INCOME TAXES
Earnings before Provision for Income Taxes
|
| | | | | | | | | | | |
For the years ended December 31 ($ in millions) | 2017 |
| 2016 |
| 2015 |
U.S. | $ | 3,334 |
| | $ | 3,545 |
| | $ | 3,513 |
|
Non-U.S. | (10 | ) | | 25 |
| | 18 |
|
Earnings before provision for income taxes | $ | 3,324 |
| | $ | 3,570 |
| | $ | 3,531 |
|
Provision for Income Taxes
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| | | | | | | | | | | |
For the years ended December 31 ($ in millions) | 2017 |
| 2016 |
| 2015 |
Current provision for income taxes | | | | | |
U.S. Federal | $ | 900 |
| | $ | 829 |
| | $ | 1,443 |
|
U.S. state and local | 92 |
| | 86 |
| | 158 |
|
Non-U.S. | 12 |
| | 15 |
| | 11 |
|
Total current provision for income taxes | 1,004 |
| | 930 |
| | 1,612 |
|
| | | | | |
Deferred (benefit) provision for income taxes | | | | | |
U.S. Federal | 367 |
| | 357 |
| | (263 | ) |
U.S. state and local | 20 |
| | 33 |
| | (32 | ) |
Non-U.S. | (2 | ) | | (1 | ) | | — |
|
Deferred (benefit) provision for income taxes | 385 |
| | 389 |
| | (295 | ) |
Total provision for income taxes | $ | 1,389 |
| | $ | 1,319 |
| | $ | 1,317 |
|
U.S. income taxes have not been provided on temporary differences related to investments in certain non-U.S. subsidiaries. These temporary differences are due to earnings that have been reinvested abroad for an indefinite period of time and other differences between the book basis and tax basis in the equity in our non-U.S. subsidiaries. Any U.S. tax liability associated with these temporary differences would not be material to the consolidated financial statements.
Tax Reform
On December 22, 2017, the Tax Act was signed into law. The Tax Act significantly revised the U.S. income tax laws, which impacted our year ended December 31, 2017, including lowering the corporate income tax rate from 35% to 21% effective January 1, 2018. We recognized additional discrete tax expense of $160 million for the year ended December 31, 2017, primarily due to the remeasurement of our deferred tax assets and liabilities following enactment of the Tax Act. At December 31, 2017, our accounting for the Tax Act is complete under SAB 118. Forthcoming guidance, such as regulations or technical corrections, could change how we interpreted provisions of the Tax Act.
Reconciliation of Our Effective Tax Rate to the U.S. Federal Statutory Income Tax Rate
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| | | | | | | | |
For the years ended December 31 | 2017 |
| 2016 | | 2015 |
U.S. federal statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
U.S. state and local income taxes, net of federal benefit | 2.2 | % | | 2.2 | % | | 2.3 | % |
Tax Act - impact of tax rate change | 4.8 | % | | — | % | | — | % |
All other, net | (0.2 | )% | | (0.3 | )% | | — | % |
Effective tax rate | 41.8 | % | | 36.9 | % | | 37.3 | % |
Deferred Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax laws and rates that will be in effect when such differences are expected to reverse. The effect of a change in tax law is recognized on the date of enactment. As a result of the Tax Act, the Company remeasured our deferred tax assets and liabilities at the lower enacted corporate tax rate and our net deferred tax asset was reduced during the fourth quarter of 2017. The table below reflects the reduction in deferred tax assets and liabilities in 2017 following the enactment of the Tax Act.
