Bank of America Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2016

The components of income tax expense for 2016, 2015 and 2014 are presented in the table below.




Income Tax Expense

(Dollars in millions)	2016			2015		2014
Current income tax expense
U.S. federal	$	302		$	2,539	$	443
U.S. state and local	120			210		340
Non-U.S.	984			561		513
Total current expense	1,406			3,310		1,296
Deferred income tax expense
U.S. federal	5,464			1,812		953
U.S. state and local	(279		)	515		136
Non-U.S.	656			597		58
Total deferred expense	5,841			2,924		1,147
Total income tax expense	$	7,247		$	6,234	$	2,443

Total income tax expense does not reflect the tax effects of items that are included in accumulated OCI. For additional information, see Note 14 – Accumulated Other Comprehensive Income (Loss). These tax effects resulted in a benefit of $498 million in 2016 and an expense of $631 million and $3.1 billion in 2015 and 2014, respectively, recorded in accumulated OCI. In addition, total income tax expense does not reflect tax effects associated with the Corporation’s employee stock plans which decreased common stock and additional paid-in capital $41 million, $44 million and $35 million in 2016, 2015 and 2014, respectively.

Income tax expense for 2016, 2015 and 2014 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, and the effective tax rates for 2016, 2015 and 2014 are presented in the table below.




Reconciliation of Income Tax Expense

	2016					2015					2014
(Dollars in millions)	Amount			Percent		Amount			Percent		Amount			Percent
Expected U.S. federal income tax expense	$	8,804		35.0	%	$	7,725		35.0	%	$	2,787		35.0	%
Increase (decrease) in taxes resulting from:
State tax expense, net of federal benefit	420			1.7		438			1.9		322			4.0
Affordable housing/energy/other credits	(1,203		)	(4.8	)	(1,087		)	(4.9	)	(950		)	(11.9	)
Tax-exempt income, including dividends	(562		)	(2.3	)	(539		)	(2.4	)	(533		)	(6.6	)
Changes in prior-period UTBs, including interest	(328		)	(1.3	)	(52		)	(0.2	)	(754		)	(9.5	)
Non-U.S. tax rate differential	(307		)	(1.2	)	(559		)	(2.5	)	(507		)	(6.4	)
Non-U.S. tax law changes	348			1.4		289			1.3		—			—
Nondeductible expenses	180			0.7		40			0.1		1,982			24.9
Other	(105		)	(0.4	)	(21		)	(0.1	)	96			1.2
Total income tax expense	$	7,247		28.8	%	$	6,234		28.2	%	$	2,443		30.7	%

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)	2016			2015			2014
Balance, January 1	$	1,095		$	1,068		$	3,068
Increases related to positions taken during the current year	104			36			75
Increases related to positions taken during prior years	1,318			187			519
Decreases related to positions taken during prior years	(1,091		)	(177		)	(973		)
Settlements	(503		)	(1		)	(1,594		)
Expiration of statute of limitations	(48		)	(18		)	(27		)
Balance, December 31	$	875		$	1,095		$	1,068

At December 31, 2016, 2015 and 2014, the balance of the Corporation’s UTBs which would, if recognized, affect the Corporation’s effective tax rate was $0.6 billion, $0.7 billion and $0.7 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 examinations by major jurisdiction for the Corporation and various subsidiaries as of December 31, 2016.




Tax Examination Status

	Years under Examination ⁽¹⁾	Status at December 31 2016
U.S.	2012 – 2013	Field examination
New York	2015	To begin in 2017
U.K.	2012-2014	Field examination


⁽¹⁾	All tax years subsequent to the years shown remain subject to examination.

During 2016, the Corporation settled federal examinations for the 2010 and 2011 tax years and settled various state and local examinations for multiple years, including New York through 2014. Also, field work for the federal 2012 through 2013 and for the U.K. 2012 through 2014 examinations were substantially completed during 2016.

It is reasonably possible that the UTB balance may decrease by as much as $0.2 billion during the next 12 months, since resolved items will be removed from the balance whether their resolution results in payment or recognition.

The Corporation recognized expense of $56 million during 2016 and benefits of $82 million and $196 million in 2015 and 2014, respectively, for interest and penalties, net-of-tax, in income tax expense. At December 31, 2016 and 2015, the Corporation’s accrual for interest and penalties that related to income taxes, net of taxes and remittances, was $167 million and $288 million.

Significant components of the Corporation’s net deferred tax assets and liabilities at December 31, 2016 and 2015 are presented in the table below.




Deferred Tax Assets and Liabilities

	December 31
(Dollars in millions)	2016			2015
Deferred tax assets
Net operating loss carryforwards	$	9,199		$	9,439
Security, loan and debt valuations	4,726			4,919
Allowance for credit losses	4,362			4,649
Tax credit carryforwards	3,125			2,266
Accrued expenses	3,016			6,340
Employee compensation and retirement benefits	2,677			3,593
Available-for-sale securities	784			152
Other	1,599			2,483
Gross deferred tax assets	29,488			33,841
Valuation allowance	(1,117		)	(1,149		)
Total deferred tax assets, net of valuation allowance	28,371			32,692

Deferred tax liabilities
Equipment lease financing	3,489			3,014
Intangibles	1,171			1,306
Fee income	847			864
Mortgage servicing rights	829			689
Long-term borrowings	355			327
Other	2,454			1,859
Gross deferred tax liabilities	9,145			8,059
Net deferred tax assets, net of valuation allowance	$	19,226		$	24,633

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, 2016.




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.	$	1,908	$	—		$	1,908	After 2027
Net operating losses – U.K.	5,410		—			5,410		None ⁽¹⁾
Net operating losses – other non-U.S.	411		(311		)	100		Various
Net operating losses – U.S. states ⁽²⁾	1,470		(398		)	1,072		Various
General business credits	3,053		—			3,053		After 2031
Foreign tax credits	72		(72		)	—		n/a


⁽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 $2.3 billion and $612 million.

n/a = not applicable

Management concluded that no valuation allowance was necessary to reduce the deferred tax assets related to the U.K. NOL carryforwards, 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, profit forecasts for the relevant entities and the indefinite period to carry forward NOLs. However, a material change in those estimates could lead management to reassess its U.K. valuation allowance conclusions.

At December 31, 2016, U.S. federal income taxes had not been provided on $17.8 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 $4.9 billion at December 31, 2016.