Note 10. Income Taxes

On December 22, 2017, U.S. tax reform legislation known as the Tax Cuts and Jobs Act (the “TCJA”) was signed into law. The TCJA makes substantial changes to U.S. tax law, including a reduction in the corporate tax rate, a limitation on deductibility of interest expense, a limitation on the use of net operating losses to offset future taxable income, and the allowance of immediate expensing of capital expenditures. The Company has estimated the impact of the TCJA incorporating assumptions made based upon its current interpretation of the TCJA in accordance with SEC Staff issued Staff Accounting Bulletin No. 118 (“SAB 118”). Given the timing of the enactment of the TCJA on December 22, 2017, the SEC issued guidance under SAB 118 directing taxpayers to consider the impact of the new legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effects resulting from the change in law. The Company has recognized the provisional tax impacts related to revaluation of its deferred tax assets, and included those amounts in the consolidated financial statements for the year ended February 3, 2018. The actual impact of the TCJA may differ from the Company’s estimates due to, among other things, further refinement of its calculations, changes in interpretations and assumptions made, guidance that may be issued and actions the Company may take as a result of the TCJA. The Company expects the accounting to be completed within the one year measurement period, as allowed under SAB 118.

As a result of the enactment of the Tax Cuts and Jobs Act in the U.S., the Company recognized a net income tax benefit of $379 from the valuation allowance release associated with minimum tax credits which can be utilized and/or refunded in the future. The reduction in deferred tax assets due to the rate change from 35% to 21% of $43,655 was offset with a corresponding decrease in valuation allowance of $43,655.

The provision for income taxes consisted of the following:

	Fiscal Year
(in thousands)	2017			2016		2015
Current:
Domestic:
Federal	$	(295	)	$	—	$	(53	)
State		32			207		522
Foreign		70			75		—
Total current		(193	)		282		469
Deferred:
Domestic:
Federal		(379	)		83,323		2,994
State		—			10,121		(249	)
Total deferred		(379	)		93,444		2,745
Total provision for income taxes	$	(572	)	$	93,726	$	3,214

The sources of income (loss) before provision for income taxes are from the United States and the Company’s French branch. The Company files U.S. federal income tax returns and income tax returns in various state and local jurisdictions.

Current income taxes are the amounts payable under the respective tax laws and regulations on each year’s earnings. Deferred income tax assets and liabilities represent the tax effects of revenues, costs and expenses, which are recognized for tax purposes in different periods from those used for financial statement purposes.

A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows:

	Fiscal Year
	2017			2016			2015
Statutory federal rate		33.7	%		35.0	%		35.0	%
State taxes, net of federal benefit		(4.3	)%		5.5	%		6.5	%
Nondeductible Tax Receivable Agreement adjustment ⁽¹⁾		(47.6	)%		0.4	%		4.1	%
Valuation allowance		19.0	%		(176.8	)%		(0.5	)%
Return to provision adjustment		(0.9	)%		(0.1	)%		(2.4	)%
Impact of TCJA and other changes in tax law		(0.5	)%	—%				(3.2	)%
Rate Differential on Foreign Income		0.1	%	—%			—%
Other		(0.5	)%	—%				(0.8	)%
Total		(1.0	)%		(136.0	)%		38.7	%

⁽¹⁾

Non-deductible Tax Receivable Agreement liability revaluation due to TCJA and change in levels of projected pre-tax income. See “Tax Receivable Agreement” under Note 12 “Related Party Transactions” for additional information.

Deferred income tax assets and liabilities consisted of the following:

	February 3,			January 28,
(in thousands)	2018			2017
Deferred tax assets:
Depreciation and amortization	$	13,317		$	28,353
Employee related costs		2,001			2,361
Allowance for asset valuations		2,441			4,817
Accrued expenses		4,725			7,349
Net operating losses		71,122			83,670
Tax credits		498			812
Other		490			489
Total deferred tax assets		94,594			127,851
Less: valuation allowances		(92,590	)		(122,860	)
Net deferred tax assets		2,004			4,991
Deferred tax liabilities:
Cancellation of debt income		(1,473	)		(4,607	)
Other		(152	)		(384	)
Total deferred tax liabilities		(1,625	)		(4,991	)
Net deferred tax assets	$	379		$	—
Included in:
Prepaid expenses and other current assets	$	—		$	—
Deferred income taxes		379			—
Net deferred tax assets	$	379		$	—

Net operating losses as of February 3, 2018 presented above include prior deductions related to stock options that exceeded expenses previously recognized for financial reporting purposes. There is no excess deduction related to stock option during tax year ended February 3, 2018. Upon adoption on January 29, 2017 of ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” the Company recognized an increase of $2,350 to deferred tax assets related to net operating loss carryforwards for the excess tax benefits related to share-based compensation and also recognized an increase of an equal amount in the valuation allowance against such increase of deferred tax assets. Net operating losses as of January 28, 2017 presented above do not include prior deductions related to stock options that exceeded expenses previously recognized for financial reporting purposes in the amount of $2,350, since they did not reduce income taxes payable.

As of February 3, 2018, the Company had a net operating loss of $271,991 (federal tax effected amount of $57,118) for federal income tax purposes that may be used to reduce future federal taxable income. The net operating losses for federal income tax purposes will expire between 2030 and 2038.

As of February 3, 2018, the Company recorded a $16,353 deferred tax asset related to net operating loss carryforwards for state income tax purposes that may be used to reduce future state taxable income. The net operating loss carryforwards for state income tax purposes expire between 2022 and 2038.

As of February 3, 2018, the Company had total deferred tax assets related to net operating loss carryforwards, reduced for uncertain tax positions, of $71,122, of which $55,336 and $15,786 were attributable to federal and domestic state and local jurisdictions, respectively.

The valuation allowance for deferred tax assets was $92,590 (post tax reform) at February 3, 2018, decreasing $30,270 from the valuation allowance for deferred tax assets of $122,860 at January 28, 2017. During fiscal 2017, the Company released valuation allowances in the amount of $30,270, which consists of $44,034 impact from TCJA offset by $13,764 due to current year pre-tax loss. Adjustments to the valuation allowance are made when there is a change in management’s assessment of the amount of deferred tax assets that are realizable.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties, is as follows:

	Fiscal Year
(in thousands)	2017		2016		2015
Beginning balance	$	2,339	$	2,127	$	4,487
Increases for tax positions in current year		10		208		72
Increases for tax positions in prior years		—		4		27
Decreases for tax positions in prior years		—		—		(2,459	)
Ending balance	$	2,349	$	2,339	$	2,127

As of February 3, 2018 and January 28, 2017 , unrecognized tax benefits in the amount of $0 and $0, respectively, would impact the Company’s effective tax rate if recognized. It is reasonably possible that within the next 12 months certain temporary unrecognized tax benefits could fully reverse. Should this occur, the Company’s unrecognized tax benefits could be reduced by up to $2,349.

The Company includes accrued interest and penalties on underpayments of income taxes in its income tax provision. As of February 3, 2018 and January 28, 2017, the Company did not have any interest and penalties accrued on its Consolidated Balance Sheets and no related provision or benefit was recognized in each of the Company’s Consolidated Statements of Operations for the years ended February 3, 2018, January 28, 2017 and January 30, 2016. Interest is computed on the difference between the tax position recognized net of any unrecognized tax benefits and the amount previously taken or expected to be taken in the Company’s tax returns.

With limited exceptions, the Company is no longer subject to examination for U.S. federal and state income tax for 2007 and prior.