JPMORGAN CHASE & CO

Income taxes

JPMorgan Chase and its eligible subsidiaries file a consolidated U.S. federal income tax return. JPMorgan Chase uses the asset and liability method to provide income taxes on all transactions recorded in the Consolidated Financial Statements. This method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities for book and tax purposes. Accordingly, a deferred tax asset or liability for each temporary difference is determined based on the tax rates that the Firm expects to be in effect when the underlying items of income and expense are realized. JPMorgan Chase’s expense for income taxes includes the current and deferred portions of that expense. A valuation allowance is established to reduce deferred tax assets to the amount the Firm expects to realize.

Due to the inherent complexities arising from the nature of the Firm’s businesses, and from conducting business and being taxed in a substantial number of jurisdictions, significant judgments and estimates are required to be made. Agreement of tax liabilities between JPMorgan Chase and the many tax jurisdictions in which the Firm files tax returns may not be finalized for several years. Thus, the Firm’s final tax-related assets and liabilities may ultimately be different from those currently reported.

Effective tax rate and expense

A reconciliation of the applicable statutory U.S. federal income tax rate to the effective tax rate for each of the years ended December 31, 2017, 2016 and 2015, is presented in the following table.



Effective tax rate
Year ended December 31,	2017		2016		2015
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Increase/(decrease) in tax rate resulting from:
U.S. state and local income taxes, net of U.S. federal income tax benefit	2.2		2.4		1.5
Tax-exempt income	(3.3	)	(3.1	)	(3.3	)
Non-U.S. subsidiary earnings^(a)	(3.1	)	(1.7	)	(3.9	)
Business tax credits	(4.2	)	(3.9	)	(3.7	)
Nondeductible legal expense	—		0.3		0.8
Tax audit resolutions	—		—		(5.7	)
Impact of the TCJA	5.4		—		—
Other, net	(0.1	)	(0.6	)	(0.3	)
Effective tax rate	31.9	%	28.4	%	20.4	%


(a)	Predominantly includes earnings of U.K. subsidiaries that were deemed to be reinvested indefinitely through December 31, 2017.

Impact of the TCJA

On December 22, 2017, the TCJA was signed into law. The Firm’s effective tax rate increased in 2017 driven by a $1.9 billion income tax expense representing the estimated impact of the enactment of the TCJA. The $1.9 billion tax expense was predominantly driven by a deemed repatriation of the Firm’s unremitted non-U.S. earnings and adjustments to the value of certain tax-oriented investments partially offset by a benefit from the revaluation of the Firm’s net deferred tax liability.

The deemed repatriation of the Firm’s unremitted non-U.S. earnings is based on the post-1986 earnings and profits of each controlled foreign corporation. The calculation resulted in an estimated income tax expense of $3.7 billion. Furthermore, accounting for income taxes requires the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The Firm remeasured its deferred tax asset and liability balances in the fourth quarter of 2017 to the new statutory U.S. federal income tax rate of 21% as well as any federal benefit associated with state and local deferred income taxes. The remeasurement resulted in an estimated income tax benefit of $2.1 billion.

The deemed repatriation and remeasurement of deferred taxes were calculated based on all available information and published legislative guidance. These amounts are considered to be estimates under SEC Staff Accounting Bulletin No. 118 as the Firm anticipates refinements to both calculations. Anticipated refinements will result from the issuance of future legislative and accounting guidance as well as those in the normal course of business, including true-ups to the tax liability on the tax return as filed and the resolution of tax audits.

Adjustments were also recorded to income tax expense for certain tax-oriented investments. These adjustments were driven by changes to affordable housing proportional amortization resulting from the reduction of the federal income tax rate under the TCJA. SEC Staff Accounting Bulletin No. 118 does not apply to these adjustments.

The components of income tax expense/(benefit) included in the Consolidated statements of income were as follows for each of the years ended December 31, 2017, 2016, and 2015.



Income tax expense/(benefit)
Year ended December 31, (in millions)	2017			2016			2015
Current income tax expense/(benefit)
U.S. federal	$	5,718		$	2,488		$	3,160
Non-U.S.	2,400			1,760			1,220
U.S. state and local	1,029			904			547
Total current income tax expense/(benefit)	9,147			5,152			4,927
Deferred income tax expense/(benefit)
U.S. federal	2,174			4,364			1,213
Non-U.S.	(144		)	(73		)	(95		)
U.S. state and local	282			360			215
Total deferred income tax expense/(benefit)	2,312			4,651			1,333
Total income tax expense	$	11,459		$	9,803		$	6,260

Total income tax expense includes $252 million, $55 million and $2.4 billion of tax benefits recorded in 2017, 2016, and 2015, respectively, as a result of tax audit resolutions.

Tax effect of items recorded in stockholders’ equity

The preceding table does not reflect the tax effect of certain items that are recorded each period directly in stockholders’ equity. The tax effect of all items recorded directly to stockholders’ equity resulted in a decrease of $915 million in 2017, an increase of $925 million in 2016, and an increase of $1.5 billion in 2015. Effective January 1, 2016, the Firm adopted new accounting guidance related to employee share-based payments. As a result of the adoption of this new guidance, all excess tax benefits (including tax benefits from dividends or dividend equivalents) on share-based payment awards are recognized within income tax expense in the Consolidated statements of income. In prior years these tax benefits were recorded as increases to additional paid-in capital.

Results from Non-U.S. earnings

The following table presents the U.S. and non-U.S. components of income before income tax expense for the years ended December 31, 2017, 2016 and 2015.



