Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.22.4
Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The components of income tax expense for 2022, 2021 and 2020 are presented in the table below.
Income Tax Expense
(Dollars in millions) 2022 2021 2020
Current income tax expense      
U.S. federal $ 1,157  $ 1,076  $ 1,092 
U.S. state and local 389  775  1,076 
Non-U.S.  1,156  985  670 
Total current expense 2,702  2,836  2,838 
Deferred income tax expense      
U.S. federal 110  962  (799)
U.S. state and local 254  491  (233)
Non-U.S.  375  (2,291) (705)
Total deferred expense 739  (838) (1,737)
Total income tax expense $ 3,441  $ 1,998  $ 1,101 
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 $4.9 billion and $877 million in 2022 and 2021 and an expense of $1.5 billion in 2020.
Income tax expense for 2022, 2021 and 2020 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 2022, 2021 and 2020. 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 2022, 2021 and 2020 are presented in the following table.
Reconciliation of Income Tax Expense
  Amount Percent Amount Percent Amount Percent
(Dollars in millions) 2022 2021 2020
Expected U.S. federal income tax expense $ 6,504  21.0  % $ 7,135  21.0  % $ 3,989  21.0  %
Increase (decrease) in taxes resulting from:
State tax expense, net of federal benefit 756  2.4  1,087  3.2  728  3.8 
Affordable housing/energy/other credits (3,698) (11.9) (3,795) (11.2) (2,869) (15.1)
Tax-exempt income, including dividends (273) (0.9) (352) (1.0) (346) (1.8)
Changes in prior-period UTBs, including interest (273) (0.9) (155) (0.5) (41) (0.2)
Rate differential on non-U.S. earnings 368  1.2  45  0.1  218  1.1 
Nondeductible expenses 352  1.1  206  0.6  324  1.7 
Tax law changes 186  0.6  (2,050) (6.0) (699) (3.7)
Other (481) (1.5) (123) (0.3) (203) (1.0)
Total income tax expense $ 3,441  11.1  % $ 1,998  5.9  % $ 1,101  5.8  %
Tax Law changes reflect the impact of the 2022, 2021 and 2020 U.K. enacted corporate income tax rate changes, which resulted in a negative tax adjustment of approximately $186 million in 2022 and positive income tax adjustments of approximately $2.0 billion and $700 million in 2021 and 2020, with corresponding adjustments of U.K. net deferred tax assets. The U.K. net deferred tax assets are primarily net operating losses (NOLs), incurred by the Corporation’s U.K. broker-dealer entity in historical periods, which do not expire under U.K. tax law and are assessed regularly for impairment. If further U.K. tax law changes are enacted, a corresponding income tax adjustment will be made based on the amount of available net deferred tax assets and applicable tax rate changes.
Tax credits originate from ESG investments in affordable housing and renewable energy partnerships and similar entities. Significant increases in the tax credits recognized over the last three annual periods have been primarily driven by the Corporation’s continued growth in the volume of investments in wind and solar energy production facilities, consistent with the Corporation’s commitment to support the transition to a lower carbon economy. For additional information, see Note 6 – Securitizations and Other Variable Interest Entities.
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) 2022 2021 2020
Balance, January 1 $ 1,322  $ 1,340  $ 1,175 
Increases related to positions taken during the current year
 121  208  238 
Increases related to positions taken during prior years (1)
167  265  99 
Decreases related to positions taken during prior years (1)
(289) (413) (172)
Settlements (99) (23) — 
Expiration of statute of limitations (166) (55) — 
Balance, December 31 $ 1,056  $ 1,322  $ 1,340 
(1)    The sum of the positions taken during prior years differs from the $(273) million, $(155) million and $(41) 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, 2022, 2021 and 2020, the balance of the Corporation’s UTBs which would, if recognized, affect the Corporation’s effective tax rate was $709 million, $959 million and $976 million, 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 $375 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 an interest benefit of $50 million in 2022 and interest expense of $32 million and $9 million in 2021 and 2020. At December 31, 2022 and 2021, the Corporation’s accrual for interest and penalties that related to income taxes, net of taxes and remittances, was $107 million and $167 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 table below summarizes the status of examinations by major jurisdiction for the Corporation and various subsidiaries at December 31, 2022.
Tax Examination Status
Years under
Examination (1)
Status at December 31 2022
United States 2017-2021 Field Examination
California 2012-2014 Appeals
California 2015-2017 Field Examination
California 2018-2020 To begin in 2023
New York 2019-2021 To begin in 2023
United Kingdom (2)
2019-2020 Field Examination
(1)    All tax years subsequent to the years shown remain subject to examination.
(2) Field examination for tax year 2021 to begin in 2023.
Significant components of the Corporation’s net deferred tax assets and liabilities at December 31, 2022 and 2021 are presented in the following table.
Deferred Tax Assets and Liabilities
  December 31
(Dollars in millions) 2022 2021
Deferred tax assets    
Net operating loss carryforwards $ 9,029  $ 9,360 
Security, loan and debt valuations 4,788  2,746 
Allowance for credit losses 3,503  3,097 
Lease liability 2,443  2,508 
Employee compensation and retirement benefits 1,625  1,392 
Accrued expenses 1,143  1,626 
Available-for-sale securities 960  — 
Credit carryforwards 769  705 
Other 1,371  1,160 
Gross deferred tax assets 25,631  22,594 
Valuation allowance (2,133) (1,988)
Total deferred tax assets, net of valuation
   allowance		 23,498  20,606 
   
Deferred tax liabilities
Equipment lease financing 2,432  3,083 
Right-of-use asset 2,303  2,358 
ESG-related tax credit investments 1,759  1,387 
Fixed Assets 1,200  2,082 
Available-for-sale securities
 —  1,016 
Other 2,459  1,527 
Gross deferred tax liabilities 10,153  11,453 
Net deferred tax assets $ 13,345  $ 9,153 
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, 2022.
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.K. (1)
$ 7,661  $ —  $ 7,661  None
Net operating losses - other non-U.S. 
 331  (147) 184  Various
Net operating losses - U.S. states (2)
1,036  (627) 409  Various
Foreign tax credits 769  (769) —  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 $1.3 billion and $794 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, 2022, 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.