Significant Components of Our Net Deferred Income Taxes
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| | | | | | | |
At December 31 ($ in millions) | 2017 |
| 2016 |
Assets | | | |
Allowance for loan losses | $ | 1,381 |
| | $ | 1,662 |
|
Reward programs | 64 |
| | 121 |
|
Compensation and employee benefits | 95 |
| | 154 |
|
Net operating losses | 5 |
| | 7 |
|
Other assets | 21 |
| | 37 |
|
Total deferred income tax assets before valuation allowance | 1,566 |
| | 1,981 |
|
Valuation allowance | — |
| | (5 | ) |
Total deferred income tax assets | $ | 1,566 |
| | $ | 1,976 |
|
| | | |
Liabilities | | | |
Original issue discount | $ | (1,053 | ) | | $ | (989 | ) |
Goodwill and identifiable intangibles | (141 | ) | | (222 | ) |
Other liabilities | (120 | ) | | (132 | ) |
Total deferred income tax liabilities | (1,314 | ) | | (1,343 | ) |
Net deferred income tax assets | $ | 252 |
| | $ | 633 |
|
Tax Sharing and Separation Agreement
In connection with our initial public offering in August 2014 (“IPO”), we entered into a Tax Sharing and Separation Agreement (“TSSA”), which governs certain Separation-related tax matters between the Company and GE following the IPO. The TSSA governs the allocation of the responsibilities for the taxes of the GE group between GE and the Company. The TSSA also allocates rights, obligations and responsibilities in connection with certain administrative matters relating to the preparation of tax returns and control of tax audits and other proceedings relating to taxes.
Under the TSSA, we generally are responsible for all taxes attributable to us or our operations for taxable periods following December 31, 2013. To the extent we filed tax returns on a consolidated basis with GE, we are required to make tax sharing payments to GE in amounts equal to our separate company tax liability. Our separate company tax liability is generally equal to the amount of tax we would have paid had we been filing tax returns separately from GE, subject to certain adjustments, whether or not GE is actually required to pay such amounts to the taxing authorities. For taxable periods prior to January 1, 2014, GE is responsible for all income taxes imposed by the United States, Canada and Puerto Rico. Liabilities related to taxable periods prior to January 1, 2014 were settled with GE during the year ended December 31, 2014. We are responsible for all other taxes attributable to our business. Where required for certain tax items, we have retained the liability and recorded an indemnity receivable from GE in our Consolidated Statement of Financial Position.
Unrecognized Tax Benefits
Reconciliation of Unrecognized Tax Benefits
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| | | | | | | |
($ in millions) | 2017 | | 2016 |
Balance at January 1 | $ | 150 |
| | $ | 327 |
|
Additions: | | | |
Tax positions of the current year | 99 |
| | 21 |
|
Tax positions of prior years | 16 |
| | 16 |
|
Reductions: | | | |
Prior year tax positions(a) | (4 | ) | | (208 | ) |
Settlements with tax authorities | — |
| | — |
|
Expiration of the statute of limitation | (6 | ) | | (6 | ) |
Balance at December 31 | $ | 255 |
| | $ | 150 |
|
Portion of balance that, if recognized, would impact the effective income tax rate | $ | 173 |
| | $ | 99 |
|
| |
(a) | Included in the prior year tax positions for the year ended December 31, 2016 is a reversal of an unrecognized tax benefit of $208 million related to temporary items that had been recorded in 2015. |
The amount of unrecognized tax benefits that is reasonably possible to be resolved in the next twelve months is expected to be $96 million, of which, $40 million, if recognized, would reduce the company’s tax expense and effective tax rate. Included in the $96 million of unrecognized benefits are certain temporary differences that would not affect the effective tax rate if they were recognized in the Consolidated Statement of Earnings.
Additionally, there are unrecognized tax benefits of $30 million for both the years ended December 31, 2017 and 2016, that are included in the tabular reconciliation above but recorded in the Consolidated Statement of Financial Position as a reduction of the related deferred tax asset for net operating losses.
Interest expense and penalties related to income tax liabilities recognized in our Consolidated Statements of Earnings were not material for all periods presented.
For periods prior to Separation, we are under continuous examination by the IRS and the tax authorities of various states as part of their audit of GE’s tax returns. The IRS is currently auditing GE's consolidated U.S. income tax returns for 2012 through 2015. We are under examination in various states going back to 2008 as part of their audit of GE’s tax returns. We are not currently under audit with respect to any post-Separation periods. We believe that there are no issues or claims that are likely to significantly impact our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties that could result from such examinations.