Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.1.9
Income Taxes
12 Months Ended
Dec. 31, 2014
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The components of income tax expense (benefit) for 2014, 2013 and 2012 are presented in the table below.
 
 
 
 
 
 
Income Tax Expense (Benefit)
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
2014
 
2013
 
2012
Current income tax expense
 

 
 

 
 

U.S. federal
$
443

 
$
180

 
$
458

U.S. state and local
340

 
786

 
592

Non-U.S. 
513

 
513

 
569

Total current expense
1,296

 
1,479

 
1,619

Deferred income tax expense (benefit)
 

 
 

 
 

U.S. federal
583

 
2,056

 
(3,433
)
U.S. state and local
85

 
(94
)
 
(55
)
Non-U.S. 
58

 
1,300

 
753

Total deferred expense (benefit)
726

 
3,262

 
(2,735
)
Total income tax expense (benefit)
$
2,022

 
$
4,741

 
$
(1,116
)

Total income tax expense (benefit) does not reflect the deferred tax effects of unrealized gains and losses on AFS debt and marketable equity securities, foreign currency translation adjustments, derivatives and employee benefit plan adjustments that are included in accumulated OCI. These tax effects resulted in an expense of $3.4 billion in 2014 and $1.3 billion in 2012, and a benefit of $2.7 billion in 2013, recorded in accumulated OCI. In addition, total income tax expense (benefit) does not reflect tax effects associated with the Corporation’s employee stock plans which decreased common stock and additional paid-in capital $35 million, $128 million and $277 million in 2014, 2013 and 2012, respectively.
Income tax expense (benefit) for 2014, 2013 and 2012 varied from the amount computed by applying the statutory income tax rate to income before income taxes. A reconciliation of the expected U.S. federal income tax expense, calculated by applying the federal statutory tax rate of 35 percent, to the Corporation’s actual income tax expense (benefit), and the effective tax rates for 2014, 2013 and 2012 are presented in the table below.
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation of Income Tax Expense (Benefit)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
2013
 
2012
(Dollars in millions)
Amount

Percent

Amount

Percent

Amount

Percent
Expected U.S. federal income tax expense
$
2,399

 
35.0
 %
 
$
5,660

 
35.0
 %
 
$
1,075

 
35.0
 %
 Increase (decrease) in taxes resulting from:
 

 
(0.001
)%
 
 

 
(0.001
)%
 
 

 
(0.001
)%
State tax expense, net of federal benefit
276

 
4.0

 
450

 
2.8

 
349

 
11.4

Affordable housing credits/other credits
(950
)
 
(13.8
)
 
(863
)
 
(5.3
)
 
(783
)
 
(25.5
)
Changes in prior period UTBs, including interest
(741
)
 
(10.8
)
 
(255
)
 
(1.6
)
 
(198
)
 
(6.4
)
Tax-exempt income, including dividends
(533
)
 
(7.8
)
 
(524
)
 
(3.2
)
 
(576
)
 
(18.8
)
Non-U.S. tax rate differential (1)
(507
)
 
(7.4
)
 
(940
)
 
(5.8
)
 
(1,968
)
 
(64.1
)
Nondeductible expenses
1,982

 
28.9

 
104

 
0.6

 
231

 
7.5

Leveraged lease tax differential
53

 
0.8

 
26

 
0.2

 
83

 
2.7

Non-U.S. statutory rate reductions

 

 
1,133

 
7.0

 
788

 
25.7

Other
43

 
0.6

 
(50
)
 
(0.4
)
 
(117
)
 
(3.8
)
Total income tax expense (benefit)
$
2,022

 
29.5
 %
 
$
4,741

 
29.3
 %
 
$
(1,116
)
 
(36.3
)%
(1)  
Includes in 2012, a $1.7 billion income tax benefit attributable to the excess of foreign tax credits recognized in the U.S. upon repatriation of the earnings of certain non-U.S. subsidiaries over the related U.S. tax liability.
The reconciliation of the beginning unrecognized tax benefits (UTB) balance to the ending balance is presented in the table below.
 
 
 
 
 
 
Reconciliation of the Change in Unrecognized Tax Benefits
 
 
 
 
 
 
(Dollars in millions)
2014
 
2013
 
2012
Balance, January 1
$
3,068

 
$
3,677

 
$
4,203

Increases related to positions taken during the current year
75

 
98

 
352

Increases related to positions taken during prior years (1)
519

 
254

 
142

Decreases related to positions taken during prior years (1)
(973
)
 
(508
)
 
(711
)
Settlements
(1,594
)
 
(448
)
 
(205
)
Expiration of statute of limitations
(27
)
 
(5
)
 
(104
)
Balance, December 31
$
1,068

 
$
3,068

 
$
3,677

(1) 
The sum per year of positions taken during prior years differs from the $741 million, $255 million and $198 million in the Reconciliation of Income Tax Expense (Benefit) table due to temporary items, state items and jurisdictional offsets, as well as the inclusion of interest in the Reconciliation of Income Tax Expense (Benefit) table.
At December 31, 2014, 2013 and 2012, the balance of the Corporation’s UTBs which would, if recognized, affect the Corporation’s effective tax rate was $0.7 billion, $2.5 billion and $3.1 billion, respectively. Included in the UTB balance are some items the recognition of which would not affect the effective tax rate, such as the tax effect of certain temporary differences, the portion of gross state UTBs that would be offset by the tax benefit of the associated federal deduction and the portion of gross non-U.S. UTBs that would be offset by tax reductions in other jurisdictions.
The Corporation files income tax returns in more than 100 state and non-U.S. jurisdictions each year. The IRS and other tax authorities in countries and states in which the Corporation has significant business operations examine tax returns periodically (continuously in some jurisdictions). The Tax Examination Status table summarizes the status of significant examinations (U.S. federal unless otherwise noted) for the Corporation and various subsidiaries as of December 31, 2014.
 
