JPMORGAN CHASE & CO | 2013 | FY | 3


Income taxes
JPMorgan Chase and its eligible subsidiaries file a consolidated U.S. federal income tax return. JPMorgan Chase uses the asset and liability method to provide income taxes on all transactions recorded in the Consolidated Financial Statements. This method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities for book and tax purposes. Accordingly, a deferred tax asset or liability for each temporary difference is determined based on the tax rates that the Firm expects to be in effect when the underlying items of income and expense are realized. JPMorgan Chase’s expense for income taxes includes the current and deferred portions of that expense. A valuation allowance is established to reduce deferred tax assets to the amount the Firm expects to realize.
Due to the inherent complexities arising from the nature of the Firm’s businesses, and from conducting business and being taxed in a substantial number of jurisdictions, significant judgments and estimates are required to be made. Agreement of tax liabilities between JPMorgan Chase and the many tax jurisdictions in which the Firm files tax returns may not be finalized for several years. Thus, the Firm’s final tax-related assets and liabilities may ultimately be different from those currently reported.
A reconciliation of the applicable statutory U.S. income tax rate to the effective tax rate for each of the years ended December 31, 2013, 2012 and 2011, is presented in the following table.
Effective tax rate
Year ended December 31,
 
2013

 
2012

 
2011

Statutory U.S. federal tax rate
 
35.0
 %
 
35.0
 %
 
35.0
 %
Increase/(decrease) in tax rate resulting from:
 
 
 
 
 
 
U.S. state and local income taxes, net of U.S. federal income tax benefit
 
2.2

 
1.6

 
1.6

Tax-exempt income
 
(3.1
)
 
(2.9
)
 
(2.1
)
Non-U.S. subsidiary earnings(a)
 
(4.9
)
 
(2.4
)
 
(2.3
)
Business tax credits
 
(5.4
)
 
(4.2
)
 
(4.0
)
Nondeductible legal expense(b)
 
8.0

 
(0.2
)
 
0.9

Other, net
 
(1.0
)
 
(0.5
)
 

Effective tax rate
 
30.8
 %
 
26.4
 %
 
29.1
 %
(a)
Includes earnings deemed to be reinvested indefinitely in non-U.S. subsidiaries.
(b)
The prior periods have been revised to conform with the current presentation.
The components of income tax expense/(benefit) included in the Consolidated Statements of Income were as follows for each of the years ended December 31, 2013, 2012, and 2011.
Income tax expense/(benefit)
Year ended December 31,
(in millions)
 
2013

 
2012

 
2011

Current income tax expense/(benefit)
 
 
 
 
 
 
U.S. federal
 
$
(1,316
)
 
$
3,225

 
$
3,719

Non-U.S.
 
1,308

 
1,782

 
1,183

U.S. state and local
 
(4
)
 
1,496

 
1,178

Total current income tax expense/(benefit)
 
(12
)
 
6,503

 
6,080

Deferred income tax expense/(benefit)
 
 
 
 
 
 
U.S. federal
 
7,080

 
2,238

 
2,109

Non-U.S.
 
10

 
(327
)
 
102

U.S. state and local
 
913

 
(781
)
 
(518
)
Total deferred income tax expense/(benefit)
 
8,003

 
1,130

 
1,693

Total income tax expense
 
$
7,991

 
$
7,633

 
$
7,773


Total income tax expense was $8.0 billion in 2013 with an effective tax rate of 30.8%. The relationship between current and deferred income tax expense is largely driven by the reversal of significant deferred tax assets as well as prior year tax adjustments and audit resolutions. Total income tax expense includes $531 million, $200 million and $76 million of tax benefits recorded in 2013, 2012, and 2011, respectively, as a result of tax audit resolutions.
The preceding table does not reflect the tax effect of certain items that are recorded each period directly in stockholders’ equity and certain tax benefits associated with the Firm’s employee stock-based compensation plans. The tax effect of all items recorded directly to stockholders’ equity resulted in an increase of $2.1 billion in 2013, a decrease of $1.9 billion in 2012, and an increase of $927 million in 2011.
U.S. federal income taxes have not been provided on the undistributed earnings of certain non-U.S. subsidiaries, to the extent that such earnings have been reinvested abroad for an indefinite period of time. Based on JPMorgan Chase’s ongoing review of the business requirements and capital needs of its non-U.S. subsidiaries, combined with the formation of specific strategies and steps taken to fulfill these requirements and needs, the Firm has determined that the undistributed earnings of certain of its subsidiaries would be indefinitely reinvested to fund current and future growth of the related businesses. As management does not intend to use the earnings of these subsidiaries as a source of funding for its U.S. operations, such earnings will not be distributed to the U.S. in the foreseeable future. For 2013, pretax earnings of approximately $3.4 billion were generated and will be indefinitely reinvested in these subsidiaries. At December 31, 2013, the cumulative amount of undistributed pretax earnings in these subsidiaries approximated $28.5 billion. If the Firm were to record a deferred tax liability associated with these undistributed earnings, the amount would be approximately $6.4 billion at December 31, 2013.
Tax expense applicable to securities gains and losses for the years 2013, 2012 and 2011 was $261 million, $822 million, and $617 million, respectively.
Deferred income tax expense/(benefit) results from differences between assets and liabilities measured for financial reporting purposes versus income tax return purposes. Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely than not. If a deferred tax asset is determined to be unrealizable, a valuation allowance is established. The significant components of deferred tax assets and liabilities are reflected in the following table as of December 31, 2013 and 2012.
Deferred taxes
 
 
 
