Income Taxes

12 Months Ended

Dec. 31, 2015

Note 18 Income Taxes

The components of income tax expense are as follows:

Table 125: Components of Income Tax Expense

Year ended December 31
In millions			2015		2014		2013
Current
	Federal		$	927	$	1,084	$	263
	State			33		68		17
		Total current		960		1,152		280
Deferred
	Federal			320		220		1,119
	State			84		35		77
		Total deferred		404		255		1,196
Total			$	1,364	$	1,407	$	1,476

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

Table 126: Deferred Tax Assets and Liabilities

December 31 - in millions				2015		2014
Deferred tax assets
	Allowance for loan and lease losses		$	1,032	$	1,250
	Compensation and benefits			654		822
	Partnership investments			295		247
	Loss and credit carryforward			502		545
	Accrued expenses			542		581
	Other			320		290
		Total gross deferred tax assets		3,345		3,735
	Valuation allowance			(61)		(65)
		Total deferred tax assets		3,284		3,670
Deferred tax liabilities
	Leasing			1,413		1,494
	Goodwill and intangibles			320		328
	Fixed assets			391		381
	Net unrealized gains on securities and financial instruments			453		619
	BlackRock basis difference			2,327		2,166
	Other			542		619
		Total deferred tax liabilities		5,446		5,607
	Net deferred tax liability		$	2,162	$	1,937

A reconciliation between the statutory and effective tax rates follows:

Table 127: Reconciliation of Statutory and Effective Tax Rates

Year ended December 31		2015		2014		2013
Statutory tax rate		35.0	%	35.0	%	35.0	%
Increases (decreases) resulting from
	State taxes net of federal benefit	1.4		1.2		1.1
	Tax-exempt interest	(2.3)		(2.2)		(1.9)
	Life insurance	(1.7)		(1.7)		(1.7)
	Dividend received deduction	(1.7)		(1.5)		(1.2)
	Tax credits	(3.9)		(4.4)		(3.7)
	Other	(2.0)	(a)	(1.3)		(1.7)
	Effective tax rate	24.8	%	25.1	%	25.9	%
(a)	Includes tax benefits associated with settlement of acquired entity tax contingencies.

The net operating loss carryforwards at December 31, 2015 and 2014 follow:

Table 128: Net Operating Loss Carryforwards and Tax Credit Carryforwards

		December 31			December 31
In millions		2015			2014
Net Operating Loss Carryforwards:
	Federal		$	878	$	997
	State		$	2,272	$	2,594
Tax Credit Carryforwards:
	Federal		$	64	$	35
	State		$	3	$	7

The federal net operating loss carryforwards expire in 2032. The state net operating loss carryforwards will expire from 2016 to 2035. The majority of the tax credit carryforwards expire in 2032.

All federal and most state net operating loss and credit carryforwards are from acquired entities and utilization is subject to various statutory limitations. It is anticipated that the company will be able to fully utilize its carryforwards for federal tax purposes, but a valuation allowance of $61 million has been recorded against certain state tax carryforwards as of December 31, 2015. If select uncertain tax positions were successfully challenged by a state, the state net operating losses listed above could be reduced by $60 million.

As of December 31, 2015, PNC had approximately $110 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 $34 million.

Retained earnings at both December 31, 2015 and December 31, 2014 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 $26 million at December 31, 2015 and $77 million at December 31, 2014. At December 31, 2015, these unrecognized tax benefits, if recognized, would favorably impact the effective income tax rate by $20 million.

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

Table 129: Change in Unrecognized Tax Benefits

In millions			2015		2014		2013
Balance of gross unrecognized tax benefits at January 1		$	77	$	110	$	176
Increases:
	Positions taken during a prior period		17				11
Decreases:
	Positions taken during a prior period		(9)		(27)		(22)
	Settlements with taxing authorities		(52)		(1)		(48)
	Reductions resulting from lapse of statute of limitations		(7)		(5)		(7)
Balance of gross unrecognized tax benefits at December 31		$	26	$	77	$	110

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 $4 million within the next twelve months.

PNC is subject to U.S. federal income tax as well as income tax in most states and some foreign jurisdictions. Examinations were completed for PNC’s consolidated federal income tax returns for 2007 through 2010 and National City’s consolidated federal income tax returns through 2008 and were settled with the IRS. The IRS is currently examining PNC’s consolidated federal income tax returns for 2011 through 2013. In addition, we are under continuous examinations by various state taxing authorities. With few exceptions, we are no longer subject to state and local and foreign income tax examinations by taxing authorities for periods before 2010. For all open audits, any potential adjustments have been considered in establishing our unrecognized tax benefits as of December 31, 2015.

Our policy is to classify interest and penalties associated with income taxes as income tax expense. For 2015, we had a benefit of $46 million of gross interest and penalties, decreasing income tax expense. The total accrued interest and penalties at December 31, 2014 was $41 million. At December 31, 2015, the total accrued interest and penalties was not significant.

During 2015, we recognized $202 million of amortization, $224 million of tax credits and $74 million of other tax benefits associated with qualified investments in low income housing tax credits within Income taxes.