This Could Be the Year Bank of America Pays Income Tax

It's the time of year when spring is in the air, and the first quarter is about to close, giving us an idea of how the new year will be treating our favorite companies. As an added treat -- with April 15 just around the corner -- we also begin to hear whispers regarding what these entities paid in taxes in previous years.

For investors, this information is often less irksome than for Main Street at large, since a smaller tax bill should result in more capital to share with stockholders. This is not necessarily the case, of course, particularly with the banking sector -- which has just begun to blossom again in the wake of the Great Recession.

Taking a look at income taxes paid by big banks clearly points up the fact that those that pay the most in federal taxes also have the most income. This can be seen clearly by taking a look at Bank of America (NYSE: BAC  ) .

Tax refunds?
Since the financial crisis of 2008, the tax burden has been non-existent for B of A and Citigroup  (NYSE: C  ) , neither of which has paid federal income tax since that year. Banks and other corporations enjoy tax benefits by holding money offshore and being able to deduct their own pay, which can pave the way for tax refunds. In the case of Citi, this was because of special tax treatment for past losses, lobbied for by then-CEO Vikram Pandit. For Bank of America, it was because of its purchase of the ticking time bomb called Countrywide.

Debt is a bona-fide tax write-off, as are legal expenses. With approximately $45 billion in settlement costs under its belt since 2009, Bank of America has shouldered a heavy load -- and more suits are pending. The last quarter of 2012 entailed a lot of deck-clearing for the big guy, resulting in more losses against earnings, which came in at a mere $0.03 per share on an adjusted $20 billion in revenues, which fell by $6 billion in the year-ago quarter.

The fix: Increased earnings
Banks that make money pay taxes, evidenced by the tax bills of JPMorgan Chase (NYSE: JPM  ) and Wells Fargo (NYSE: WFC  ) . The former bank paid $7.6 billion in federal income taxes on pre-tax earnings of nearly $29 billion, and Wells forked over $9.1 billion in tax to Uncle Sam out of $28.5 billion in income.

The London Whale incident probably accounts for JPMorgan's slightly lower tax bill, but both of these banks were very active in the mortgage-writing business, which boosted earnings considerably.

CEO Brian Moynihan has addressed B of A's need to increase earnings, particularly via mortgage lending, and is currently working on bolstering that metric. If he delivers, Bank of America may currently be on its way to finally being able to pay an income tax bill next year.

While Bank of America's stock doubled in 2012, the earnings problem could stall the bank's progress. With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.

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