Income Taxes

12 Months Ended

Dec. 31, 2016

Income taxes

JPMorgan Chase and its eligible subsidiaries file a consolidated U.S. federal income tax return. JPMorgan Chase uses the asset and liability method to provide income taxes on all transactions recorded in the Consolidated Financial Statements. This method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities for book and tax purposes. Accordingly, a deferred tax asset or liability for each temporary difference is determined based on the tax rates that the Firm expects to be in effect when the underlying items of income and expense are realized. JPMorgan Chase’s expense for income taxes includes the current and deferred portions of that expense. A valuation allowance is established to reduce deferred tax assets to the amount the Firm expects to realize.

Due to the inherent complexities arising from the nature of the Firm’s businesses, and from conducting business and being taxed in a substantial number of jurisdictions, significant judgments and estimates are required to be made. Agreement of tax liabilities between JPMorgan Chase and the many tax jurisdictions in which the Firm files tax returns may not be finalized for several years. Thus, the Firm’s final tax-related assets and liabilities may ultimately be different from those currently reported.

Effective tax rate and expense

A reconciliation of the applicable statutory U.S. income tax rate to the effective tax rate for each of the years ended December 31, 2016, 2015 and 2014, is presented in the following table.



Effective tax rate
Year ended December 31,	2016		2015		2014
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Increase/(decrease) in tax rate resulting from:
U.S. state and local income taxes, net of U.S. federal income tax benefit	2.4		1.5		2.7
Tax-exempt income	(3.1	)	(3.3	)	(3.1	)
Non-U.S. subsidiary earnings^(a)	(1.7	)	(3.9	)	(2.0	)
Business tax credits	(3.9	)	(3.7	)	(3.3	)
Nondeductible legal expense	0.3		0.8		2.3
Tax audit resolutions	—		(5.7	)	(1.4	)
Other, net	(0.6	)	(0.3	)	(1.0	)
Effective tax rate	28.4	%	20.4	%	29.2	%


(a)	Predominantly includes earnings of U.K. subsidiaries that are deemed to be reinvested indefinitely.

The components of income tax expense/(benefit) included in the Consolidated statements of income were as follows for each of the years ended December 31, 2016, 2015, and 2014.



Income tax expense/(benefit)
Year ended December 31, (in millions)	2016			2015			2014
Current income tax expense/(benefit)
U.S. federal	$	2,488		$	3,160		$	2,382
Non-U.S.	1,760			1,220			1,353
U.S. state and local	904			547			857
Total current income tax expense/(benefit)	5,152			4,927			4,592
Deferred income tax expense/(benefit)
U.S. federal	4,364			1,213			3,890
Non-U.S.	(73		)	(95		)	71
U.S. state and local	360			215			401
Total deferred income tax expense/(benefit)	4,651			1,333			4,362
Total income tax expense	$	9,803		$	6,260		$	8,954

Total income tax expense includes $55 million, $2.4 billion and $451 million of tax benefits recorded in 2016, 2015, and 2014, respectively, as a result of tax audit resolutions.

Tax effect of items recorded in stockholders’ equity

The preceding table does not reflect the tax effect of certain items that are recorded each period directly in stockholders’ equity. The tax effect of all items recorded directly to stockholders’ equity resulted in an increase of $925 million in 2016, an increase of $1.5 billion in 2015, and a decrease of $140 million in 2014. Effective January 1, 2016, the Firm adopted new accounting guidance related to employee share-based payments. As a result of the adoption of this new guidance, all excess tax benefits (including tax benefits from dividends or dividend equivalents) on share-based payment awards are recognized within income tax expense in the Consolidated statements of income. In prior years these tax benefits were recorded as increases to additional paid-in capital.

Results from Non-U.S. earnings

The following table presents the U.S. and non-U.S. components of income before income tax expense for the years ended December 31, 2016, 2015 and 2014.



Year ended December 31, (in millions)	2016		2015		2014
U.S.	$	26,651	$	23,191	$	23,422
Non-U.S.^(a)	7,885		7,511		7,277
Income before income tax expense	$	34,536	$	30,702	$	30,699


(a)	For purposes of this table, non-U.S. income is defined as income generated from operations located outside the U.S.

U.S. federal income taxes have not been provided on the undistributed earnings of certain non-U.S. subsidiaries, to the extent that such earnings have been reinvested abroad for an indefinite period of time. Based on JPMorgan Chase’s ongoing review of the business requirements and capital needs of its non-U.S. subsidiaries, combined with the formation of specific strategies and steps taken to fulfill these requirements and needs, the Firm has determined that the undistributed earnings of certain of its subsidiaries would be indefinitely reinvested to fund current and future growth of the related businesses. As management does not intend to use the earnings of these subsidiaries as a source of funding for its U.S. operations, such earnings will not be distributed to the U.S. in the foreseeable future. For 2016, pretax earnings of $3.8 billion were generated and will be indefinitely reinvested in these subsidiaries. At December 31, 2016, the cumulative amount of undistributed pretax earnings in these subsidiaries were $38.4 billion. If the Firm were to record a deferred tax liability associated with these undistributed earnings, the amount would be $8.8 billion at December 31, 2016.

These undistributed earnings are related to subsidiaries located predominantly in the U.K. where the 2016 tax rate was 28%.

