Income Taxes
The following table is an analysis of the effective tax rate:
|
| | | | | | | | | |
| | Years Ended
December 31, |
(Dollars in millions) | | 2017 | | 2016 | | 2015 |
Federal income tax rate | | 35 | % | | 35 | % | | 35 | % |
Net tax effects of: | | |
| | |
| | |
|
State income taxes, net of federal income tax benefit | | 5 |
| | 6 |
| | 5 |
|
Tax-exempt interest income | | (1 | ) | | (1 | ) | | (2 | ) |
Losses from LIHC investments | | (3 | ) | | (3 | ) | | (5 | ) |
Amortization of LIHC investments | | 14 |
| | 10 |
| | 15 |
|
Tax credits | | (21 | ) | | (18 | ) | | (26 | ) |
Effects of US tax law change | | (8 | ) | | — |
| | — |
|
Other | | 1 |
| | 2 |
| | — |
|
Effective tax rate | | 22 | % | | 31 | % | | 22 | % |
On December 22, 2017, the Tax Cuts & Jobs Act was signed into law reducing the federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result of the reduction in the corporate income tax rate, the Company revalued its net deferred tax liabilities at December 31, 2017, resulting in a one-time tax benefit of $101 million.
The components of income tax expense were as follows:
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
(Dollars in millions) | | 2017 | | 2016 | | 2015 |
Current income tax expense: | | |
| | |
| | |
|
Federal | | $ | 257 |
| | $ | 228 |
| | $ | 114 |
|
State | | 21 |
| | 105 |
| | 61 |
|
Foreign | | (4 | ) | | 7 |
| | 14 |
|
Total current expense | | 274 |
| | 340 |
| | 189 |
|
Deferred income tax expense (benefit): | | |
| | |
| | |
|
Federal | | (49 | ) | | 58 |
| | 4 |
|
State | | 52 |
| | 24 |
| | (15 | ) |
Foreign | | 22 |
| | (3 | ) | | (9 | ) |
Total deferred expense | | 25 |
| | 79 |
| | (20 | ) |
Total income tax expense | | $ | 299 |
| | $ | 419 |
| | $ | 169 |
|
The components of the Company's net deferred tax balances as of December 31, 2017 and 2016 were as follows:
|
| | | | | | | | |
| | December 31, |
(Dollars in millions) | | 2017 | | 2016 |
Deferred tax assets: | | |
| | |
|
Tax credits and net operating loss carryforwards | | $ | 310 |
| | $ | 140 |
|
Allowance for credit losses | | 254 |
| | 443 |
|
Accrued expense, net | | 178 |
| | 346 |
|
Unrealized losses on pension and postretirement benefits | | 214 |
| | 384 |
|
Unrealized net losses on securities available for sale | | 82 |
| | 133 |
|
Fair value adjustments for valuation of FDIC covered assets | | 61 |
| | 71 |
|
Unrealized gains/losses on cash flow hedges | | 62 |
| | 52 |
|
Other | | — |
| | 14 |
|
Total deferred tax assets | | 1,161 |
| | 1,583 |
|
Deferred tax liabilities: | | |
| | |
|
Leasing and renewable energy | | 769 |
| | 963 |
|
Intangible assets | | 55 |
| | 79 |
|
Pension liabilities | | 358 |
| | 479 |
|
Other | | 7 |
| | — |
|
Total deferred tax liabilities | | 1,189 |
| | 1,521 |
|
Net deferred tax (liability) asset | | $ | (28 | ) | | $ | 62 |
|
At December 31, 2017, the US federal net operating loss carryforward was $17 million, AMT tax credit carryforward was $16 million and tax credit carryforwards were $277 million. If not utilized, the net operating loss carryforward and tax credits begin to expire in 2032 and 2035, respectively. The AMT tax credit can be carried forward indefinitely.
Deferred tax assets are evaluated for realization based on the existence of sufficient taxable income of the appropriate character. Management has determined that no valuation allowance is required.
The following table reflects the changes in gross unrecognized tax benefits:
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
(Dollars in millions) | | 2017 | | 2016 | | 2015 |
Balance, beginning of year | | $ | 11 |
| | $ | 8 |
| | $ | 11 |
|
Gross increases as a result of tax positions taken during prior periods | | 45 |
| | — |
| | 1 |
|
Gross decreases as a result of tax positions taken during prior periods | | — |
| | — |
| | (5 | ) |
Gross increases as a result of tax positions taken during current period | | 2 |
| | 3 |
| | 1 |
|
Gross decrease as a result of closed audit years or settlements | | (2 | ) | | — |
| | — |
|
Balance, end of year | | $ | 56 |
| | $ | 11 |
| | $ | 8 |
|
The amount of unrecognized tax positions that would affect the effective tax rate, if recognized, was $33 million, $9 million and $6 million at December 31, 2017, 2016 and 2015, respectively.
The Company recognizes interest and penalties as a component of income tax expense. As of December 31, 2017 we accrued $2 million for interest and $3 million of penalties. As of December 31, 2016 and 2015 there were no accruals recorded for gross interest and penalties. It is reasonably possible that certain tax positions will be resolved within the next 12 months pursuant to 2017 filings, which would decrease the Company's balance of unrecognized tax benefits by $35 million.
The Company is subject to U.S. federal income tax as well as various state and foreign income taxes. With limited exception, the Company is not open to examination for periods before 2014 by U.S. federal taxing authorities and 2013 by state taxing authorities.