Income Taxes

Total income taxes were as follows:



Year Ended December 31,	2015			2014			2013
	(in millions)
Provision (benefit) for income taxes	$	230		$	(56	)	$	156
Income taxes related to adjustments included in common shareholders' equity:
Unrealized gains (losses) on investment securities, net	(242		)	114			(697		)
Unrealized gains (losses) on derivatives classified as cash flow hedges	2			(46		)	82
Employer accounting for post-retirement plans	—			(4		)	6
Other-than-temporary impairment on debt securities	—			43			(43		)
Total income taxes	$	(10	)	$	51		$	(496	)

The components of income tax expense (benefit) were as follows:



Year Ended December 31,	2015		2014			2013
	(in millions)
Current:
Federal	$	3	$	(35	)	$	102
State and local	35		(222		)	35
Foreign	2		16			17
Total current	40		(241		)	154
Deferred	190		185			2
Total income tax expense (benefit)	$	230	$	(56	)	$	156

The significant components of deferred provision attributable to income were:



Year Ended December 31,	2015			2014		2013
	(in millions)
Deferred income tax provision (excluding the effects of other components)	$	201		$	144	$	31
Increase in Federal operating loss carryforwards	—			1		—
(Decrease) increase in State valuation allowance	(5		)	11		—
Increase in State capital loss carryforwards	(6		)	—		—
(Increase) decrease in foreign and general business tax credits	—			29		(29		)
Deferred income tax provision	$	190		$	185	$	2

The following table provides an analysis of the difference between effective rates based on the total income tax provision attributable to pretax income and the statutory U.S. Federal income tax rate:



Year Ended December 31,	2015					2014					2013
	(dollars are in millions)
Tax expense (benefit) at the U.S. Federal statutory income tax rate	$	196		35.0	%	$	104		35.0	%	$	(64	)	(35.0	)%
Increase (decrease) in rate resulting from:
State and local taxes, net of Federal benefit	20			3.6		15			5.0		22			12.1
Adjustment of tax rate used to value deferred taxes⁽¹⁾	47			8.4		63			21.1		—			—
Non-deductible goodwill impairment⁽²⁾	—			—		—			—		215			118.1
Other non-deductible / non-taxable items⁽³⁾	1			0.2		—			—		(11		)	(6.0	)
Items affecting prior periods⁽⁴⁾	(7		)	(1.3	)	(29		)	(9.7	)	(13		)	(7.1	)
Uncertain tax positions⁽⁵⁾	4			0.7		(192		)	(64.4	)	20			11.0
Impact of foreign operations⁽⁶⁾	—			—		—			—		13			7.1
Low income housing tax credit investments	(26		)	(4.6	)	(26		)	(8.7	)	(28		)	(15.4	)
Change in valuation allowances reserves⁽⁷⁾	(5		)	(.9	)	10			3.4		—			—
Other	—			—		(1		)	(0.3	)	2			1.1
Total income tax expense (benefit)	$	230		41.1	%	$	(56	)	(18.8	)%	$	156		85.7	%


⁽¹⁾	For 2015, the amount mainly relates to the effects of revaluing our deferred tax assets for New York City Tax Reform that was enacted on April 13, 2015. For 2014, the amount mainly relates to the effects of revaluing our deferred tax assets for New York State Tax Reform that was enacted on March 31, 2014.


⁽²⁾	Represents non-deductible goodwill impairment related to our GB&M reporting unit in 2013.


⁽³⁾	For 2013, the amount includes a reversal of penalty exposure.

⁽⁴⁾

For 2014, the amount relates to changes in estimates as a result of filing the Federal and State income tax returns and a change in State tax expense as a result of filing amended State tax returns upon the closing of the Federal audits for the 2006 - 2009 tax years. For 2013, the amount relates to adjustments to current and deferred tax balance sheet accounts and changes in estimates as a result of filing the Federal and State income tax returns.


⁽⁵⁾	For 2014, the amount mainly reflects the resolution and settlement with taxation authorities of certain significant State and local tax audits during the second quarter of 2014 which is discussed further below. For 2013, the amount relates to changes in State uncertain tax positions which no longer meet the more likely than not requirement for recognition.


⁽⁶⁾	For 2013, the amount relates to foreign (United Kingdom) tax expense for which no foreign tax credits were allowed.


⁽⁷⁾	For 2014, the amount relates to the establishment of a valuation allowance against our deferred tax assets as a result of New York State Tax Reform that was enacted on March 31, 2014.

