Income Taxes

12 Months Ended

Dec. 31, 2019

NOTE 14—INCOME TAXES

The components of income tax expense for the years ended December 31, 2019, 2018 and 2017 were as follows (dollars in millions):



	Year Ended December 31,
	2019		2018		2017
Current income tax expense (benefit):
Federal	$	63	$	—	$	—
State	26		13		(11		)
Total current	89		13		(11		)
Deferred income tax expense (benefit):
Federal	181		266		399
State	64		73		51
Total deferred	245		339		450
Non-current income tax expense⁽¹⁾	30		14		11
Income tax expense	$	364	$	366	$	450


(1)	Non-current income tax expense primarily relates to amortization for investments in qualified affordable housing projects recognized under the proportional amortization method and uncertain tax positions.

Income tax expense for the year ended December 31, 2018 reflects the impact of the TCJA, which was enacted on December 22, 2017 and resulted in remeasurement of certain deferred tax assets and liabilities during the year ended December 31, 2017 at the new statutory federal corporate income tax rate of 21%. Accordingly, the Company recognized $58 million of additional tax expense for the year ended December 31, 2017.

Unrecognized Tax Benefits

The following table provides a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2019, 2018, and 2017 (dollars in millions):



	Year Ended December 31,
	2019			2018			2017
Unrecognized tax benefits, beginning of period	$	31		$	25		$	28
Additions based on tax positions related to prior years	2			3			1
Additions based on tax positions related to current year	11			9			11
Reductions based on tax positions related to prior years	(2		)	—			(3		)
Settlements with taxing authorities	—			(2		)	(6		)
Statute of limitations lapses	(3		)	(4		)	(6		)
Unrecognized tax benefits, end of period	$	39		$	31		$	25

The unrecognized tax benefits increased $8 million to $39 million during the year ended December 31, 2019. At December 31, 2019, the Company had $31 million, net of federal benefits, of unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate in future periods.

The following table summarizes the tax years that are either currently under examination or remain open to assessment under the statute of limitations and subject to examination by the major tax jurisdictions in which the Company operates:



Jurisdiction	Open Tax Years
Hong Kong	2013-2018
Philippines	2016-2019
United Kingdom	2017
United States	2016-2019
Various states⁽¹⁾	2013-2019


(1)	Major state tax jurisdictions include California, Georgia, Illinois, New York and Virginia.

It is reasonably possible that the Company's unrecognized tax benefits could be reduced by as much as $7 million within the next twelve months as a result of settlements of certain examinations or expiration of statutes of limitations.

The Company accrues interest and penalties, if any, related to income tax matters in income tax expense. The Company has total reserves for interest and penalties of $6 million and $3 million as of December 31, 2019 and 2018, respectively.

Deferred Taxes and Valuation Allowances

Deferred income taxes are recorded when revenues and expenses are recognized in different periods for financial statement and tax return purposes. The temporary differences and tax carryforwards that created deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are summarized in the following table (dollars in millions):



	December 31,
	2019			2018
Deferred tax assets:
Net operating losses	$	96		$	162
Reserves and allowances, net	70			105
Leasing liability	58			—
Deferred compensation	20			34
Financial instrument valuations	1			54
Tax credits	2			69
Other	—			1
Total deferred tax assets	247			425
Valuation allowance	(20		)	(20		)
Total deferred tax assets, net of valuation allowance	227			405
Deferred tax liabilities:
Depreciation and amortization	(506		)	(413		)
Leasing asset	(52		)	—
Other	(6		)	(2		)
Total deferred tax liabilities	(564		)	(415		)
Deferred tax liabilities, net	$	(337	)	$	(10	)

The Company had $14 million of gross federal net operating losses, or $3 million in deferred tax assets related to these losses, at December 31, 2019 that is limited by Internal Revenue Code section 382. There is no valuation allowance recorded against federal net operating losses. In addition, the Company had $1.9 billion of gross state net operating losses, or $93 million in deferred tax assets related to these losses, at December 31, 2019. The $20 million valuation allowance relates to state net operating losses, which expire between 2026 and 2038. Deferred tax assets, net and deferred tax liabilities are recorded in the Other assets and Other liabilities line items respectively on the consolidated balance sheet.

The following table provides a reconciliation of the beginning and ending amount of valuation allowance for the years ended December 31, 2019, 2018, and 2017 (dollars in millions):



	Year Ended December 31,
	2019			2018			2017
Valuation allowance, beginning of period	$	(20	)	$	(23	)	$	(35	)
Additions related to reduced federal benefit	—			—			(4		)
Reductions related to the wind-down of foreign operations	1			2			14
(Additions) reductions related to state valuation allowance	(1		)	1			2
Valuation allowance, end of period	$	(20	)	$	(20	)	$	(23	)

The Company's valuation allowance remained flat at December 31, 2019 and decreased $3 million to $20 million at December 31, 2018, respectively.

Effective Tax Rate

The effective tax rate differed from the federal statutory rate as summarized in the following table for the years ended December 31, 2019, 2018 and 2017:



	Year Ended December 31,
	2019		2018		2017
Federal statutory tax rate	21.0	%	21.0	%	35.0	%
State income taxes, net of federal tax benefit	5.0		5.1		4.2
Disallowed executive compensation	0.3		0.2		0.1
Change in valuation allowances	—		—		(0.1	)
Tax credits	(0.1	)	(0.1	)	(0.3	)
Estimated reserve for uncertain tax positions	0.7		0.2		(0.3	)
Deferred tax adjustments	0.5		(0.5	)	(0.3	)
Tax reform adjustments	—		—		5.5
Excess tax benefit on share-based compensation	(0.2	)	(0.6	)	(0.7	)
Other	0.4		0.5		(0.9	)
Effective tax rate	27.6	%	25.8	%	42.2	%