Note 15. Income Taxes

For Fiscal 2020, Fiscal 2019, and Fiscal 2018, 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 “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income 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. In accordance with SAB 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (SAB 118), we completed our accounting for the tax effects of the enactment of the Act within the provisional period as of April 27, 2019. We recorded measurement period adjustments during Fiscal 2019 to reduce our net deferred tax liability by $3,911, which primarily related to the acceleration of certain deductions as permitted by the U.S. tax code. 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%, which was recorded in Fiscal 2018. We also recorded a liability associated with the one-time transition tax, however, such amount is not material.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (The “CARES Act”) was enacted. We have analyzed the provisions, which provide for a technical correction to allow for full expensing of qualified leasehold improvements, modifications to charitable contribution and net operating loss limitations, modifications to the deductibility of business interest expense, as well as Alternative Minimum Tax ("AMT") credit acceleration. The technical correction for qualified leasehold improvements allows us to accelerate deductions for assets placed in service in prior years, but the CARES Act is not otherwise expected to have a material impact on our income tax provision for Fiscal 2020.

Income tax benefits for Fiscal 2020, Fiscal 2019 and Fiscal 2018 are as follows:



	Fiscal 2020			Fiscal 2019			Fiscal 2018
Current:
Federal ^(a)	$	(5,471	)	$	(6,494	)	$	(8,089	)
State	(1,127		)	(2,035		)	2,410
Total Current	(6,598		)	(8,529		)	(5,679		)
Deferred:
Federal ^(a)	(4,086		)	(3,681		)	(13,250		)
State	(1,294		)	(850		)	(1,514		)
Total Deferred	(5,380		)	(4,531		)	(14,764		)
Total	$	(11,978	)	$	(13,060	)	$	(20,443	)


(a)	For Fiscal 2018, the income tax benefit was 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 2020		Fiscal 2019		Fiscal 2018
Federal statutory income tax rate ^(a)	21.0	%	21.0	%	34.1	%
State income taxes, net of federal income tax benefit	3.7		6.3		(0.3	)
Permanent book / tax differences	(2.9	)	(3.9	)	(0.7	)
Goodwill impairment	—		—		(34.2	)
Provisional remeasurement due to Tax Legislation	—		10.4		7.5
Credits	0.5		0.3		0.2
Other, net	1.5		0.8		0.9
Effective income tax rate	23.8	%	34.9	%	7.5	%


(a)	Due to the Act, 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% for Fiscal 2018.

The effective tax rate for Fiscal 2020 is significantly lower as compared to the comparable prior year period due to various permanent differences and the impact of the Act recorded in Fiscal 2019.

One percentage point on our Fiscal 2020 effective tax rate is approximately $502. The permanent book / tax differences are principally comprised of non-deductible compensation, non-deductible meals and entertainment costs, and federal income tax credits.

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
	5/2/2020			4/27/2019
Deferred tax assets:
Estimated accrued liabilities	$	11,046		$	10,972
Inventory	7,167			2,969
Stock-based compensation	1,511			1,738
Insurance liability	528			518
Operating lease liabilities	65,334			982
Tax credits	484			402
Goodwill	18,438			19,903
Net operating losses	4,992			4,928
Other	8,853			8,253
Gross deferred tax assets	118,353			50,665
Valuation allowance	(1,231		)	(1,194		)
Net deferred tax assets	117,122			49,471
Deferred tax liabilities:
Intangible asset amortization	(37,864		)	(40,790		)
Operating lease right-of-use assets	(64,695		)	—
Property and equipment	(6,758		)	(6,256		)
Gross deferred tax liabilities	(109,317		)	(47,046		)
Net deferred tax asset	$	7,805		$	2,425

As of May 2, 2020, we had $52 of unrecognized tax benefits, all of which, if recognized, would affect our effective tax rate. We do not believe that it is reasonably possible that these unrecognized tax benefits will decrease in the next twelve months. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



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
Additions for tax positions of the current period	—
Additions for tax positions of prior periods	—
Reductions due to settlements	—
Other reductions for tax positions of prior periods	(6		)
Balance at April 27, 2019	$	91
Additions for tax positions of the current period	—
Additions for tax positions of prior periods	—
Reductions due to settlements	—
Other reductions for tax positions of prior periods	(39		)
Balance at May 2, 2020	$	52

Our policy is to recognize interest and penalties related to income tax matters in income tax expense. As of May 2, 2020 and April 27, 2019, we had accrued $3 and $4, respectively, for net interest and penalties. The change in the amount accrued for net interest and penalties includes $1 in reductions for net interest and penalties recognized in income tax expense in our Fiscal 2020 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 our ability to utilize our deferred tax assets, we considered all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis. We have recorded a valuation allowance of $1,231 and $1,194 for May 2, 2020 and April 27, 2019, respectively.

As of May 2, 2020, and based on our tax year ended January 2020, we had state net operating loss carryforwards (“NOLs”) of approximately $83,999 that are available to offset taxable income in our respective taxing jurisdiction beginning in the current period and that expire beginning in 2030. We had net state tax credit carryforwards totaling $612, which expire beginning in 2021.

As of May 2, 2020, we 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 Fiscal 2014 and forward. Some earlier years remain open for a small minority of states. We retain an income tax liability for periods prior to the Spin-Off from Barnes & Noble, Inc. only for returns filed on a stand-alone basis.