Income Taxes

12 Months Ended

Feb. 01, 2020

INCOME TAXES

A summary of the components of the provision/(benefit) for income taxes is as follows (in thousands):


	Fiscal Year Ended
	February 1, 2020 (52 weeks)		February 2, 2019 (52 weeks)		February 3, 2018 (53 weeks)
Federal:
Current	$	11,724	$	7,375	$	16,154
Deferred	(4,265)		339		3,257
	7,459		7,714		19,411
State:
Current	1,975		1,625		1,668
Deferred	(450)		(202)		338
	1,525		1,423		2,006
Provision for income taxes	$	8,984	$	9,137	$	21,417

A reconciliation of the statutory federal income tax rate to the effective tax rate as a percentage of income before provision for income taxes follows:


	Fiscal Year Ended
	February 1, 2020 (52 weeks)		February 2, 2019 (52 weeks)		February 3, 2018 (53 weeks)
Tax provision computed at the federal statutory rate	21.00	%	21.00	%	33.72	%
Effect of state income taxes, net of federal benefits	3.60		2.86		2.50
Enactment of the Tax Cuts and Jobs Act	—		—		1.39
Federal income tax credits	(1.99)		(1.36)		(0.32)
Executive compensation limitations	1.47		—		—
Equity compensation tax deficiencies	1.71		1.30		1.23
Other, net	(1.06)		0.53		(0.58)
	24.73	%	24.33	%	37.94	%

The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduced the federal corporate income tax rate to 21% from 35%. As of the enactment date, we remeasured our deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future (which was generally 21% for federal income tax purposes).

Deferred income taxes on the consolidated balance sheets result from temporary differences between the amount of assets and liabilities recognized for financial reporting and income tax purposes. The components of the deferred income taxes, net, are as follows (in thousands):


	February 1, 2020 (52 weeks)		February 2, 2019 (52 weeks)
Rent	$	64,753	$	6,333
Inventories	3,275		3,442
Accruals	9,435		5,080
Stock-based compensation	2,767		3,681
Other	120		328
Total deferred tax assets	80,350		18,864
Rent	(58,528)		—
Accumulated depreciation and amortization	(11,329)		(15,089)
Prepaid expenses	(1,241)		(1,420)
State taxes	(256)		(77)
Total deferred tax liabilities	(71,354)		(16,586)
Deferred income taxes, net	$	8,996	$	2,278

Deferred tax assets represent items that will be used as a tax deduction or credit in future tax returns or are items of income that have not been recognized for financial statement purposes but were included in the current or prior tax returns for which we have already properly recorded the tax benefit in the consolidated statements of operations. At least quarterly, we assess the likelihood that the deferred tax assets balance will be recovered. We take into account such factors as prior earnings history, expected future earnings, carryback and carryforward periods and tax strategies that could potentially enhance the likelihood of a realization of a deferred tax asset. To the extent recovery is not more likely than not, a valuation allowance is established against the deferred tax asset, increasing our income tax expense in the year such determination is made. We have determined that no such allowance is required.

We apply the provisions of ASC Subtopic 740-10 in accounting for uncertainty in income taxes. In accordance with ASC Subtopic 740-10, we recognize a tax benefit associated with an uncertain tax position when, in our judgment based on technical merits, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. Our effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management.

We file income tax returns in the U.S. federal and various state jurisdictions. A number of years may elapse before a particular matter for which we have recorded a liability related to an unrecognized tax benefit is audited and finally resolved. Generally, we are not subject to changes in income taxes by the U.S. federal taxing jurisdiction for years prior to Fiscal 2017 or by most state taxing jurisdictions for years prior to Fiscal 2016. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized tax benefits is adequate. Favorable settlement of an unrecognized tax benefit could be recognized as a reduction in our effective tax rate in the period of resolution. Unfavorable settlement of an unrecognized tax benefit could increase the effective tax rate and may require the use of cash in the period of resolution. Our liability for unrecognized tax benefits is generally presented as non-current. However, if we anticipate paying cash within one year to settle an uncertain tax position, the liability is presented as current.

A reconciliation of the unrecognized tax benefit, excluding estimated interest and penalties, under ASC Subtopic 740-10 follows (in thousands):


	February 1, 2020 (52 weeks)		February 2, 2019 (52 weeks)		February 3, 2018 (53 weeks)
Unrecognized tax benefits - beginning of year	$	1,245	$	1,156	$	1,267
Gross increases - tax positions in prior period	—		246		140
Gross decreases - tax positions in prior period	(234)		(10)		(7)
Gross increases - tax positions in current period	—		107		70
Settlements	—		—		—
Lapse of statute of limitations	(193)		(254)		(314)
Unrecognized tax benefits - end of year	$	818	$	1,245	$	1,156

We classify interest and penalties recognized on unrecognized tax benefits as income tax expense. We have accrued interest and penalties in the amount of $0.1 million, $0.2 million and $0.1 million as of February 1, 2020, February 2, 2019 and February 3, 2018, respectively. During Fiscal 2020, Fiscal 2019 and Fiscal 2018, we recorded $(19,000), $18,000 and $4,000, respectively, for the accrual of interest and penalties in the consolidated statement of operations.

Of the unrecognized tax benefits as of February 1, 2020, February 2, 2019 and February 3, 2018, $0.6 million, $1.0 million and $1.0 million, respectively, if recognized, would affect our effective income tax rate.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted on March 27, 2020. The CARES Act includes, among other things, refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical amendments regarding the income tax depreciation of qualified improvement property placed in service after December 31, 2017. These amendments allow for retroactive accelerated income tax depreciation on certain of our leasehold improvement assets. We are currently assessing the financial impact of these technical amendments on our business, which could be significant.