Note 14. Income Taxes

Our operating results have been included in the consolidated U.S. federal and state income tax returns of Barnes & Noble for all periods ending on or before the consummation of the Spin-Off on August 2, 2015. Amounts presented in these consolidated financial statements related to income taxes have been determined on a separate tax return basis as it relates to those periods. Amounts presented in these consolidated financial statements related to income taxes for periods ending after the consummation of the Spin-Off are presented on a consolidated basis as we became a separate consolidated entity.

For Fiscal 2018, Fiscal 2017 and Fiscal 2016, we had no material revenue or expense in jurisdictions outside the United States.

Impact of U.S. Tax Reform

The Tax Cuts and Jobs Act (the "Tax Legislation") was enacted on December 22, 2017. The Tax Legislation reduces the U.S. federal corporate tax rate from 35% to 21% and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, among other provisions. As of April 28, 2018, we had not completed the accounting for the tax effects of enactment of the Act; however, as described below, we have made a reasonable estimate of the effects on existing deferred tax balances and the one-time transition tax in accordance with SAB 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (SAB 118). These amounts are provisional and subject to change within the measurement period proscribed by SAB 118 which is not to extend beyond one year from the enactment date. The most significant impact of the legislation for the Company was a $20,425 reduction of the value of our net deferred (which represents future tax liabilities) and long-term tax liabilities as a result of lowering the U.S. corporate income tax rate from 35% to 21%. We have provisionally recorded a liability associated with the one-time transition tax, however, such amount is not material.

Income tax (benefits) provisions for Fiscal 2018, Fiscal 2017 and Fiscal 2016 are as follows:



	Fiscal 2018			Fiscal 2017			Fiscal 2016
Current:
Federal ^(a)	$	(8,089	)	$	14,872		$	13,019
State	2,410			1,819			1,783
Total current	(5,679		)	16,691			14,802
Deferred:
Federal ^(a)	(13,250		)	(9,238		)	(9,922		)
State	(1,514		)	(2,723		)	(2,213		)
Total deferred	(14,764		)	(11,961		)	(12,135		)
Total	$	(20,443	)	$	4,730		$	2,667


(a)	Income tax benefit caused largely by the revaluation due to the change in the U.S. corporate income tax rate from 35% to 21% as described above.

Reconciliation between the effective income tax rate and the federal statutory income tax rate is as follows:



	Fiscal 2018		Fiscal 2017		Fiscal 2016
Federal statutory income tax rate ^(a)	34.1	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	(0.3	)	(5.8	)	(15.2	)
Valuation allowances	—		—		50.6
Permanent book / tax differences	(0.7	)	25.5		31.1
Goodwill impairment	(34.2	)	—		—
Provisional remeasurement due to Tax Legislation	7.5		—		—
Credits	0.2		(5.5	)	(5.4	)
Other, net	0.9		(2.3	)	0.8
Effective income tax rate	7.5	%	46.9	%	96.9	%


(a)	Due to the Tax Legislation, we applied a U.S. statutory federal income tax rate of 33.9% for earnings between April 30, 2017 and January 27, 2018, and 21% for earnings between January 28, 2018 and April 28, 2018. The result is an effective statutory rate of 34.1%.

The effective tax rate for Fiscal 2018 is significantly lower as compared to the comparable prior year periods due to the tax benefit of Tax Legislation, which lowered the U.S. statutory tax rate from 35% to 21% effective January 1, 2018. The combined benefit of our pre-tax book loss, plus the reduced U.S. income tax rate was partially offset by permanent differences, which includes the nondeductible portion of the goodwill impairment.

As expected, nondeductible compensation expense for Fiscal 2018 was significantly lower compared to the prior fiscal year as components of our executive compensation program qualified as deductible under Section 162(m) of the Internal Revenue Code. In addition, our income tax provision for the preceding two fiscal years reflected certain non-recurring tax benefits arising from the Spin-Off. These benefits did not impact the current fiscal year and the Company does not expect any similar non-recurring tax benefits associated with the Spin-Off to impact our effective tax rate in future fiscal years and nondeductible compensation expense may increase because of changes to Section 162(m) of the Internal Revenue Code.

One percentage point on our Fiscal 2018 effective tax rate is approximately $2,700. The permanent book / tax differences are principally comprised of non-deductible compensation, non-deductible meals and entertainment costs, and federal income tax credits.

