millions)
Deferred tax assets:
Allowance for credit losses	$	153		$	131
Interests in real estate mortgage investment conduits⁽¹⁾	181			182
Unrealized losses on investment securities	36			164
Capitalized costs⁽²⁾	595			680
Fair value adjustments	15			—
Other	364			350
Total deferred tax assets	1,344			1,507
Valuation allowance	(8		)	(6		)
Total deferred tax assets, net of valuation allowance	1,336			1,501
Deferred tax liabilities:
Fair value adjustments	—			75
Amortization of intangible assets	18			18
Other	18			22
Total deferred tax liabilities	36			115
Net deferred tax asset	$	1,300		$	1,386

⁽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.


⁽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:



	2019			2018			2017
	(in millions)
Balance at January 1,	$	24		$	17		$	16
Additions based on tax positions related to the current year	—			2			2
Additions for tax positions of prior years	7			6			—
Reductions for tax positions of prior years	(1		)	—			(1		)
Reductions related to settlements with taxing authorities	—			(1		)	—
Balance at December 31,	$	30		$	24		$	17