Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

14. 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	2019		2018			2017
Currently payable:
Federal	$	241	$	184		$	334
State	20		62			—
Total currently payable	261		246			334
Deferred:
Federal	34		117			274
State	19		(19		)	29
Total deferred	53		98			303
Total income tax (benefit) expense (a)	$	314	$	344		$	637

(a) There was income tax (benefit) expense on securities transactions of $5 million in 2019, and no income tax (benefit) expense on securities transactions in 2018 and 2017. 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 non-income taxes, which are recorded in “noninterest expense” on the income statement, totaled $23 million in 2019, $15 million in 2018, and $22 million in 2017.

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.

We were 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. We recorded 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.

During 2018, we completed and filed our 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.

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	2019			2018
Allowance for loan and lease losses	$	236		$	232
Employee benefits	164			170
Net unrealized securities losses	—			144
Federal net operating losses and credits	81			34
Fair value adjustments	21			41
Non-tax accruals	61			80
Operating lease liabilities (a)	178			—
State net operating losses and credits	1			3
Other	245			221
Gross deferred tax assets	987			925
Less: Valuation Allowance	—			11
Total deferred tax assets	987			914
Leasing transactions	628			531
Net unrealized securities gains	117			—
Operating lease right-of-use assets (a)	156			—
Other	175			161
Total deferred tax liabilities	1,076			692
Net deferred tax assets (liabilities) (b)	$	(89	)	$	222

(a) A separate deferred tax asset and liability is recognized for each operating lease item resulting from the adoption of ASC 842 in 2019.

(b) From continuing operations.

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 no recorded valuation allowances at December 31, 2019.

At December 31, 2019, we had federal net operating loss carryforwards of $43 million and federal credit carryforwards of $72 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. The federal credit carryforward consists of general business credits which expire in 2037, under the Internal Revenue Code. We currently expect to fully utilize these losses and credits.

We had state net operating loss carryforwards of $40 million, resulting in a net state deferred tax asset of $1 million.

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	2019					2018					2017
	Amount			Rate		Amount			Rate		Amount			Rate
Income (loss) before income taxes times 21% (35% for 2017) statutory federal tax rate	$	425		21.0	%	$	463		21.0	%	$	675		35.0	%
Amortization of tax-advantaged investments	132			6.5		127			5.8		104			5.4
Foreign tax adjustments	—			—		2			.1		1			.1
Tax-exempt interest income	(30		)	(1.5	)	(30		)	(1.4	)	(37		)	(1.9	)
Corporate-owned life insurance income	(29		)	(1.4	)	(29		)	(1.3	)	(46		)	(2.4	)
State income tax, net of federal tax benefit	31			1.5		34			1.5		19			1.0
Tax credits	(231		)	(11.4	)	(234		)	(10.6	)	(218		)	(11.3	)
Tax Cuts and Jobs Act	—			—		7			.3		147			7.6
Other	16			.9		4			.2		(8		)	(.5	)
Total income tax expense (benefit)	$	314		15.6	%	$	344		15.6	%	$	637		33.0	%

Liability for Unrecognized Tax Benefits

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

Year ended December 31, in millions	2019			2018
Balance at beginning of year	$	35		$	39
Increase for other tax positions of prior years	2			15
Decrease for payments and settlements	—			—
Decrease related to tax positions taken in prior years	(18		)	(19		)
Balance at end of year	$	19		$	35

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 $19 million at December 31, 2019, and $35 million at December 31, 2018. 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 $.9 million, $.7 million, and $1.3 million in 2019, 2018, and 2017, respectively. We did not recover any state tax penalties in 2019 or 2018. We recovered state tax penalties of $1 million in 2017. At December 31, 2019, we had an accrued interest payable of $2 million, compared to $3 million at December 31, 2018. There was no liability for accrued state tax penalties at December 31, 2019, and December 31, 2018.

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, 2019, and December 31, 2018, are $15.9 million and $14.3 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.