In March 2016, the FASB issued ASU No. 2016-09 to provide guidance that changed the accounting for certain aspects of share-based payments to employees. The guidance required, among other things, the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. We early adopted this standard during the fourth quarter of Fiscal 2016 as permitted. Prior to Fiscal 2016, we had no windfall benefits. There was no material impact upon adoption of this guidance since the recognition of income tax effects of awards was not materially different than amounts that had previously been recorded in our financial statements.

We account for income taxes using the asset and liability method. Deferred taxes are recorded based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards.

The significant components of our deferred taxes consisted of the following:



	As of
	April 28, 2018			April 29, 2017
Deferred tax assets:
Estimated accrued liabilities	$	9,375		$	13,047
Inventory	8,256			16,969
Stock-based compensation	1,374			1,780
Insurance liability	474			881
Lease transactions	1,095			1,826
Property and equipment	2,803			8,728
Tax credits	220			206
Goodwill	9,105			—
Net operating losses	5,834			4,916
Other	4,356			5,106
Gross deferred tax assets	42,892			53,459
Valuation allowance	(932		)	(1,392		)
Net deferred tax assets	41,960			52,067
Deferred tax liabilities:
Intangible asset amortization	(44,066		)	(68,938		)
Gross deferred tax liabilities	(44,066		)	(68,938		)
Net deferred tax liabilities	$	(2,106	)	$	(16,871	)

As of April 28, 2018, we had $97 of unrecognized tax benefits, all of which, if recognized, would affect our effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



Balance at May 2, 2015	$	215
Additions for tax positions of the current period	21
Additions for tax positions of prior periods	—
Reductions due to settlements	—
Other reductions for tax positions of prior periods	(215		)
Balance at April 30, 2016	$	21
Additions for tax positions of the current period	40
Additions for tax positions of prior periods	25
Reductions due to settlements	—
Other reductions for tax positions of prior periods	—
Balance at April 29, 2017	$	86
Additions for tax positions of the current period	25
Additions for tax positions of prior periods	2
Reductions due to settlements	—
Other reductions for tax positions of prior periods	(16		)
Balance at April 28, 2018	$	97

We do not believe that it is reasonably possible that these unrecognized tax benefits will decrease in the next twelve months.

Our policy is to recognize interest and penalties related to income tax matters in income tax expense. As of April 28, 2018 and April 29, 2017, we had accrued $5 and $3, respectively, for net interest and penalties. The change in the amount accrued for net interest and penalties includes $2 in additions for net interest and penalties recognized in income tax expense in our Fiscal 2018 consolidated statement of operations.

In assessing the realizability of the deferred tax assets, management considered whether it is more likely than not that some or all of the deferred tax assets would be realized. In evaluating the Company’s ability to utilize its deferred tax assets, it considered all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis. The Company has recorded a valuation allowance of $932 and $1,392 for April 28, 2018 and April 29, 2017, respectively. The decrease in the valuation allowance during Fiscal 2018 is due to the reduction of the U.S. income tax rate.

At April 28, 2018, and based on its tax year ended January 2018, the Company had state net operating loss carryforwards (NOLs) of approximately $99,604 that are available to offset taxable income in its respective taxing jurisdiction beginning in the current period and that expire beginning in 2030. The Company had net state tax credit carryforwards totaling $278, which expire beginning in 2021.

As of April 28, 2018, the Company has recorded $200 of foreign withholding tax related to repatriations of earnings from certain foreign subsidiaries. If additional earnings in these foreign subsidiaries were repatriated in the future, additional income and withholding tax expense would be incurred. Additional income and withholding tax expense on any future repatriated earnings is estimated to be less than $100.

We are subject to U.S. federal income tax as well as income tax in jurisdictions of each state having an income tax. The tax years that remain subject to examination are primarily from Fiscal 2013 and forward. Some earlier years remain open for a small minority of states. Pursuant to the Tax Matters Agreements referenced in Part I - Item 1. Business and Part II - Item 8. Financial Statements and Supplementary Data - Note 10. Barnes & Noble, Inc. Transactions, we retain income tax liability for periods prior to the Spin-Off only for returns filed on a stand-alone basis.