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, 2017

On December 22, 2017, the President signed into law the Tax Act which made significant changes to federal income tax law including, among other things, reducing the statutory corporate income tax rate to 21 percent from 35 percent and changing the taxation of the Corporation’s non-U.S. business activities. The estimated impact on net income was $2.9 billion, driven by $2.3 billion in income tax expense, largely from a lower valuation of certain U.S. deferred tax assets and liabilities. The change in the statutory tax rate also impacted the Corporation’s tax-advantaged energy investments, resulting in a downward valuation adjustment of $946 million recorded in other income and a related income tax benefit of $347 million, which when netted against the $2.3 billion, resulted in a net impact on income tax expense of $1.9 billion. For more information on the Tax Act, see Note 1 – Summary of Significant Accounting Principles.

The components of income tax expense for 2017, 2016 and 2015 are presented in the table below.




Income Tax Expense

(Dollars in millions)	2017		2016			2015
Current income tax expense
U.S. federal	$	1,310	$	302		$	2,539
U.S. state and local	557		120			210
Non-U.S.	939		984			561
Total current expense	2,806		1,406			3,310
Deferred income tax expense
U.S. federal	7,238		5,416			1,855
U.S. state and local	835		(279		)	515
Non-U.S.	102		656			597
Total deferred expense	8,175		5,793			2,967
Total income tax expense	$	10,981	$	7,199		$	6,277

Total income tax expense does not reflect the tax effects of items that are included in OCI each period. For more information, see Note 14 – Accumulated Other Comprehensive Income (Loss). Other tax effects included in OCI each period resulted in a benefit of $1.2 billion and $498 million in 2017 and 2016 and an expense of $631 million in 2015. In addition, prior to 2017, 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 and $44 million in 2016 and 2015.

Income tax expense for 2017, 2016 and 2015 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 2017, 2016 and 2015 are presented in the table below.




Reconciliation of Income Tax Expense

	Amount			Percent		Amount			Percent		Amount			Percent
(Dollars in millions)	2017					2016					2015
Expected U.S. federal income tax expense	$	10,225		35.0	%	$	8,757		35.0	%	$	7,765		35.0	%
Increase (decrease) in taxes resulting from:
State tax expense, net of federal benefit	881			3.0		420			1.7		438			2.0
Tax law changes ⁽¹⁾	2,281			7.8		348			1.4		289			1.3
Changes in prior-period UTBs, including interest	133			0.5		(328		)	(1.3	)	(52		)	(0.2	)
Nondeductible expenses	97			0.3		180			0.7		40			0.1
Affordable housing/energy/other credits	(1,406		)	(4.8	)	(1,203		)	(4.8	)	(1,087		)	(4.9	)
Tax-exempt income, including dividends	(672		)	(2.3	)	(562		)	(2.2	)	(539		)	(2.4	)
Non-U.S. tax rate differential	(272		)	(0.9	)	(307		)	(1.2	)	(559		)	(2.5	)
Share-based compensation	(236		)	(0.8	)	—			—		—			—
Other	(50		)	(0.2	)	(106		)	(0.5	)	(18		)	(0.1	)
Total income tax expense	$	10,981		37.6	%	$	7,199		28.8	%	$	6,277		28.3	%


⁽¹⁾	Amounts for 2016 and 2015 are for Non-U.S. tax law changes.

The reconciliation of the beginning unrecognized tax benefits (UTB) balance to the ending balance is presented in the following table.




Reconciliation of the Change in Unrecognized Tax Benefits

(Dollars in millions)	2017			2016			2015
Balance, January 1	$	875		$	1,095		$	1,068
Increases related to positions taken during the current year	292			104			36
Increases related to positions taken during prior years	750			1,318			187
Decreases related to positions taken during prior years	(122		)	(1,091		)	(177		)
Settlements	(17		)	(503		)	(1		)
Expiration of statute of limitations	(5		)	(48		)	(18		)
Balance, December 31	$	1,773		$	875		$	1,095

At December 31, 2017, 2016 and 2015, the balance of the Corporation’s UTBs which would, if recognized, affect the Corporation’s effective tax rate was $1.2 billion, $0.6 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 following table summarizes the status of examinations by major jurisdiction for the Corporation and various subsidiaries at December 31, 2017.




Tax Examination Status

	Years under Examination ⁽¹⁾	Status at December 31 2017
United States	2012 – 2013	IRS Appeals
United States	2014 – 2016	Field examination
New York	2015	Field examination
United Kingdom	2016	To begin in 2018


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

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.

The Corporation recognized expense of $1 million and $56 million in 2017 and 2016 and a benefit of $82 million in 2015 for interest and penalties, net-of-tax, in income tax expense. At December 31, 2017 and 2016, the Corporation’s accrual for interest and penalties that related to income taxes, net of taxes and remittances, was $185 million and $167 million.

Significant components of the Corporation’s net deferred tax assets and liabilities at December 31, 2017 and 2016 are presented in the following table. Amounts at December 31, 2017 reflect appropriate revaluations as a result of the Tax Act’s new 21 percent federal tax rate.




Deferred Tax Assets and Liabilities

	December 31
(Dollars in millions)	2017			2016
Deferred tax assets
Net operating loss carryforwards	$	8,506		$	9,199
Security, loan and debt valuations	2,939			4,726
Allowance for credit losses	2,598			4,362
Accrued expenses	2,021			3,016
Tax credit carryforwards	1,793			3,125
Employee compensation and retirement benefits	1,705			3,042
Available-for-sale securities	510			784
Other	1,034			1,599
Gross deferred tax assets	21,106			29,853
Valuation allowance	(1,644		)	(1,117		)
Total deferred tax assets, net of valuation allowance	19,462			28,736

Deferred tax liabilities
Equipment lease financing	2,492			3,489
Tax credit partnerships	734			539
Intangibles	670			1,171
Fee income	601			847
Mortgage servicing rights	349			829
Long-term borrowings	227			355
Other	1,764			1,915
Gross deferred tax liabilities	6,837			9,145
Net deferred tax assets, net of valuation allowance	$	12,625		$	19,591

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, 2017.




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.	$	868	$	—		$	868	After 2027
Net operating losses - U.K. ⁽¹⁾	5,347		—			5,347		None
Net operating losses - other non-U.S.	657		(578		)	79		Various
Net operating losses - U.S. states ⁽²⁾	1,634		(584		)	1,050		Various
General business credits	1,721		—			1,721		After 2036
Foreign tax credits	72		(72		)	—		n/a


⁽¹⁾	Represents U.K. broker/dealer net operating losses which 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 $2.1 billion and $739 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 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, 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, 2017, U.S. federal income taxes had not been provided on approximately $5 billion of temporary differences associated with investments in non-U.S. subsidiaries that are essentially permanent in duration. If the Corporation were to record the associated deferred tax liability, the amount would be approximately $1 billion.