Affordable housing tax credits

The Firm recognized $1.7 billion, $1.6 billion and $1.6 billion of tax credits and other tax benefits associated with investments in affordable housing projects within income tax expense for the years 2016, 2015 and 2014, respectively. The amount of amortization of such investments reported in income tax expense under the current period presentation during these years was $1.2 billion, $1.1 billion and $1.1 billion, respectively. The carrying value of these investments, which are reported in other assets on the Firm’s Consolidated balance sheets, was $8.8 billion and $7.7 billion at December 31, 2016 and 2015, respectively. The amount of commitments related to these investments, which are reported in accounts payable and other liabilities on the Firm’s Consolidated balance sheets, was $2.8 billion and $2.0 billion at December 31, 2016 and 2015, respectively.

Deferred taxes

Deferred income tax expense/(benefit) results from differences between assets and liabilities measured for financial reporting purposes versus income tax return purposes. Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely than not. If a deferred tax asset is determined to be unrealizable, a valuation allowance is established. The significant components of deferred tax assets and liabilities are reflected in the following table as of December 31, 2016 and 2015.



December 31, (in millions)	2016			2015
Deferred tax assets
Allowance for loan losses	$	5,534		$	5,343
Employee benefits	2,911			2,972
Accrued expenses and other	6,831			7,299
Non-U.S. operations	5,368			5,365
Tax attribute carryforwards	2,155			2,602
Gross deferred tax assets	22,799			23,581
Valuation allowance	(785		)	(735		)
Deferred tax assets, net of valuation allowance	$	22,014		$	22,846
Deferred tax liabilities
Depreciation and amortization	$	3,294		$	3,167
Mortgage servicing rights, net of hedges	4,807			4,968
Leasing transactions	4,053			3,042
Non-U.S. operations	4,572			4,285
Other, net	5,493			4,419
Gross deferred tax liabilities	22,219			19,881
Net deferred tax (liabilities)/assets	$	(205	)	$	2,965

JPMorgan Chase has recorded deferred tax assets of $2.2 billion at December 31, 2016, in connection with U.S. federal and non-U.S. NOL carryforwards and foreign tax credit carryforwards. At December 31, 2016, total U.S. federal NOL carryforwards were approximately $3.8 billion and non-U.S. NOL carryforwards were $142 million. If not utilized, the U.S. federal NOL carryforwards will expire between 2025 and 2036 and the non-U.S. NOL carryforwards will expire in 2017. Foreign tax credit carryforwards were $776 million and will expire between 2022 and 2026.

The valuation allowance at December 31, 2016, was due to losses associated with non-U.S. subsidiaries.

Unrecognized tax benefits

At December 31, 2016, 2015 and 2014, JPMorgan Chase’s unrecognized tax benefits, excluding related interest expense and penalties, were $3.5 billion, $3.5 billion and $4.9 billion, respectively, of which $2.6 billion, $2.1 billion and $3.5 billion, respectively, if recognized, would reduce the annual effective tax rate. Included in the amount of unrecognized tax benefits are certain items that would not affect the effective tax rate if they were recognized in the Consolidated statements of income. These unrecognized items include the tax effect of certain temporary differences, the portion of gross state and local unrecognized tax benefits that would be offset by the benefit from associated U.S. federal income tax deductions, and the portion of gross non-U.S. unrecognized tax benefits that would have offsets in other jurisdictions. JPMorgan Chase is presently under audit by a number of taxing authorities, most notably by the Internal Revenue Service as summarized in the Tax examination status table below. As JPMorgan Chase is presently under audit by a number of taxing authorities, it is reasonably possible that over the next 12 months the resolution of these examinations may increase or decrease the gross balance of unrecognized tax benefits by as much as $800 million. Upon settlement of an audit, the change in the unrecognized tax benefit would result from payment or income statement recognition.

The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2016, 2015 and 2014.



Year ended December 31, (in millions)	2016			2015			2014
Balance at January 1,	$	3,497		$	4,911		$	5,535
Increases based on tax positions related to the current period	262			408			810
Increases based on tax positions related to prior periods	583			1,028			477
Decreases based on tax positions related to prior periods	(785		)	(2,646		)	(1,902		)
Decreases related to cash settlements with taxing authorities	(56		)	(204		)	(9		)
Decreases related to a lapse of applicable statute of limitations	(51		)	—			—
Balance at December 31,	$	3,450		$	3,497		$	4,911

After-tax interest expense/(benefit) and penalties related to income tax liabilities recognized in income tax expense were $86 million, $(156) million and $17 million in 2016, 2015 and 2014, respectively.

At December 31, 2016 and 2015, in addition to the liability for unrecognized tax benefits, the Firm had accrued $687 million and $578 million, respectively, for income tax-related interest and penalties.

Tax examination status

JPMorgan Chase is continually under examination by the Internal Revenue Service, by taxing authorities throughout the world, and by many state and local jurisdictions throughout the U.S. The following table summarizes the status of significant income tax examinations of JPMorgan Chase and its consolidated subsidiaries as of December 31, 2016.



December 31, 2016	Periods under examination	Status
JPMorgan Chase – U.S.	2003 – 2005	At Appellate level
JPMorgan Chase – U.S.	2006 – 2010	Field examination of amended returns; certain matters at Appellate level
JPMorgan Chase – U.S.	2011 – 2013	Field Examination
JPMorgan Chase – New York State	2008 – 2011	Field Examination
JPMorgan Chase – New York City	2008 – 2011	Field Examination
JPMorgan Chase – California	2011 – 2012	Field Examination
JPMorgan Chase – U.K.	2006 – 2014	Field examination of certain select entities