Income Taxes

12 Months Ended

Dec. 31, 2014

Note 19 Income Taxes

The components of Income tax expense are as follows:

Table 142: Components of Income Tax Expense

Year ended December 31
In millions			2014		2013		2012
Current
	Federal (a)		$	1,084	$	263	$	453
	State			68		17		29
		Total current		1,152		280		482
Deferred
	Federal (a)			220		1,119		515
	State			35		77		48
		Total deferred		255		1,196		563
Total			$	1,407	$	1,476	$	1,045
(a) Amounts for 2013 and 2012 have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits.

Significant components of deferred tax assets and liabilities are as follows:

Table 143: Deferred Tax Assets and Liabilities

December 31 - in millions				2014		2013
Deferred tax assets
	Allowance for loan and lease losses		$	1,250	$	1,343
	Compensation and benefits			822		581
	Loss and credit carryforward			545		797
	Accrued expenses			581		575
	Other (a)			537		580
		Total gross deferred tax assets		3,735		3,876
	Valuation allowance			(65)		(61)
		Total deferred tax assets		3,670		3,815
Deferred tax liabilities
	Leasing			1,494		1,498
	Goodwill and intangibles			328		342
	Basis difference in loans			44		48
	Fixed assets			381		397
	Net unrealized gains on securities and financial instruments			619		391
	BlackRock basis difference			2,166		2,031
	Other			575		730
		Total deferred tax liabilities		5,607		5,437
	Net deferred tax liability		$	1,937	$	1,622
(a) Amounts for 2013 have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits.

A reconciliation between the statutory and effective tax rates follows:

Table 144: Reconciliation of Statutory and Effective Tax Rates

Year ended December 31		2014		2013		2012
Statutory tax rate		35.0	%	35.0	%	35.0	%
Increases (decreases) resulting from
	State taxes net of federal benefit	1.2		1.1		1.3
	Tax-exempt interest (a)	(2.2)		(1.9)		(2.3)
	Life insurance	(1.7)		(1.7)		(2.3)
	Dividend received deduction (a)	(1.5)		(1.2)		(1.6)
	Tax credits (a)	(4.4)		(3.7)		(4.6)
	Other (a)	(1.3)		(1.7)		.4
	Effective tax rate	25.1	%	25.9	%	25.9	%
(a)	Amounts for 2013 and 2012 have been updated to reflect the first quarter 2014 adoption of ASU 2014-01 related to investments in low income housing tax credits.

The net operating loss carryforwards at December 31, 2014 and 2013 follow:

Table 145: Net Operating Loss Carryforwards and Tax Credit Carryforwards
		December 31			December 31
In millions		2014			2013
Net Operating Loss Carryforwards:
	Federal		$	997	$	1,116
	State			2,594		2,958
Tax Credit Carryforwards:
	Federal		$	35	$	221
	State			7		7

The federal net operating loss carryforwards expire in 2032. The state net operating loss carryforwards will expire from 2015 to 2031. The majority of the tax credit carryforwards expire in 2032.

The federal net operating loss carryforwards and tax credit carryforwards above are substantially from the 2012 acquisition of RBC Bank (USA) and are subject to a federal annual Section 382 limitation under the Internal Revenue Code of 1986; and acquired state operating loss carryforwards are subject to similar limitations that exist for state tax purposes. The majority of the decrease to state net operating loss carryforwards is attributable to the estimated utilization on 2014 tax return filings. It is anticipated that the company will be able to fully utilize its carryforwards for federal tax purposes, but a valuation allowance of $65 million has been recorded against certain state tax carryforwards as of December 31, 2014. See Note 2 Acquisition and Divestiture Activity in our 2013 Form 10-K for additional discussion of our 2012 acquisition of RBC Bank (USA).

As of December 31, 2014, PNC had approximately $77 million of earnings attributed to foreign subsidiaries that have been indefinitely reinvested for which no incremental U.S. income tax provision has been recorded. If a U.S. deferred tax liability were to be recorded, the estimated tax liability on those undistributed earnings would be approximately $24 million.

Retained earnings at both December 31, 2014 and December 31, 2013 included $117 million in allocations for bad debt deductions of former thrift subsidiaries for which no income tax has been provided. Under current law, if certain subsidiaries use these bad debt reserves for purposes other than to absorb bad debt losses, they will be subject to Federal income tax at the current corporate tax rate.

PNC had unrecognized tax benefits of $77 million at December 31, 2014 and $110 million at December 31, 2013. At December 31, 2014, $64 million of unrecognized tax benefits, if recognized, would favorably impact the effective income tax rate.

A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows:

Table 146: Change in Unrecognized Tax Benefits

In millions			2014		2013		2012
Balance of gross unrecognized tax benefits at January 1		$	110	$	176	$	209
Increases:
	Positions taken during a prior period				11		23
	Positions taken during the current period						1
Decreases:
	Positions taken during a prior period		(27)		(22)		(51)
	Settlements with taxing authorities		(1)		(48)		(1)
	Reductions resulting from lapse of statute of limitations		(5)		(7)		(5)
Balance of gross unrecognized tax benefits at December 31		$	77	$	110	$	176

It is reasonably possible that the balance of unrecognized tax benefits could increase or decrease in the next twelve months due to completion of tax authorities’ exams or the expiration of statutes of limitations. Management estimates that the balance of unrecognized tax benefits could decrease by $54 million within the next twelve months.

Examinations are substantially completed for PNC’s consolidated federal income tax returns for 2007 through 2010 and are effectively settled. The Internal Revenue Service (IRS) is currently examining PNC’s 2011 through 2013 returns. National City's consolidated federal income tax returns through 2008 have been audited by the IRS. Certain adjustments remain under review by the IRS Appeals Division for years 2004 through 2008.

PNC files tax returns in most states and some non-U.S. jurisdictions each year and is under continuous examination by various state taxing authorities. With few exceptions, we are no longer subject to state and local and non-U.S. income tax examinations by taxing authorities for periods before 2009. For all open audits, any potential adjustments have been considered in establishing our unrecognized tax benefits as of December 31, 2014.

Our policy is to classify interest and penalties associated with income taxes as income tax expense. For 2014, we had a benefit of $5 million of gross interest and penalties, decreasing income tax expense. The total accrued interest and penalties at December 31, 2014 and December 31, 2013 was $41 million and $45 million, respectively.

ASU 2014-01 was adopted effective January 1, 2014. Under this standard, amortization of investments in qualified low income housing tax credits is reported within income tax expense. Certain amounts for 2013 and 2012 periods including income tax provision have been updated to reflect the adoption.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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