Year ended December 31, (in millions)	2017		2016		2015
U.S.	$	27,103	$	26,651	$	23,191
Non-U.S.^(a)	8,797		7,885		7,511
Income before income tax expense	$	35,900	$	34,536	$	30,702


(a)	For purposes of this table, non-U.S. income is defined as income generated from operations located outside the U.S.

Prior to December 31, 2017, U.S. federal income taxes had not been provided on the undistributed earnings of certain non-U.S. subsidiaries, to the extent that such earnings had been reinvested abroad for an indefinite period of time. The Firm will no longer maintain the indefinite reinvestment assertion on the undistributed earnings of those non-U.S. subsidiaries in light of the enactment of the TCJA. The U.S. federal and state and local income taxes associated with the undistributed and previously untaxed earnings of those non-U.S. subsidiaries was included in the deemed repatriation charge recorded as of December 31, 2017.

JPMC will treat any tax it may incur on global intangible low tax income as a period cost to tax expense when the tax is incurred.

Deferred taxes

Deferred income tax expense/(benefit) results from differences between assets and liabilities measured for financial reporting purposes versus income tax return purposes. Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely than not. If a deferred tax asset is determined to be unrealizable, a valuation allowance is established. The significant components of deferred tax assets and liabilities are reflected in the following table as of December 31, 2017 and 2016.



December 31, (in millions)	2017			2016
Deferred tax assets
Allowance for loan losses	$	3,395		$	5,534
Employee benefits	688			2,911
Accrued expenses and other	3,528			6,831
Non-U.S. operations	327			5,368
Tax attribute carryforwards	219			2,155
Gross deferred tax assets	8,157			22,799
Valuation allowance	(46		)	(785		)
Deferred tax assets, net of valuation allowance	$	8,111		$	22,014
Deferred tax liabilities
Depreciation and amortization	$	2,299		$	3,294
Mortgage servicing rights, net of hedges	2,757			4,807
Leasing transactions	3,483			4,053
Non-U.S. operations	200			4,572
Other, net	3,502			5,493
Gross deferred tax liabilities	12,241			22,219
Net deferred tax (liabilities)/assets	$	(4,130	)	$	(205	)

JPMorgan Chase has recorded deferred tax assets of $219 million at December 31, 2017, in connection with U.S. federal and non-U.S. net operating loss (“NOL”) carryforwards and state and local capital loss carryforwards. At December 31, 2017, total U.S. federal NOL carryforwards were approximately $769 million, non-U.S. NOL carryforwards were approximately $142 million and state and local capital loss carryforwards were $660 million. If not utilized, the U.S. federal NOL carryforwards will expire between 2025 and 2036 and the state and local capital loss carryforwards will expire between 2020 and 2021. Certain non-U.S. NOL carryforwards will expire between 2028 and 2034 whereas others have an unlimited carryforward period.

The valuation allowance at December 31, 2017, was due to the state and local capital loss carryforwards and certain non-U.S. NOL carryforwards.

Unrecognized tax benefits

At December 31, 2017, 2016 and 2015, JPMorgan Chase’s unrecognized tax benefits, excluding related interest expense and penalties, were $4.7 billion, $3.5 billion and $3.5 billion, respectively, of which $3.5 billion, $2.6 billion and $2.1 billion, respectively, if recognized, would reduce the annual effective tax rate. Included in the amount of unrecognized tax benefits are certain items that would not affect the effective tax rate if they were recognized in the Consolidated statements of income. These unrecognized items include the tax effect of certain temporary differences, the portion of gross state and local unrecognized tax benefits that would be offset by the benefit from associated U.S. federal income tax deductions, and the portion of gross non-U.S. unrecognized tax benefits that would have offsets in other jurisdictions. JPMorgan Chase is presently under audit by a number of taxing authorities, most notably by the Internal Revenue Service as summarized in the Tax examination status table below. As JPMorgan Chase is presently under audit by a number of taxing authorities, it is reasonably possible that over the next 12 months the resolution of these examinations may increase or decrease the gross balance of unrecognized tax benefits by as much as $1.3 billion. Upon settlement of an audit, the change in the unrecognized tax benefit would result from payment or income statement recognition.

The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015.



Year ended December 31, (in millions)	2017			2016			2015
Balance at January 1,	$	3,450		$	3,497		$	4,911
Increases based on tax positions related to the current period	1,355			262			408
Increases based on tax positions related to prior periods	626			583			1,028
Decreases based on tax positions related to prior periods	(350		)	(785		)	(2,646		)
Decreases related to cash settlements with taxing authorities	(334		)	(56		)	(204		)
Decreases related to a lapse of applicable statute of limitations	—			(51		)	—
Balance at December 31,	$	4,747		$	3,450		$	3,497

After-tax interest expense/(benefit) and penalties related to income tax liabilities recognized in income tax expense were $102 million, $86 million and $(156) million in 2017, 2016 and 2015, respectively.

At December 31, 2017 and 2016, in addition to the liability for unrecognized tax benefits, the Firm had accrued $639 million and $687 million, respectively, for income tax-related interest and penalties.



December 31, 2017	Periods under examination	Status
JPMorgan Chase – U.S.	2003 – 2005	At Appellate level
JPMorgan Chase – U.S.	2006 – 2010	Field examination of amended returns; certain matters at Appellate level
JPMorgan Chase – U.S.	2011 – 2013	Field Examination
JPMorgan Chase – California	2011 – 2012	Field Examination
JPMorgan Chase – U.K.	2006 – 2015	Field examination of certain select entities