JP Morgan Chase 2012 Annual Report Download - page 294

Notes to consolidated financial statements
304 JPMorgan Chase & Co./2012 Annual Report
A reconciliation of the applicable statutory U.S. income tax
rate to the effective tax rate for each of the years ended
December 31, 2012, 2011 and 2010, is presented in the
following table.
Effective tax rate
Year ended December 31, 2012 2011 2010
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 1.6 1.6 3.6
Tax-exempt income (2.9) (2.1) (2.4)
Non-U.S. subsidiary earnings(a) (2.4) (2.3) (2.2)
Business tax credits (4.2) (4.0) (3.7)
Other, net (0.7) 0.9 (0.2)
Effective tax rate 26.4% 29.1% 30.1%
(a) Includes earnings deemed to be reinvested indefinitely in non-U.S.
subsidiaries.
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, 2012 and 2011.
Deferred taxes
December 31, (in millions) 2012 2011
Deferred tax assets
Allowance for loan losses $ 8,712 $ 10,689
Employee benefits 4,308 4,570
Accrued expenses and other(a) 12,393 11,183
Non-U.S. operations 3,537 2,943
Tax attribute carryforwards 1,062 1,547
Gross deferred tax assets(a) 30,012 30,932
Valuation allowance (689) (1,303)
Deferred tax assets, net of valuation
allowance(a) $ 29,323 $ 29,629
Deferred tax liabilities
Depreciation and amortization(a) $ 2,563 $ 2,799
Mortgage servicing rights, net of
hedges (a) 5,336 4,396
Leasing transactions(a) 2,242 2,348
Non-U.S. operations 3,582 2,790
Other, net(a) 4,340 2,520
Gross deferred tax liabilities(a) 18,063 14,853
Net deferred tax assets $ 11,260 $ 14,776
(a) The prior period has been revised to conform with the current
presentation.
JPMorgan Chase has recorded deferred tax assets of $1.1
billion at December 31, 2012, in connection with U.S.
federal and state and local net operating loss carryforwards
and foreign tax credit carryforwards. At December 31,
2012, the U.S. federal net operating loss carryforwards
were approximately $1.5 billion; the state and local net
operating loss carryforward was approximately
$269 million; and the U.S. foreign tax credit carryforward
was approximately $525 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, 2012, was due to
losses associated with non-U.S. subsidiaries. During 2012,
the valuation allowance decreased by $614 million largely
related to the realization of state and local tax benefits.
At December 31, 2012, 2011 and 2010, JPMorgan Chase’s
unrecognized tax benefits, excluding related interest
expense and penalties, were $7.2 billion, $7.2 billion and
$7.8 billion, respectively, of which $4.2 billion, $4.0 billion
and $3.8 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. As JPMorgan
Chase is presently under audit by a number of taxing
authorities, it is reasonably possible that significant changes
in the gross balance of unrecognized tax benefits may occur
within the next 12 months. JPMorgan Chase does not expect
that any changes over the next 12 months in its gross
balance of unrecognized tax benefits caused by such audits
would result in a significant change in its annual effective
tax rate.
The following table presents a reconciliation of the
beginning and ending amount of unrecognized tax benefits
for the years ended December 31, 2012, 2011 and 2010.