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Income Taxes

12 Months Ended

Dec. 31, 2018

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. federal income tax rate to the effective tax rate for each of the years ended December 31, 2018, 2017 and 2016, is presented in the following table.



Effective tax rate
Year ended December 31,	2018		2017			2016
Statutory U.S. federal tax rate	21.0	%	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	4.0		2.2			2.4
Tax-exempt income	(1.5	)	(3.3	)		(3.1	)
Non-U.S. subsidiary earnings	0.6		(3.1	)	^(a)	(1.7	)	^(a)
Business tax credits	(3.5	)	(4.2	)		(3.9	)
Impact of the TCJA	(0.7	)	5.4			—
Other, net	0.4		(0.1	)		(0.3	)
Effective tax rate	20.3	%	31.9	%		28.4	%


(a)	Predominantly includes earnings of U.K. subsidiaries that were deemed to be reinvested indefinitely through December 31, 2017.

Impact of the TCJA

2018

The Firm’s effective tax rate decreased in 2018 due to the TCJA, including the reduction in the U.S. federal statutory income tax rate as well as a $302 million net tax benefit recorded in 2018 resulting from changes in the estimates related to the remeasurement of certain deferred taxes and the deemed repatriation tax on non-U.S. earnings. The change in estimate was recorded under SEC Staff Accounting Bulletin No. 118 (“SAB 118”) and the accounting under SAB 118 is complete.

2017

The Firm’s effective tax rate increased in 2017 driven by a $1.9 billion income tax expense representing the estimated impact of the enactment of the TCJA. The $1.9 billion tax expense was predominantly driven by a deemed repatriation of the Firm’s unremitted non-U.S. earnings and adjustments to the value of certain tax-oriented investments partially offset by a benefit from the revaluation of the Firm’s net deferred tax liability.

The deemed repatriation of the Firm’s unremitted non-U.S. earnings is based on the post-1986 earnings and profits of each controlled foreign corporation. The calculation resulted in an estimated income tax expense of $3.7 billion. Furthermore, accounting for income taxes requires the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The Firm remeasured its deferred tax asset and liability balances in the fourth quarter of 2017 to the new statutory U.S. federal income tax rate of 21% as well as any federal benefit associated with state and local deferred income taxes. The remeasurement resulted in an estimated income tax benefit of $2.1 billion.

Adjustments were also recorded in 2017 to income tax expense for certain tax-oriented investments. These adjustments were driven by changes to affordable housing proportional amortization resulting from the reduction of the federal income tax rate under the TCJA. SAB 118 did not apply to these adjustments.

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, 2018, 2017, and 2016.



Income tax expense/(benefit)
Year ended December 31, (in millions)	2018			2017			2016
Current income tax expense/(benefit)
U.S. federal	$	2,854		$	5,718		$	2,488
Non-U.S.	2,077			2,400			1,760
U.S. state and local	1,638			1,029			904
Total current income tax expense/(benefit)	6,569			9,147			5,152
Deferred income tax expense/(benefit)
U.S. federal	1,359			2,174			4,364
Non-U.S.	(93		)	(144		)	(73		)
U.S. state and local	455			282			360
Total deferred income tax expense/(benefit)	1,721			2,312			4,651
Total income tax expense	$	8,290		$	11,459		$	9,803

Total income tax expense includes $54 million, $252 million and $55 million of tax benefits recorded in 2018, 2017, and 2016, 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 $172 million in 2018, a decrease of $915 million in 2017, and an increase of $925 million in 2016.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, 2018, 2017 and 2016.



Year ended December 31, (in millions)	2018		2017		2016
U.S.	$	33,052	$	27,103	$	26,651
Non-U.S.^(a)	7,712		8,797		7,885
Income before income tax expense	$	40,764	$	35,900	$	34,536


