Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

14. Income Taxes

Income taxes included in the income statement are summarized below. We file a consolidated federal income tax return.

Year ended December 31, Dollars in millions	2021		2020		2019
Currently payable:
Federal	$	423	$	336	$	241
State	73		83		20
Total currently payable	496		419		261
Deferred:
Federal	119		(156)		34
State	27		(36)		19
Total deferred	146		(192)		53
Total income tax (benefit) expense (a)	$	642	$	227	$	314

(a)There was income tax (benefit) expense on securities transactions of $(2) million in 2021, $1 million in 2020, and $5 million in 2019. Income tax expense excludes equity- and gross receipts-based taxes, which are assessed in lieu of an income tax in certain states in which we operate. These non-income taxes, which are recorded in “noninterest expense” on the income statement, totaled $33 million in 2021, $30 million in 2020, and $23 million in 2019.

Significant components of our deferred tax assets and liabilities included in “accrued expense and other liabilities” on the balance sheet, are as follows:

December 31, Dollars in millions	2021		2020
Allowance for loan and lease losses	$	296	$	443
Employee benefits	203		166
Net unrealized securities losses	102		—
Federal net operating losses and credits	6		7
Non-tax accruals	73		76
Operating lease liabilities (a)	165		174
State net operating losses and credits	1		1
Other	266		297
Gross deferred tax assets	1,112		1,164
Less: Valuation Allowance	12		—
Total deferred tax assets	1,100		1,164
Leasing transactions	521		556
Net unrealized securities gains	—		340
Operating lease right-of-use assets (a)	145		153
Goodwill	121		104
Other	124		111
Total deferred tax liabilities	911		1,264
Net deferred tax assets (liabilities) (b)	$	189	$	(100)

(a)A separate deferred tax asset and liability is recognized for each operating lease item resulting from the adoption of ASC 842 in 2019.

(b)From continuing operations.

We conduct quarterly assessments of all available evidence to determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded. The available evidence used in connection with these assessments includes taxable income in prior periods, projected future taxable income, potential tax-planning strategies, and projected future reversals of deferred tax items. These assessments involve a degree of subjectivity and may undergo significant change.

At December 31, 2021, we had net capital loss carryforwards of $12 million for which we have recorded $12 million of valuation allowances. The capital loss carryforward if not utilized, will expire in 2025. Realization of this tax benefit is dependent upon Key's ability to generate sufficient capital gain in an appropriate tax year to offset the capital loss carryforward. Currently, generation of sufficient gain income is uncertain.

At December 31, 2021, we had federal net operating loss carryforwards of $20 million and federal credit carryforwards of $1 million. The federal net operating loss carryforwards are from prior acquisitions by First Niagara and are subject to annual limitations under the tax code and, if not utilized, will expire in the years beginning 2027. The federal credit carryforward consists of general business credits which expire in 2037, under the Internal Revenue Code. We currently expect to fully utilize these losses and credits.

We had state net operating loss carryforwards of $24 million, resulting in a net state deferred tax asset of $1 million.

The following table shows how our total income tax expense (benefit) and the resulting effective tax rate were derived:

Year ended December 31, Dollars in millions	2021				2020				2019
	Amount		Rate		Amount		Rate		Amount		Rate
Income (loss) before income taxes times 21% statutory federal tax rate	$	683	21.0	%	$	327	21.0	%	$	425	21.0	%
Amortization of tax-advantaged investments	151		4.6		150		9.7		132		6.5
Tax-exempt interest income	(26)		(.8)		(28)		(1.8)		(30)		(1.5)
Corporate-owned life insurance income	(27)		(.8)		(29)		(1.9)		(29)		(1.4)
State income tax, net of federal tax benefit	79		2.4		37		2.4		31		1.5
Tax credits	(218)		(6.7)		(218)		(14.0)		(231)		(11.4)
Other	—		—		(12)		(.8)		16		.9
Total income tax expense (benefit)	$	642	19.7	%	$	227	14.6	%	$	314	15.6	%

Liability for Unrecognized Tax Benefits

The change in our liability for unrecognized tax benefits is as follows:

Year ended December 31, Dollars in millions	2021		2020
Balance at beginning of year	$	58	$	19
Increase for other tax positions of prior years	—		40
Decrease for payments and settlements	—		—
Decrease related to tax positions taken in prior years	(8)		(1)
Balance at end of year	$	50	$	58

Each quarter, we review the amount of unrecognized tax benefits recorded in accordance with the applicable accounting guidance. Any adjustment to unrecognized tax benefits is recorded in income tax expense. The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $50 million at December 31, 2021, and $58 million at December 31, 2020. It is reasonably possible that the balance of unrecognized tax benefits could decrease in the next twelve months due to examinations by various tax authorities or the expiration of statutes of limitations.

As permitted under the applicable accounting guidance, it is our policy to record interest and penalties related to unrecognized tax benefits in income tax expense. We recorded net interest benefit of $0.1 million, $0.2 million, and $0.9 million in 2021, 2020, and 2019, respectively. We did not recover any state tax penalties in 2021, 2020, or 2019. At December 31, 2021, we had an accrued interest payable of $2 million, compared to $3 million at December 31, 2020. There was no liability for accrued state tax penalties at December 31, 2021, and December 31, 2020.

There were no unrecognized tax benefits presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, at December 31, 2021 and December 31, 2020, respectively.

We file federal income tax returns, as well as returns in various state and foreign jurisdictions. We are subject to income tax examination by the IRS for the tax years 2016 and forward. Currently, we are under IRS audit for tax year 2016. We are not subject to income tax examinations by other tax authorities for years prior to 2014.

Pre-1988 Bank Reserves acquired in a business combination

Retained earnings of KeyBank included approximately $92 million of allocated bad debt deductions for which no income taxes have been recorded. Under current federal law, these reserves are subject to recapture into taxable income if KeyBank, or any successor, fails to maintain its bank status under the Internal Revenue Code or makes non-dividend distributions or distributions greater than its accumulated earnings and profits. No deferred tax liability has been established as these events are not expected to occur in the foreseeable future.