Income Taxes

12 Months Ended

Dec. 31, 2018

13. Income Taxes

Income taxes included in the income statement are summarized below. We file a consolidated federal income tax return.



Year ended December 31, in millions	2018			2017		2016
Currently payable:
Federal	$	184		$	334	$	149
State	62			—		19
Total currently payable	246			334		168
Deferred:
Federal	117			274		13
State	(19		)	29		(2		)
Total deferred	98			303		11
Total income tax (benefit) expense ^(a)	$	344		$	637	$	179

(a)

There was no income tax (benefit) expense on securities transactions in 2018, 2017, and 2016. Income tax expense excludes equity- and gross receipts-based taxes, which are assessed in lieu of an income tax in certain states in which we operate. These taxes, which are recorded in “noninterest expense” on the income statement, totaled $15 million in 2018, $22 million in 2017, and $18 million in 2016.

Significant components of our deferred tax assets and liabilities included in “accrued income and other assets” and “accrued expense and other liabilities,” respectively, on the balance sheet, are as follows:



December 31, in millions	2018		2017
Allowance for loan and lease losses	$	232	$	233
Employee benefits	170		147
Net unrealized securities losses	144		138
Federal net operating losses and credits	34		205
Fair value adjustments	41		63
Non-tax accruals	80		89
State net operating losses and credits	3		7
Other	221		223
Gross deferred tax assets	925		1,105
Less: Valuation Allowance	11		15
Total deferred tax assets	914		1,090
Leasing transactions	531		588
Other	161		182
Total deferred tax liabilities	692		770
Net deferred tax assets (liabilities) ^(a)	$	222	$	320


(a)	From continuing operations.

On December 22, 2017, the TCJ Act was signed into law. This comprehensive tax legislation provided for significant changes to the U.S. Internal Revenue Code of 1986, as amended, that impacted corporate taxation requirements, such as the reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The TCJ Act retained the low-income housing and research and development credits and repealed the corporate alternative minimum tax. Other relevant corporate changes include earlier recognition of certain revenue; accelerating expensing of investments in tangible property, including leasing assets; and limiting several deductions such as FDIC premiums, certain executive compensation, and meals and entertainment expenses.

Key was required to re-value certain tax-related assets under the provisions of the TCJ Act at December 31, 2017. Under current U.S. GAAP, deferred tax assets and liabilities are to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. The tax-related assets consist primarily of deferred tax assets and liabilities and investments in low-income housing transactions. Due to the close proximity of our year end to the date the TCJ Act was signed into law, we estimated the impact of the income tax effects as of December 31, 2017, based upon currently available information which resulted in a reduction to our net income of $161 million. The significant components of this reduction included a $14 million reduction in our investments in certain low-income housing that is reflected in other expenses and a $147 million, or 7.6%, increase in our income tax provision for the twelve months ended December 31, 2017, due to the reduction to our net deferred tax asset and related actions. This reduction was primarily the result of the lower federal corporate income tax rate and was based on information available at that time.

During the third quarter of 2018, Key completed and filed its 2017 federal income tax return and management finalized its assessment of the initial impact of the TCJ Act and related regulatory guidance. As a result, our income tax provision was increased by $7 million during the quarter and the total impact to Key of the TCJ Act was a reduction to our net income of $168 million.

The accounting for the changes in tax law resulted in stranded tax effects within AOCI for items that were originally recognized in OCI rather than in net income. During the quarter ended December 31, 2017, we early adopted an ASU issued by the FASB allowing companies to reclassify stranded tax effects resulting from the TCJ Act from accumulated other comprehensive income to retained earnings. Utilizing the portfolio method, during the quarter ended December 31, 2017, we reclassified $141 million from accumulated other comprehensive income to retained earnings to eliminate the stranded tax effects.

We conduct quarterly assessments of all available evidence to determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded. The available evidence used in connection with these assessments includes taxable income in prior periods, projected future taxable income, potential tax-planning strategies, and projected future reversals of deferred tax items. These assessments involve a degree of subjectivity and may undergo significant change. Based on these criteria, we have recorded $11 million of valuation allowances at December 31, 2018; primarily against federal and state capital loss carryforwards acquired in the First Niagara acquisition.

