Income Taxes

The significant components of income tax expense from continuing operations were as follows.



Year ended December 31, ($ in millions)	2017			2016		2015
Current income tax (benefit) expense
U.S. federal	$	(17	)	$	—	$	—
Foreign	6			8		6
State and local	53			9		3
Total current expense	42			17		9
Deferred income tax expense (benefit)
U.S. federal	566			423		454
Foreign	—			—		1
State and local	(27		)	30		32
Total deferred expense	539			453		487
Total income tax expense from continuing operations	$	581		$	470	$	496

A reconciliation of income tax expense from continuing operations with the amounts at the statutory U.S. federal income tax rate is shown in the following table.



Year ended December 31, ($ in millions)	2017			2016			2015
Statutory U.S. federal tax expense	$	527		$	553		$	488
Change in tax resulting from
Valuation allowance change, excluding expirations	(49		)	51			(25		)
Tax credits, excluding expirations	(12		)	(15		)	(13		)
State and local income taxes, net of federal income tax benefit (a)	7			35			38
Nondeductible expenses	4			7			14
Changes in unrecognized tax expenses (benefits) (b)	1			(161		)	(5		)
Other, net	(16		)	—			(1		)
Total income tax expense from continuing operations exclusive of tax reform impacts	462			470			496
Tax law enactment	119			—			—
Total income tax expense from continuing operations inclusive of tax reform impacts	$	581		$	470		$	496


(a)	Amount for 2017 includes state deferred tax adjustments primarily offset in the valuation allowance change caption.


(b)	Amount for 2016 is primarily the result of a U.S. tax reserve release in the second quarter of 2016 related to a prior-year federal return.

On December 22, 2017, the Tax Act was enacted. The Tax Act makes broad and complex changes to the U.S. tax code that impact our year ended December 31, 2017, and forward, including, but not limited to (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) allowing bonus depreciation for full expensing of qualified property; (3) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credit carryforwards can be realized; and (4) eliminating the deduction for FDIC premiums.

As a result of the Tax Act, we recorded net tax expense of $119 million due to an increase in the valuation allowance of $549 million primarily attributable to foreign tax credit carryforwards and a decrease to the value of the low income housing tax credit investments of $7 million, offset by adjustments to deferred tax assets and liabilities of $421 million and an increase to income tax receivable of $16 million due to refundable AMT credit carryforwards. As of December 31, 2017, we have completed our accounting for the income tax effects of the Tax Act enactment. While the Tax Act negatively impacted earnings in the fourth quarter of 2017, the lower corporate tax rate is expected to be a significant ongoing benefit to Ally.

For the year ended December 31, 2017, consolidated income tax expense from continuing operations was largely driven by tax attributable to pretax earnings for the year increased by the aforementioned Tax Act enactment charge, partially offset by changes to our valuation allowance balances related to capital-in-nature deferred tax assets and foreign tax credit carryforwards. For the year ended December 31, 2016, consolidated income tax expense from continuing operations was largely driven by tax attributable to pretax earnings for the year and the establishment of a valuation allowance on capital loss carryforwards, offset by a reduction in the liability for unrecognized tax benefits that resulted from the completion of a U.S. federal audit related to a prior tax year. For the year ended December 31, 2015, consolidated income tax expense from continuing operations was largely driven by tax attributable to pretax earnings for the year, offset by tax benefits recognized from the release of our valuation allowance on capital loss carryforwards utilized against current year capital gains.

As of each reporting date, we consider existing evidence, both positive and negative, that could impact our view with regard to future realization of deferred tax assets. We continue to believe it is more likely than not that the benefit for certain foreign tax credit carryforwards, state net operating loss carryforwards, and state capital loss carryforwards will not be realized. In recognition of this risk, we continue to provide a partial valuation allowance on the deferred tax assets relating to these carryforwards.

The significant components of deferred tax assets and liabilities are reflected in the following table.



December 31, ($ in millions)	2017			2016
Deferred tax assets
Tax credit carryforwards	$	2,002		$	1,987
Adjustments to loan value	450			546
Tax loss carryforwards	302			936
State and local taxes	200			162
Unearned insurance premiums	85			141
Hedging transactions	49			123
Other	108			208
Gross deferred tax assets	3,196			4,103
Valuation allowance	(1,123		)	(646		)
Deferred tax assets, net of valuation allowance	2,073			3,457
Deferred tax liabilities
Lease transactions	1,212			1,789
Deferred acquisition costs	269			424
Debt transactions	95			161
Other	44			107
Gross deferred tax liabilities	1,620			2,481
Net deferred tax assets (a) (b)	$	453		$	976

(a)

Amounts include $461 million and $994 million of net deferred tax assets included in other assets on our Consolidated Balance Sheet for tax jurisdictions in a total net deferred tax asset position and $8 million and $18 million included in accrued expenses and other liabilities on our Consolidated Balance Sheet for tax jurisdictions in a total net deferred tax liability position at December 31, 2017, and 2016, respectively.

