v3.22.0.1
Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes
Note 24.
Income Taxes
Provision for Income Taxes
Income taxes are provided for using the asset and liability method under which deferred tax assets and liabilities are recognized for temporary differences between the financial reporting and tax bases of assets and liabilities. The firm reports interest expense related to income tax matters in provision for taxes and income tax penalties in other expenses.
The table below presents information about the provision for taxes.
 
    Year Ended December  
       
$ in millions
  
 
2021
 
      2020        2019  
Current taxes
                          
U.S. federal
  
 
$2,904
 
      $1,759        $1,113  
State and local
  
 
574
 
      555        388  
Non-U.S.
  
 
1,926
 
      1,539        950  
Total current tax expense
  
 
5,404
 
      3,853        2,451  
Deferred taxes
                          
U.S. federal
  
 
192
 
      (798 )       (383 ) 
State and local
  
 
72
 
      (42 )       (20 ) 
Non-U.S.
  
 
(259
) 
      7        69  
Total deferred tax benefit
  
 
5
 
      (833 )       (334 ) 
Provision for taxes
  
 
$5,409
 
      $3,020        $2,117  
The table below presents a reconciliation of the U.S. federal statutory income tax rate to the effective income tax rate.

    Year Ended December  
       
 
  
 
2021
 
     2020       2019  
U.S. federal statutory income tax rate
  
 
21.0%
 
     21.0%       21.0%  
State and local taxes, net of U.S. federal benefit
  
 
1.9
 
     3.1       2.9  
Settlement of employee share-based awards
  
 
(0.7
) 
     (1.0 )      (0.6 ) 
Non-U.S.
operations
  
 
(1.5
) 
     (2.4 )      (3.6 ) 
Tax credits
  
 
(0.6
) 
     (1.2 )      (1.8 ) 
Tax-exempt
income, including dividends
  
 
(0.5
) 
     (0.6 )      (1.0 ) 
Non-deductible
legal expenses
  
 
–
 
     5.6       2.1  
Other
  
 
0.4
 
     (0.3 )      1.0  
Effective income tax rate
  
 
20.0%
 
     24.2%       20.0%  
In the table above,
Non-U.S.
operations include the impact of the Base Erosion and Anti-Abuse Tax and Global Intangible Low Taxed Income (GILTI).
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities. These temporary differences result in taxable or d
e
ductible amounts in future years and are measured using the tax rates and laws that will be in effect when such differences are expected to reverse. Valuation allowances are established to reduce deferred tax assets to the amount that more likely than not will be realized and primarily relate to the ability to utilize losses in various tax jurisdictions. Tax assets are included in other assets and tax liabilities are included in other liabilities.
The table below presents information about deferred tax assets and liabilities, excluding the impact of netting within tax jurisdictions.
 
