Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Total income taxes was as follows:

Year Ended December 31,	2021		2020		2019
	(in millions)
Provision (benefit) for income taxes	$	224	$	(42)	$	157
Income tax expense (benefit) included in common equity related to:
Unrealized gains (losses) on investment securities	(258)		274		128
Unrealized gains (losses) on fair value option liabilities attributable to our own credit spread	4		8		(98)
Unrealized gains (losses) on derivatives designated as cash flow hedges	(19)		23		3
Employer accounting for post-retirement plans	1		(1)		(5)
Total income taxes	$	(48)	$	262	$	185

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

Year Ended December 31,	2021		2020		2019
	(in millions)
Current:
Federal	$	(111)	$	(45)	$	(3)
State and local	(7)		(9)		35
Foreign	2		(13)		16
Total current	(116)		(67)		48
Deferred	340		25		109
Provision (benefit) for income taxes	$	224	$	(42)	$	157

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

Year Ended December 31,	2021				2020				2019
	(dollars are in millions)
Tax expense (benefit) at the U.S. Federal statutory income tax rate	$	192	21.0	%	$	(206)	(21.0)	%	$	57	21.0	%
Increase (decrease) in rate resulting from:
State and local taxes, net of Federal benefit	31		3.4		(2)		(.2)		23		8.5
Non-deductible FDIC assessment fees	13		1.4		15		1.5		5		1.9
Non-deductible goodwill impairment(1)	—		—		165		16.8		77		28.5
Items affecting prior periods(2)	—		—		3		.3		7		2.6
Uncertain tax positions	6		.7		(8)		(.8)		5		1.9
Low income housing and other tax credit investments	(15)		(1.7)		(14)		(1.4)		(13)		(4.8)
Other	(3)		(.2)		5		.5		(4)		(1.5)
Provision (benefit) for income taxes	$	224	24.6	%	$	(42)	(4.3)	%	$	157	58.1	%

(1)For 2020, the amount represents non-deductible goodwill impairment related to our previously separate Retail Banking and Wealth Management and Private Banking businesses. For 2019, the amount represents non-deductible goodwill impairment related to our previously separate Retail Banking and Wealth Management business.

(2)For 2020, the amount primarily relates to prior year State audit settlements, partially offset by changes in estimates as a result of filing the 2019 Federal and State income tax returns. 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.

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

At December 31,	2021		2020
	(in millions)
Deferred tax assets:
Allowance for credit losses	$	150	$	245
Accrued expenses	64		108
Interests in real estate mortgage investment conduits(1)	127		158
Unrealized losses on investment securities	21		—
Capitalized costs(2)	495		501
Lease liabilities	111		152
Other	219		268
Total deferred tax assets	1,187		1,432
Deferred tax liabilities:
Lease ROU assets	80		127
Unrealized gains on investment securities	—		237
Amortization of intangible assets	21		19
Fair value adjustments	43		1
Other	14		37
Total deferred tax liabilities	158		421
Net deferred tax asset	$	1,029	$	1,011

(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.

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

	2021		2020		2019
	(in millions)
Balance at January 1,	$	20	$	30	$	24
Additions for tax positions of prior years	9		—		7
Reductions for tax positions of prior years	(3)		(1)		(1)
Reductions related to settlements with taxing authorities	—		(9)		—
Balance at December 31,	$	26	$	20	$	30

The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate was $22 million, $16 million and $24 million at December 31, 2021, 2020 and 2019, respectively. Included in the unrecognized tax benefits are certain items the recognition of which would not affect the effective tax rate, such as the tax effect of temporary differences and the amount of State taxes that would be deductible for U.S. Federal tax purposes. It is reasonably possible that there could be a change in the amount of our unrecognized tax benefits within the next 12 months due to settlements or statutory expirations in various State and local tax jurisdictions.

It is our policy to recognize accrued interest related to uncertain tax positions in interest expense in the consolidated statement of income (loss) and to recognize penalties, if any, related to uncertain tax positions as a component of other expenses in the consolidated statement of income (loss). Accruals for the payment of interest associated with uncertain tax positions totaled $6 million, $5 million and $10 million at December 31, 2021, 2020 and 2019, respectively. Our accrual for the payment of interest associated with uncertain tax positions increased by $1 million during 2021 and decreased by $5 million during 2020.

Deferred tax assets and liabilities are recognized for the future tax consequences related to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, for State net operating losses and for State tax credits. Our net deferred tax assets, including deferred tax liabilities, totaled $1,029 million and $1,011 million at December 31, 2021 and 2020, respectively.

See Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," for further discussion regarding our accounting policy relating to the evaluation, recognition and measurement of both the HNAH Group's and HSBC USA's deferred tax assets and liabilities. In evaluating the need for a valuation allowance at December 31, 2021, it has been determined that HNAH Group projections of future taxable income from U.S. operations based on management approved business plans provide sufficient and appropriate support for the recognition of our net deferred tax assets.

Federal income tax returns for 2017 and forward remain open to examination by the Internal Revenue Service.

We remain subject to State and local income tax examinations for years 2010 and forward. We are currently under audit by various State and local tax jurisdictions. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and the closing of statute of limitations. Such adjustments are reflected in the tax provision.

 At December 31, 2021, for State tax purposes, we had apportioned and pre-tax effected net operating loss carryforwards of $13 million which expire as follows: $1 million in 2028 and $12 million in 2030 and beyond.