(b)

Amount for 2017 decreased $128 million due to the Tax Act, which is composed of adjustments to our deferred tax assets and liabilities of $421 million and an increase in the valuation allowance of $549 million primarily attributable to foreign tax credit carryforwards. The additional decrease of $395 million primarily resulted from the monetization of deferred tax assets against taxes generated from pretax earnings for the year, offset by deferred tax asset builds stemming from tax credit generation, including low income housing tax credits.

The following table summarizes net deferred tax assets including related valuation allowances at December 31, 2017.



($ in millions)	Deferred tax asset (liability)				Valuation allowance				Net deferred tax asset (liability)			Years of expiration
Tax credit carryforwards
Foreign tax credits	$	1,772			$	(983	)		$	789		2018–2027
General business credits	213				—				213			2031–2037
Alternative minimum tax (AMT) credits	17				—				17			n/a
Total tax credit carryforwards	2,002				(983		)		1,019
Tax loss carryforwards
Net operating losses — federal	302				—				302			2027–2036
Net operating losses — state	253			(a)	(135		)		118			2018–2037
Capital losses — state	2			(a)	(2		)		—			2018–2027
Total tax loss carryforwards	557				(137		)		420
Other net deferred tax liabilities (b)	(983		)		(3		)		(986		)	n/a
Net deferred tax assets	$	1,576			$	(1,123	)	(c)	$	453


(a)	State net operating loss and capital loss carryforwards are included in the state and local taxes and other liabilities totals disclosed in our deferred inventory table above.


(b)	Other net deferred tax liabilities are composed of other liabilities and assets. A portion of these assets are subject to a valuation allowance.


(c)	Includes the valuation allowance impact of the Tax Act of $549 million primarily related to foreign tax credit carryforwards. This valuation allowance impact of the Tax Act is disclosed in the tax law enactment caption in the reconciliation of income tax expense table above.

As part of the Tax Act, a Deemed Repatriation Transition Tax (the Transition Tax) was enacted. The Transition Tax is a tax on previously-untaxed accumulated and current earnings and profits (E&P) of certain foreign subsidiaries. To determine the amount of the Transition Tax, we had to determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Given our consolidated accumulated E&P deficit position, we determined there is no liability related to the Transition Tax. As of December 31, 2017, we continue to not assert that foreign earnings are indefinitely reinvested outside of the United States. Deferred tax liabilities for incremental U.S. tax that stem from temporary differences related to investments in foreign subsidiaries or corporate joint ventures are negligible and have been recognized as of December 31, 2017.

The following table provides a reconciliation of the beginning and ending amount of unrecognized tax benefits.



($ in millions)	2017			2016			2015
Balance at January 1,	$	14		$	185		$	191
Additions based on tax positions related to the current year	—			—			—
Additions for tax positions of prior years	3			12			7
Reductions for tax positions of prior years	(1		)	—			—
Settlements	—			(182		)	(10		)
Expiration of statute of limitations	(1		)	(1		)	(3		)
Balance at December 31,	$	15		$	14		$	185

Included in the unrecognized tax benefits balances are some items, the recognition of which would not affect the effective tax rate, such as the tax effect of certain temporary differences and the portion of gross state unrecognized tax benefits that would be offset by the tax benefit of the associated federal deduction. At December 31, 2017, 2016, and 2015, the balance of unrecognized tax benefits that, if recognized, would affect our effective tax rate were $12 million, $9 million, and $177 million, respectively.

We recognize accrued interest and penalties related to uncertain income tax positions in interest expense and other operating expenses, respectively. The cumulative accrued balance for interest and penalties was less than $1 million at December 31, 2017, $1 million at December 31, 2016, and $2 million at December 31, 2015. For each of the years ended December 31, 2017, 2016, and 2015, interest and penalties of $1 million or less were accrued.

It is reasonably possible that the unrecognized tax benefits will decrease by up to $15 million over the next twelve months if certain tax matters ultimately settle with the applicable taxing jurisdiction.

We file tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. Our most significant operations remaining following our divestitures of various international operations are the United States and Canada. The oldest tax years that remain subject to examination for those jurisdictions are 2012 and 2011, respectively.