 
 
 
Tax Examination Status
 
 
 
 
 
 
 
 
Years under
Examination
 
Status at December 31 2014
U.S. (1)
2010 – 2011
 
IRS Appeals
U.S.
2012 – 2013
 
Field examination
New York
2008 – 2012
 
Field examination
U.K.
2012
 
Field examination
(1) 
Field examination completed during 2014. The Corporation filed a protest related to certain adjustments with the IRS administrative appeals division.
During 2014, the Corporation settled and effectively resolved the federal examinations related to years 2005 through 2009 and all open Merrill Lynch years through 2008, as well as various state and local examinations for multiple years.
It is reasonably possible that the UTB balance may decrease by as much as $0.4 billion during the next 12 months, since resolved items will be removed from the balance whether their resolution results in payment or recognition.
During 2014, 2013 and 2012, the Corporation recognized a benefit of $196 million and expense of $127 million and $99 million, respectively, for interest and penalties, net-of-tax, in income tax expense. At December 31, 2014 and 2013, the Corporation’s accrual for interest and penalties that related to income taxes, net of taxes and remittances, was $455 million and $888 million.
Significant components of the Corporation’s net deferred tax assets and liabilities at December 31, 2014 and 2013 are presented in the table below.
 
 
 
 
Deferred Tax Assets and Liabilities
 
 
 
 
 
 
 
 
December 31
(Dollars in millions)
2014
 
2013
Deferred tax assets
 

 
 

Net operating loss carryforwards
$
9,787

 
$
10,967

Accrued expenses
5,916

 
6,749

Tax credit carryforwards
5,614

 
9,689

Security, loan and debt valuations
5,190

 
4,264

Allowance for credit losses
5,047

 
6,100

Employee compensation and retirement benefits
3,665

 
2,729

State income taxes
2,034

 
2,643

Available-for-sale securities

 
1,918

Other
1,688

 
722

Gross deferred tax assets
38,941

 
45,781

Valuation allowance
(1,111
)
 
(1,940
)
Total deferred tax assets, net of valuation allowance
37,830

 
43,841

 
 
 
 
Deferred tax liabilities
 

 
 

Equipment lease financing
2,880

 
3,106

Intangibles
1,349

 
1,529

Mortgage servicing rights
1,041

 
1,547

Available-for-sale securities
828

 

Fee income
816

 
798

Long-term borrowings
587

 
3,033

Other
2,075

 
1,472

Gross deferred tax liabilities
9,576

 
11,485

Net deferred tax assets
$
28,254

 
$
32,356


The table below summarizes the deferred tax assets and related valuation allowances recognized for the net operating loss (NOL) and tax credit carryforwards at December 31, 2014.
 
 
 
 
 
 
 
 
Net Operating Loss and Tax Credit Carryforward Deferred Tax Assets
 
 
 
 
 
 
 
 
(Dollars in millions)
Deferred
Tax Asset
 
Valuation
Allowance
 
Net
Deferred
Tax Asset
 
First Year
Expiring
Net operating losses – U.S. 
$
3,065

 
$

 
$
3,065

 
After 2027
Net operating losses – U.K.
6,276

 

 
6,276

 
None (1)
Net operating losses – other non-U.S. 
446

 
(316
)
 
130

 
Various
Net operating losses – U.S. states (2)
1,168

 
(460
)
 
708

 
Various
General business credits
3,383

 

 
3,383

 
After 2029
Foreign tax credits
2,231

 
(68
)
 
2,163

 
After 2022
(1) 
The U.K. net operating losses may be carried forward indefinitely.
(2) 
The net operating losses and related valuation allowances for U.S. states before considering the benefit of federal deductions were $1.8 billion and $708 million.
Management concluded that no valuation allowance was necessary to reduce the U.K. NOL carryforwards and U.S. NOL and general business credit carryforwards since estimated future taxable income will be sufficient to utilize these assets prior to their expiration. The majority of the Corporation’s U.K. net deferred tax assets, which consist primarily of NOLs, are expected to be realized by certain subsidiaries over an extended number of years. Management’s conclusion is supported by financial results and forecasts, the reorganization of certain business activities and the indefinite period to carry forward NOLs. However, significant changes to those estimates, such as changes that would be caused by a substantial and prolonged worsening of the condition of Europe’s capital markets, or a change in applicable laws, could lead management to reassess its U.K. valuation allowance conclusions.
At December 31, 2014, U.S. federal income taxes had not been provided on $17.2 billion of undistributed earnings of non-U.S. subsidiaries that management has determined have been reinvested for an indefinite period of time. If the Corporation were to record a deferred tax liability associated with these undistributed earnings, the amount would be approximately $4.5 billion at December 31, 2014.