Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.4
Income Taxes
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The components of income tax expense for 2020, 2019 and 2018 are presented in the table below.
Income Tax Expense
(Dollars in millions) 2020 2019 2018
Current income tax expense      
U.S. federal $ 1,092  $ 1,136  $ 816 
U.S. state and local 1,076  901  1,377 
Non-U.S.  670  852  1,203 
Total current expense 2,838  2,889  3,396 
Deferred income tax expense      
U.S. federal (799) 2,001  2,579 
U.S. state and local (233) 223  240 
Non-U.S.  (705) 211  222 
Total deferred expense (1,737) 2,435  3,041 
Total income tax expense $ 1,101  $ 5,324  $ 6,437 
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 an expense of $1.5 billion and $1.9 billion in 2020 and 2019 and a benefit of $1.2 billion in 2018.
Income tax expense for 2020, 2019 and 2018 varied from the amount computed by applying the statutory income tax rate to income before income taxes. The Corporation’s federal
statutory tax rate was 21 percent for 2020, 2019 and 2018. A reconciliation of the expected U.S. federal income tax expense, calculated by applying the federal statutory tax rate, to the Corporation’s actual income tax expense, and the effective tax rates for 2020, 2019 and 2018 are presented in the table below.
Reconciliation of Income Tax Expense
  Amount Percent Amount Percent Amount Percent
(Dollars in millions) 2020 2019 2018
Expected U.S. federal income tax expense $ 3,989  21.0  % $ 6,878  21.0  % $ 7,263  21.0  %
Increase (decrease) in taxes resulting from:
State tax expense, net of federal benefit 728  3.8  1,283  3.9  1,367  4.0 
Affordable housing/energy/other credits (2,869) (15.1) (2,365) (7.2) (1,888) (5.5)
Tax law changes (699) (3.7) —  —  —  — 
Tax-exempt income, including dividends (346) (1.8) (433) (1.3) (413) (1.2)
Share-based compensation (129) (0.7) (225) (0.7) (257) (0.7)
Changes in prior-period UTBs, including interest (41) (0.2) (613) (1.9) 144  0.4 
Nondeductible expenses 324  1.7  290  0.9  302  0.9 
Rate differential on non-U.S. earnings 218  1.1  504  1.5  98  0.3 
Other (74) (0.3) 5  0.1  (179) (0.6)
Total income tax expense (benefit) $ 1,101  5.8  % $ 5,324  16.3  % $ 6,437  18.6  %
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) 2020 2019 2018
Balance, January 1 $ 1,175  $ 2,197  $ 1,773 
Increases related to positions taken during the current year
 238  238  395 
Increases related to positions taken during prior years (1)
99  401  406 
Decreases related to positions taken during prior years (1)
(172) (1,102) (371)
Settlements —  (541) (6)
Expiration of statute of limitations —  (18) — 
Balance, December 31 $ 1,340  $ 1,175  $ 2,197 
(1)    The sum of the positions taken during prior years differs from the $(41) million, $(613) million and $144 million in the Reconciliation of Income Tax Expense table due to temporary items, state items and jurisdictional offsets, as well as the inclusion of interest in the Reconciliation of Income Tax Expense table.
At December 31, 2020, 2019 and 2018, the balance of the Corporation’s UTBs which would, if recognized, affect the Corporation’s effective tax rate was $976 million, $814 million and $1.6 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.

It is reasonably possible that the UTB balance may decrease by as much as $166 million 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 interest expense of $9 million in 2020, an interest benefit of $19 million in 2019 and interest expense of $43 million in 2018. At December 31, 2020 and 2019, the Corporation’s accrual for interest and penalties that related to income taxes, net of taxes and remittances, was $130 million and $147 million.
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, 2020.
Tax Examination Status
Years under
Examination (1)
Status at December 31 2020
United States 2017-2020 Field Examination
California 2012-2017 Field Examination
New York 2016-2018 Field Examination
United Kingdom (2)
2018 Field Examination
(1)    All tax years subsequent to the years shown remain subject to examination.
(2) Field examination for tax year 2019 to begin in 2021.
Significant components of the Corporation’s net deferred tax assets and liabilities at December 31, 2020 and 2019 are presented in the following table.
Deferred Tax Assets and Liabilities
  December 31
(Dollars in millions) 2020 2019
Deferred tax assets    
Net operating loss carryforwards $ 7,717  $ 7,417 
Allowance for credit losses 4,701  2,354 
Security, loan and debt valuations 2,571  1,860 
Lease liability 2,400  2,321 
Employee compensation and retirement benefits 1,582  1,622 
Accrued expenses 1,481  1,719 
Credit carryforwards 484  183 
Other 1,412  1,203 
Gross deferred tax assets 22,348  18,679 
Valuation allowance (2,346) (1,989)
Total deferred tax assets, net of valuation
allowance		 20,002  16,690 
   
Deferred tax liabilities
Equipment lease financing 3,101  2,933 
Right-to-use asset 2,296  2,246 
Fixed assets 1,957  1,505 
ESG-related tax credit investments 1,930  1,577 
Available-for-sale securities
 1,701  100 
Other 1,570  1,885 
Gross deferred tax liabilities 12,555  10,246 
Net deferred tax assets $ 7,447  $ 6,444 
On January 1, 2020, the Corporation adopted the CECL accounting standard. The transition adjustment included a tax benefit of $760 million in retained earnings, which increased deferred tax assets by a corresponding amount.
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, 2020.
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. 
 $ 36  $ —  $ 36  After 2028
Net operating losses - U.K. (1)
5,896  —  5,896  None
Net operating losses - other non-U.S. 
 506  (441) 65  Various
Net operating losses - U.S. states (2)
1,279  (579) 700  Various
Foreign tax credits 484  (484) —  After 2028
(1)Represents U.K. broker-dealer net operating losses that 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 $1.6 billion and $733 million.
Management concluded that no valuation allowance was necessary to reduce the deferred tax assets related to the U.K. NOL carryforwards and U.S. federal and certain state NOL 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 such valuation allowance conclusions.
At December 31, 2020, U.S. federal income taxes had not been provided on approximately $5.0 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 $1.0 billion.