At December 31, 2018, we had federal net operating loss carryforwards of $61 million, federal credit carryforwards of $21 million, and capital loss carryforwards of $11 million. The federal net operating loss carryforwards are from prior acquisitions by First Niagara and are subject to annual limitations under the tax code and, if not utilized, will expire in the years beginning 2027. We currently expect to fully utilize these losses. The federal credit carryforward consists of general business credits which expire in 2037, under the Internal Revenue Code.

The capital loss carryforward, if not utilized, will expire in 2019. Realization of this tax benefit is dependent upon Key’s ability to generate sufficient capital gain in an appropriate tax year to offset the capital loss carryforward. Currently, generation of sufficient capital gain income is uncertain.

We had state net operating loss carryforwards of $54 million, and state credit carryforwards of $1 million, resulting in a net state deferred tax asset of $3 million. Additionally, we had state capital loss carryforwards of $1 million. These carryforwards, if not utilized, will gradually expire through 2031.

The following table shows how our total income tax expense (benefit) and the resulting effective tax rate were derived:



Year ended December 31, dollars in millions	2018					2017					2016
Year ended December 31, dollars in millions	Amount			Rate		Amount			Rate		Amount			Rate
Income (loss) before income taxes times 21% (35% for 2017 and 2016) statutory federal tax rate	$	463		21.0	%	$	675		35.0	%	$	339		35.0	%
Amortization of tax-advantaged investments	127			5.8		104			5.4		88			9.0
Foreign tax adjustments	2			.1		1			.1		1			.1
Tax-exempt interest income	(30		)	(1.4	)	(37		)	(1.9	)	(25		)	(2.6	)
Corporate-owned life insurance income	(29		)	(1.3	)	(46		)	(2.4	)	(44		)	(4.5	)
State income tax, net of federal tax benefit	34			1.5		19			1.0		11			1.1
Tax credits	(234		)	(10.6	)	(218		)	(11.3	)	(208		)	(21.3	)
Tax Cuts and Jobs Act	7			.3		147			7.6		—			—
Other	4			.2		(8		)	(.5	)	17			1.7
Total income tax expense (benefit)	$	344		15.6	%	$	637		33.0	%	$	179		18.5	%

Liability for Unrecognized Tax Benefits

The change in our liability for unrecognized tax benefits is as follows:



Year ended December 31, in millions	2018			2017
Balance at beginning of year	$	39		$	53
Increase for other tax positions of prior years	15			3
Increase from Acquisitions	—			3
Decrease for payments and settlements	—			(4		)
Decrease related to tax positions taken in prior years	(19		)	(16		)
Balance at end of year	$	35		$	39

Each quarter, we review the amount of unrecognized tax benefits recorded in accordance with the applicable accounting guidance. Any adjustment to unrecognized tax benefits is recorded in income tax expense. The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $35 million at December 31, 2018, and $39 million at December 31, 2017. We do not currently anticipate that the amount of unrecognized tax benefits will significantly change over the next 12 months.

As permitted under the applicable accounting guidance, it is our policy to record interest and penalties related to unrecognized tax benefits in income tax expense. We recorded net interest benefit of $.7 million and $1.3 million in 2018 and 2017, respectively and net interest expense of $.4 million in 2016. We did not recover any state tax penalties in 2018 or 2016. We recovered state tax penalties of $1 million in 2017. At December 31, 2018, we had an accrued interest payable of $3 million, compared to $4 million at December 31, 2017. There was no liability for accrued state tax penalties at December 31, 2018, and December 31, 2017.

The amount of unrecognized tax benefits to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if certain criteria are met at December 31, 2018, and December 31, 2017, are $14.3 million and $17.2 million, respectively.

We file federal income tax returns, as well as returns in various state and foreign jurisdictions. We are subject to income tax examination by the IRS for the tax years 2013 and forward. Currently, we are under IRS audit for the tax years 2013 and 2014. We are not subject to income tax examinations by other tax authorities for years prior to 2009.

Pre-1988 Bank Reserves acquired in a business combination

Retained earnings of KeyBank included approximately $92 million of allocated bad debt deductions for which no income taxes have been recorded. Under current federal law, these reserves are subject to recapture into taxable income if KeyBank, or any successor, fails to maintain its bank status under the Internal Revenue Code or makes non-dividend distributions or distributions greater than its accumulated earnings and profits. No deferred tax liability has been established as these events are not expected to occur in the foreseeable future.