Income Taxes

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



Year ended December 31, ($ in millions)	2018			2017			2016
Current income tax (benefit) expense
U.S. federal	$	(12	)	$	(17	)	$	—
Foreign	5			6			8
State and local	35			53			9
Total current expense	28			42			17
Deferred income tax expense (benefit)
U.S. federal	328			566			423
State and local	3			(27		)	30
Total deferred expense	331			539			453
Total income tax expense from continuing operations	$	359		$	581		$	470

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)	2018			2017			2016
Statutory U.S. federal tax expense (a)	$	340		$	527		$	553
Change in tax resulting from
Nondeductible expenses	28			4			7
State and local income taxes, net of federal income tax benefit (b)	26			7			35
Tax law enactment	(23		)	119			—
Changes in unrecognized tax benefits (c)	22			1			(161		)
Tax credits, excluding expirations	(20		)	(12		)	(15		)
Valuation allowance change, excluding expirations	(8		)	(49		)	51
Other, net	(6		)	(16		)	—
Total income tax expense from continuing operations	$	359		$	581		$	470


(a)	The statutory U.S. federal tax rate was 21% for 2018 and 35% for both 2017 and 2016.


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


(c)	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.

For the year ended December 31, 2018, consolidated income tax expense from continuing operations was largely driven by tax attributable to pretax earnings for the year. 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 and income tax expense attributable to changes to our net deferred tax assets as a result of the Tax Act, 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.

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 and state net operating 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 and it is reasonably possible that the valuation allowance may change in the next twelve months.

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



December 31, ($ in millions)	2018			2017
Deferred tax assets
Tax credit carryforwards	$	1,796		$	2,002
Adjustments to loan value	366			450
State and local taxes	168			200
Unearned insurance premiums	90			85
Hedging transactions	27			49
Tax loss carryforwards	8			302
Other	222			108
Gross deferred tax assets	2,677			3,196
Valuation allowance	(1,057		)	(1,123		)
Deferred tax assets, net of valuation allowance	1,620			2,073
Deferred tax liabilities
Lease transactions	850			1,212
Deferred acquisition costs	321			269
Debt transactions	93			95
Other	56			44
Gross deferred tax liabilities	1,320			1,620
Net deferred tax assets (a)	$	300		$	453

(a)

Amounts include $317 million and $461 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 at December 31, 2018, and 2017, respectively, and $17 million and $8 million included in accrued expenses and other liabilities on our Consolidated Balance Sheet for tax jurisdictions in a total net deferred tax liability position.

The following table summarizes net deferred tax assets including related valuation allowances at December 31, 2018.



($ in millions)	Deferred tax asset (liability)				Valuation allowance			Net deferred tax asset (liability)			Years of expiration
Tax credit carryforwards
Foreign tax credits	$	1,522			$	(963	)	$	559		2022–2028
General business credits	274				—			274			2025–2038
Total tax credit carryforwards	1,796				(963		)	833
Tax loss carryforwards
Net operating losses — federal	8				—			8			2027–2036
Net operating losses — state	198			(a)	(94		)	104			2019–2038
Total federal and state tax loss carryforwards	206				(94		)	112
Other net deferred tax liabilities	(645		)		—			(645		)	n/a
Net deferred tax assets	$	1,357			$	(1,057	)	$	300


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

As of December 31, 2018, 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 investment in foreign subsidiaries or corporate joint ventures are negligible and have been recognized as of December 31, 2018.

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



($ in millions)	2018		2017			2016
Balance at January 1,	$	15	$	14		$	185
Additions based on tax positions related to the current year	—		—			—
Additions for tax positions of prior years	29		3			12
Reductions for tax positions of prior years	—		(1		)	—
Settlements	—		—			(182		)
Expiration of statute of limitations	—		(1		)	(1		)
Balance at December 31,	$	44	$	15		$	14

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, 2018, 2017, and 2016, the balance of unrecognized tax benefits that, if recognized, would affect our effective tax rate were $34 million, $12 million, and $9 million, respectively.

We recognize accrued interest and penalties related to uncertain income tax positions in interest expense and other operating expenses, respectively. For the years ended December 31, 2018, 2017, and 2016, the cumulative accrued balance for interest and penalties was less than $1 million and interest and penalties of $1 million or less were accrued each year.

It is reasonably possible that the unrecognized tax benefits will decrease by up to $41 million over the next twelve months if certain tax matters ultimately settle with the applicable taxing jurisdictions.

We file tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. Our most significant operations are in the United States and Canada. The oldest tax years that remain subject to examination for those jurisdictions are 2015 and 2011, respectively.