SCHWAB CHARLES CORP

Taxes on Income

On December 22, 2017, P.L. 115-97, known as the Tax Cuts and Jobs Act (the Tax Act), was signed into law. Among other things, the Tax Act lowers the federal corporate income tax rate from 35% to 21%, effective for tax years including or commencing January 1, 2018. The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for the effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under ASC 740 Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

In connection with our initial analysis of the impact of the Tax Act, Schwab recognized a $46 million one-time non-cash charge to taxes on income in the fourth quarter of 2017 associated with the remeasurement of net deferred tax assets and other tax adjustments related to the Tax Act. While we were able to make a reasonable estimate of the impact of the reduction in the corporate tax rate, our accounting for various elements of the Tax Act may be affected by other related analysis including, but not limited to, bonus depreciation that will allow for immediate expensing of qualified property and the state tax effect of adjustments made to federal temporary differences. As such, the impact of the Tax Act is an estimate pending further information and the analysis noted.

The components of taxes on income are as follows:



Year Ended December 31,	2017		2016		2015
Current:
Federal	$	1,132	$	980	$	740
State	106		109		99
Total current	1,238		1,089		839
Deferred:
Federal	58		13		(6		)
State	—		2		(1		)
Total deferred	58		15		(7		)
Taxes on income	$	1,296	$	1,104	$	832

The temporary differences that created deferred tax assets and liabilities are detailed below:



December 31,	2017			2016
Deferred tax assets:
Employee compensation, severance, and benefits	$	133		$	216
Net unrealized loss on available for sale securities	57			97
Reserves and allowances	15			25
Facilities lease commitments	14			25
State and local taxes	12			17
Net operating loss carryforwards	5			5
Other	3			—
Total deferred tax assets	239			385
Valuation allowance	(2		)	(3		)
Deferred tax assets — net of valuation allowance	237			382
Deferred tax liabilities:
Capitalized internal-use software development costs	(89		)	(118		)
Depreciation and amortization	(72		)	(114		)
Other	—			(7		)
Total deferred tax liabilities	(161		)	(239		)
Deferred tax asset — net ⁽¹⁾	$	76		$	143

⁽¹⁾ Amounts are included in other assets on the consolidated balance sheets at both December 31, 2017 and 2016.

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:



Year Ended December 31,	2017		2016		2015
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	2.2		2.4		2.6
Equity compensation benefit	(2.4	)	—		—
Other ⁽¹⁾	0.7		(0.5	)	(1.1	)
Effective income tax rate	35.5	%	36.9	%	36.5	%

⁽¹⁾ Includes the impact of one-time charge to taxes on income associated with the Tax Act.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



December 31,	2017			2016
Balance at beginning of year	$	93		$	48
Additions for tax positions related to the current year	22			16
Additions for tax positions related to prior years	15			32
Reductions for tax positions related to prior years	(2		)	(2		)
Reductions due to lapse of statute of limitations	—			—
Reductions for settlements with tax authorities	(17		)	(1		)
Balance at end of year	$	111		$	93

Unrecognized tax benefits totaled $111 million and $93 million as of December 31, 2017 and 2016, respectively, $104 million and $85 million of which if recognized would affect the annual effective tax rate.

Interest was accrued related to unrecognized tax benefits in tax expense and penalties in other expense. Approximately $5 million and $8 million for the payment of interest and penalties was accrued at December 31, 2017 and 2016, respectively.

The Company and its subsidiaries are subject to routine examinations by the respective federal, state and applicable local jurisdictions’ taxing authorities. Federal returns for 2011 through 2016 remain subject to examination. The years open to examination by state and local governments vary by jurisdiction.