The components of the net deferred tax asset are presented in the following table:



At December 31,	2015			2014
	(in millions)
Deferred tax assets:
Allowance for credit losses	$	346		$	265
Employee benefit accruals	124			130
Accrued expenses	79			143
Bond premium amortization	20			284
Interests in real estate mortgage investment conduits⁽¹⁾	561			453
Partnerships	104			105
Other	480			315
Total deferred tax assets	1,714			1,695
Valuation allowance	(6		)	(11		)
Total deferred tax assets, net of valuation allowance	1,708			1,684
Deferred tax liabilities:
Fair value adjustments	137			71
Unrealized gain on investment securities	—			103
Mortgage servicing rights	52			62
Capitalized costs	—			42
Other	45			53
Total deferred tax liabilities	234			331
Net deferred tax asset	$	1,474		$	1,353

¹⁾

Real estate mortgage investment conduits ("REMICs") are investment vehicles that hold commercial and residential mortgages in trust and issue securities representing an undivided interest in these mortgages. HSBC Bank USA holds portfolios of noneconomic residual interests in a number of REMICs. This item represents tax basis in such interests which has accumulated as a result of tax rules requiring the recognition of income related to such noneconomic residuals.

A reconciliation of the beginning and ending amount of unrecognized tax benefits related to uncertain tax positions is as follows:



	2015		2014			2013
	(in millions)
Balance at January 1,	$	14	$	540		$	478
Additions based on tax positions related to the current year	4		18			16
Reductions based on tax positions related to the current year	—		(10		)	(5		)
Additions for tax positions of prior years	8		5			66
Reductions for tax positions of prior years	—		(337		)	(15		)
Reductions related to settlements with taxing authorities	—		(202		)	—
Balance at December 31,	$	26	$	14		$	540

During 2014, certain State and local tax audits were concluded resulting in the settlement of significant uncertain tax positions covering a number of years. As a result, tax reserves previously maintained in relation to the periods and issues under review were released which resulted in an income tax benefit of $183 million. In addition, we released our accrued interest associated with the tax reserves released which resulted in a $120 million benefit to interest expense.

The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate was $14 million, $11 million and $334 million at December 31, 2015, 2014 and 2013, respectively. Included in the unrecognized tax benefits are certain items the recognition of which would not affect the effective tax rate, such as the tax effect of temporary differences and the amount of State taxes that would be deductible for U.S. Federal tax purposes. It is reasonably possible that there could be a change in the amount of our unrecognized tax benefits within the next 12 months due to settlements or statutory expirations in various State and local tax jurisdictions.

It is our policy to recognize accrued interest related to uncertain tax positions in interest expense in the consolidated statement of income (loss) and to recognize penalties, if any, related to uncertain tax positions as a component of other expenses in the consolidated statement of income (loss). Accruals for the payment of interest associated with uncertain tax positions totaled $4 million, $3 million and $208 million at December 31, 2015, 2014 and 2013, respectively. Our accrual for the payment of interest associated with uncertain tax positions increased by $1 million during 2015 and decreased by $205 million during 2014.

Deferred tax assets and liabilities are recognized for the future tax consequences related to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, for State net operating losses and for State tax credits. Any Federal tax credits that cannot be currently utilized by the consolidated group are effectively transferred to HSBC North America and reflected within the HSBC North America's deferred tax assets. Our net deferred tax assets, including deferred tax liabilities, totaled $1,474 million and $1,353 million as of December 31, 2015 and 2014, respectively.

See Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," for further discussion regarding our accounting policy relating to the evaluation, recognition and measurement of both the HNAH Group's and HSBC USA's deferred tax assets and liabilities. In evaluating the need for a valuation allowance at December 31, 2015, it has been determined that HNAH Group projections of future taxable income from U.S. operations based on management approved business plans provide sufficient and appropriate support for the recognition of our net deferred tax assets. At December 31, 2015, we have valuation allowances against certain State capital loss carryforwards for which the aforementioned projections of future taxable income do not provide the appropriate support. Prior to the third quarter of 2015, the evaluation of the need for a valuation allowance significantly discounted any future taxable income from U.S. operations and relied primarily on continued capital support from our parent, HSBC, and the implementation of tax planning strategies in relation to such support.

The Internal Revenue Service commenced its examination of our 2012 and 2013 Federal income tax returns in the first quarter of 2015 and is expected to conclude its examination in 2016.

We remain subject to State and local income tax examinations for years 2003 and forward. We are currently under audit by various State and local tax jurisdictions. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and the closing of statute of limitations. Such adjustments are reflected in the tax provision.

At December 31, 2015, for State tax purposes, we had apportioned and pre-tax effected net operating loss carryforwards of $21 million which expire as follows: $2 million in 2021 - 2025, $18 million in 2026 - 2030, and $1 million in 2031 and forward.