 
December 31, (in millions)
 
2013

 
2012

Deferred tax assets
 
 
 
 
Allowance for loan losses
 
$
6,593

 
$
8,712

Employee benefits
 
4,468

 
4,308

Accrued expenses and other
 
9,179

 
12,393

Non-U.S. operations
 
5,493

 
3,537

Tax attribute carryforwards
 
748

 
1,062

Gross deferred tax assets
 
26,481

 
30,012

Valuation allowance
 
(724
)
 
(689
)
Deferred tax assets, net of valuation allowance
 
$
25,757

 
$
29,323

Deferred tax liabilities
 
 
 
 
Depreciation and amortization
 
$
3,196

 
$
2,563

Mortgage servicing rights, net of hedges
 
5,882

 
5,336

Leasing transactions
 
2,352

 
2,242

Non-U.S. operations
 
4,705

 
3,582

Other, net
 
3,459

 
4,340

Gross deferred tax liabilities
 
19,594

 
18,063

Net deferred tax assets
 
$
6,163

 
$
11,260

JPMorgan Chase has recorded deferred tax assets of $748 million at December 31, 2013, in connection with U.S. federal and state and local net operating loss carryforwards and foreign tax credit carryforwards. At December 31, 2013, the U.S. federal net operating loss carryforwards were approximately $1.5 billion; the state and local net operating loss carryforward was approximately $156 million; and the U.S. foreign tax credit carryforward was approximately $203 million. If not utilized, the U.S. federal net operating loss carryforwards and the state and local net operating loss carryforward will expire between 2027 and 2030; and the U.S. foreign tax credit carryforward will expire in 2022.
The valuation allowance at December 31, 2013, was due to losses associated with non-U.S. subsidiaries.
At December 31, 2013, 2012 and 2011, JPMorgan Chase’s unrecognized tax benefits, excluding related interest expense and penalties, were $5.5 billion, $7.2 billion and $7.2 billion, respectively, of which $3.7 billion, $4.2 billion and $4.0 billion, respectively, if recognized, would reduce the annual effective tax rate. Included in the amount of unrecognized tax benefits are certain items that would not affect the effective tax rate if they were recognized in the Consolidated Statements of Income. These unrecognized items include the tax effect of certain temporary differences, the portion of gross state and local unrecognized tax benefits that would be offset by the benefit from associated U.S. federal income tax deductions, and the portion of gross non-U.S. unrecognized tax benefits that would have offsets in other jurisdictions. JPMorgan Chase is presently under audit by a number of taxing authorities, most notably by the Internal Revenue Service, New York State and City, and the State of California as summarized in the Tax examination status table below. Based upon the status of all of the tax examinations currently in process, it is reasonably possible that over the next 12 months the resolution of some of these examinations could result in a significant reduction in the gross balance of unrecognized tax benefits; however, at this time, it is not possible to reasonably estimate the amount of the reduction, if any.
The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2013, 2012 and 2011.
Unrecognized tax benefits
Year ended December 31,
(in millions)
 
2013

 
2012

 
2011

Balance at January 1,
 
$
7,158

 
$
7,189

 
$
7,767

Increases based on tax positions related to the current period
 
542

 
680

 
516

Decreases based on tax positions related to the current period
 

 

 
(110
)
Increases based on tax positions related to prior periods
 
88

 
234

 
496

Decreases based on tax positions related to prior periods
 
(2,200
)
 
(853
)
 
(1,433
)
Decreases related to settlements with taxing authorities
 
(53
)
 
(50
)
 
(16
)
Decreases related to a lapse of applicable statute of limitations
 

 
(42
)
 
(31
)
Balance at December 31,
 
$
5,535

 
$
7,158

 
$
7,189


After-tax interest (benefit)/expense and penalties related to income tax liabilities recognized in income tax expense were $(184) million, $147 million and $184 million in 2013, 2012 and 2011, respectively.
At December 31, 2013 and 2012, in addition to the liability for unrecognized tax benefits, the Firm had accrued $1.2 billion and $1.9 billion, respectively, for income tax-related interest and penalties.
JPMorgan Chase is continually under examination by the Internal Revenue Service, by taxing authorities throughout the world, and by many states throughout the U.S. The following table summarizes the status of significant income tax examinations of JPMorgan Chase and its consolidated subsidiaries as of December 31, 2013.
Tax examination status
December 31, 2013
 
Periods under examination
 
Status
JPMorgan Chase – U.S.
 
2003 - 2005
 
Field examination completed, JPMorgan Chase intends to appeal
JPMorgan Chase – U.S.
 
2006 - 2010
 
Field examination
Bear Stearns – U.S.
 
2003 – 2005
 
Refund claims under review
Bear Stearns – U.S.
 
2006 – 2008
 
Field examination
JPMorgan Chase – United Kingdom
 
2006 – 2011
 
Field examination
JPMorgan Chase – New York State and City
 
2005 – 2007
 
Field examination
JPMorgan Chase – California
 
2006 – 2010
 
Field examination
The following table presents the U.S. and non-U.S. components of income before income tax expense for the years ended December 31, 2013, 2012 and 2011.
Income before income tax expense - U.S. and non-U.S.
Year ended December 31,
(in millions)
 
2013

 
2012

 
2011

U.S.
 
$
17,229

 
$
24,895

 
$
16,336

Non-U.S.(a)
 
8,685

 
4,022

 
10,413

Income before income tax expense
 
$
25,914

 
$
28,917

 
$
26,749

(a)
For purposes of this table, non-U.S. income is defined as income generated from operations located outside the U.S.

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