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

Prior to December 31, 2017, U.S. federal income taxes had not been provided on the undistributed earnings of certain non-U.S. subsidiaries, to the extent that such earnings had been reinvested abroad for an indefinite period of time. The Firm is no longer maintaining the indefinite reinvestment assertion on the undistributed earnings of those non-U.S. subsidiaries in light of the enactment of the TCJA. The U.S. federal and state and local income taxes associated with the undistributed and previously untaxed earnings of those non-U.S. subsidiaries was included in the deemed repatriation charge recorded as of December 31, 2017. Affordable housing tax creditsThe Firm recognized $1.5 billion, $1.7 billion and $1.7 billion of tax credits and other tax benefits associated with investments in affordable housing projects within income tax expense for the years 2018, 2017 and 2016, respectively. The amount of amortization of such investments reported in income tax expense was $1.2 billion, $1.7 billion and $1.2 billion, respectively. The carrying value of these investments, which are reported in other assets on the Firm’s Consolidated balance sheets, was $7.9 billion and $7.8 billion at December 31, 2018 and 2017, 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 $2.3 billion and $2.4 billion at December 31, 2018 and 2017, 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, 2018 and 2017.



December 31, (in millions)	2018			2017
Deferred tax assets
Allowance for loan losses	$	3,433		$	3,395
Employee benefits	1,129			688
Accrued expenses and other	2,701			3,528
Non-U.S. operations	629			327
Tax attribute carryforwards	163			219
Gross deferred tax assets	8,055			8,157
Valuation allowance	(89		)	(46		)
Deferred tax assets, net of valuation allowance	$	7,966		$	8,111
Deferred tax liabilities
Depreciation and amortization	$	2,533		$	2,299
Mortgage servicing rights, net of hedges	2,586			2,757
Leasing transactions	4,719			3,483
Non-U.S. operations	—			200
Other, net	3,713			3,502
Gross deferred tax liabilities	13,551			12,241
Net deferred tax (liabilities)/assets	$	(5,585	)	$	(4,130	)

JPMorgan Chase has recorded deferred tax assets of $163 million at December 31, 2018, in connection with U.S. federal and non-U.S. net operating loss (“NOL”) carryforwards and state and local capital loss carryforwards. At December 31, 2018, total U.S. federal NOL carryforwards were approximately $423 million, non-U.S. NOL carryforwards were approximately $120 million and state and local capital loss carryforwards were $1.3 billion. If not utilized, the U.S. federal NOL carryforwards will expire between 2022 and 2036 and the state and local capital loss carryforwards will expire between 2020 and 2022. Certain non-U.S. NOL carryforwards will expire between 2028 and 2034 whereas others have an unlimited carryforward period.

The valuation allowance at December 31, 2018, was due to the state and local capital loss carryforwards and certain non-U.S. deferred tax assets, including NOL carryforwards.Unrecognized tax benefits

At December 31, 2018, 2017 and 2016, JPMorgan Chase’s unrecognized tax benefits, excluding related interest expense and penalties, were $4.9 billion, $4.7 billion and $3.5 billion, respectively, of which $3.8 billion, $3.5 billion and $2.6 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 $0.9 billion. 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, 2018, 2017 and 2016.



Year ended December 31, (in millions)	2018			2017			2016
Balance at January 1,	$	4,747		$	3,450		$	3,497
Increases based on tax positions related to the current period	980			1,355			262
Increases based on tax positions related to prior periods	649			626			583
Decreases based on tax positions related to prior periods	(1,249		)	(350		)	(785		)
Decreases related to cash settlements with taxing authorities	(266		)	(334		)	(56		)
Decreases related to a lapse of applicable statute of limitations	—			—			(51		)
Balance at December 31,	$	4,861		$	4,747		$	3,450

After-tax interest expense/(benefit) and penalties related to income tax liabilities recognized in income tax expense were $192 million, $102 million and $86 million in 2018, 2017 and 2016, respectively.

At December 31, 2018 and 2017, in addition to the liability for unrecognized tax benefits, the Firm had accrued $887 million and $639 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, 2018.



December 31, 2018	Periods under examination	Status
JPMorgan Chase – U.S.	2006 – 2010	Field examination of amended returns
JPMorgan Chase – U.S.	2011 – 2013	Field Examination
JPMorgan Chase – U.S.	2014 - 2016	Field Examination
JPMorgan Chase – New York State	2012 - 2014	Field Examination
JPMorgan Chase – New York City	2012 - 2014	Field Examination
JPMorgan Chase – California	2011 – 2012	Field Examination
JPMorgan Chase – U.K.	2006 – 2016	Field examination of certain select entities