    As of December  
     
$ in millions
  
 
2021
 
      2020  
Deferred tax assets
                 
Compensation and benefits
  
 
$1,978
 
      $1,609  
ASC 740 asset related to unrecognized tax benefits
  
 
287
 
      200  
Non-U.S.
operations
  
 
606
 
      737  
Net operating losses
  
 
681
 
      510  
Occupancy-related
  
 
151
 
      138  
Other comprehensive income/(loss)-related
  
 
593
 
      282  
Tax credits carryforward
  
 
43
 
      34  
Operating lease liabilities
  
 
624
 
      618  
Allowance for credit losses
  
 
1,081
 
      1,054  
Other, net
  
 
271
 
      333  
Subtotal
  
 
6,315
 
      5,515  
Valuation allowance
  
 
(895
) 
      (551 ) 
Total deferred tax assets
  
 
$5,420
 
      $4,964  
 
Deferred tax liabilities
                 
Depreciation and amortization
  
 
$1,225
 
      $1,153  
Unrealized gains
  
 
1,114
 
      1,120  
Operating lease
right-of-use
assets
  
 
585
 
      581  
Total deferred tax liabilities
  
 
$2,924
 
      $2,854  
The firm has recorded deferred tax assets of $681 million as of December 2021 and $510 million as of December 2020, in connection with U.S. federal, state and local and foreign net operating loss carryforwards. The firm also recorded a valuation allowance of $285 million as of December 2021 and $79 million as of December 2020, related to these net operating loss carryforwards.
As of December 2021, the U.S. federal net operating loss carryforward was $1.16 billion, the state and local net operating loss carryforward was $1.80 billion, and the foreign net operating loss carryforward was $1.31 billion. If not utilized, the U.S. federal, the state and local, and foreign net operating loss carryforwards will begin to expire in 2022. If these carryforwards expire, they will not have a material impact on the firm’s results of operations. As of December 2021, the firm has recorded deferred tax assets of $32 million in connection with general business credit carryforwards and $11 million in connection with state and local tax credit carryforwards. If not utilized, the general business credit carryforward will begin to expire in 2022 and the state and local tax credit carryforward will begin to expire in 2023. As of December 2021, the firm did not have any foreign tax credit carryforwards.
As of both December 2021 and December 2020, the firm had no U.S. capital loss carryforwards and no related net deferred income tax assets. As of December 2021, the firm had deferred tax assets of $270 million in connection with foreign capital loss carryforwards and a valuation allowance of $270 million related to these capital loss carryforwards.
The valuation allowance increased by $344 million during 2021 and increased by $84 million during 2020. The increases in both 2021 and 2020 were primarily due to an increase in deferred tax assets from which the firm does not expect to realize any benefit.
The firm permanently reinvested eligible earnings of certain foreign subsidiaries. As of both December 2021 and December 2020, all U.S. taxes were accrued on these subsidiaries’ distributable earnings.
Unrecognized Tax Benefits
The firm recognizes tax positions in the consolidated financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the consolidated financial statements.
The accrued liability for interest expense related to income tax matters and income tax penalties was $131 million as of December 2021 and $129 million as of December 2020. The firm recognized interest expense and income tax penalties of $13 million for 2021, $41 million for 2020 and $60 million for 2019. It is reasonably possible that unrecognized tax benefits could change significantly during the twelve months subsequent to December 2021 due to potential audit settlements. However, at this time it is not possible to estimate any potential change.
The table below presents the changes in the liability for unrecognized tax benefits, which is included in other liabilities.
 
    Year Ended or as of December  
       
$ in millions
  
 
2021
 
     2020       2019  
Beginning balance
  
 
$1,251
 
     $1,445       $1,051  
Increases based on current year tax positions
  
 
297
 
     164       131  
Increases based on prior years’ tax positions
  
 
95
 
     209       441  
Decreases based on prior years’ tax positions
  
 
(111
) 
     (205 )      (54 ) 
Decreases related to settlements
  
 
(80
) 
     (367 )      (125 ) 
Exchange rate fluctuations
  
 
(6
) 
     5       1  
Ending balance
  
 
$1,446
 
     $1,251       $1,445  
 
Related deferred income tax asset
  
 
287
 
     200       279  
Net unrecognized tax benefit
  
 
$1,159
 
     $1,051       $1,166  
Regulatory Tax Examinations
The firm is subject to examination by the U.S. Internal Revenue Service (IRS) and other taxing authorities in jurisdictions where the firm has significant business operations, such as the United Kingdom, Japan, Hong Kong and various states, such as New York. The tax years under examination vary by jurisdiction. The firm does not expect completion of these audits to have a material impact on the firm’s financial condition, but it may be material to operating results for a particular period, depending, in part, on the operating results for that period.
The table below presents the earliest tax years that remain subject to examination by major jurisdiction.
 
Jurisdiction
  
 
As of
December 2021
 
 
U.S. Federal
  
 
2011
 
New York State and City
  
 
2015
 
United Kingdom
  
 
2017
 
Japan
  
 
2016
 
Hong Kong
  
 
2015
 
The firm has been accepted into the Compliance Assurance Process program by the IRS for each of the tax years from 2013 through 2022. This program allows the firm to work with the IRS to identify and resolve potential U.S. Federal tax issues before the filing of tax returns. The fieldwork for tax years 2011 through 2018 has been completed and the final resolution is not expected to have a material impact on the effective tax rate. The 2019 and 2020 tax years remain subject to post-filing review. New York State and City examinations of 2015 through 2018 commenced during 2021.
All years, including and subsequent to the years in the table above, remain open to examination by the taxing authorities. The firm believes that the liability for unrecognized tax benefits it has established is adequate in relation to the potential for additional assessments.