3. Income taxes

The provision (benefit) for income taxes consists of the following:


(In thousands)	2018		2017		2016
Current:
Federal	$	320,361	$	426,933	$	613,009
Foreign		159		105		135
State		53,091		79,011		88,990
		373,611		506,049		702,134
Deferred:
Federal		48,262		(159,728)		11,053
Foreign		(38)		(22)		—
State		4,109		22,021		1,308
		52,333		(137,729)		12,361
	$	425,944	$	368,320	$	714,495

A reconciliation between actual income taxes and amounts computed by applying the federal statutory rate to income before income taxes is summarized as follows:


(Dollars in thousands)	2018				2017				2016
U.S. federal statutory rate on earnings before income taxes	$	423,237	21.0	%	$	643,326	33.7	%	$	687,969	35.0	%
Impact of tax rate changes		(12,222)	(0.6)			(310,756)	(16.3)			—	—
State income taxes, net of federal income tax benefit		44,584	2.2			61,201	3.2			60,168	3.1
Jobs credits, net of federal income taxes		(27,506)	(1.4)			(26,759)	(1.4)			(18,952)	(1.0)
Increase (decrease) in valuation allowances, net of federal taxes		—	—			4,435	0.2			(1,474)	(0.1)
Stock-based compensation programs		(3,682)	(0.2)			(2,227)	(0.1)			(9,915)	(0.5)
Increase (decrease) in income tax reserves		3,952	0.2			(1,837)	(0.1)			(2,161)	(0.1)
Other, net		(2,419)	(0.1)			937	0.1			(1,140)	(0.1)
	$	425,944	21.1	%	$	368,320	19.3	%	$	714,495	36.3	%

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among other changes, the Act reduces the federal corporate tax rate to 21% from 35% effective January 1, 2018, including a reduction in the Company’s current year federal corporate tax rate for 2017 to 33.7% as a result of the Company’s 2017 fiscal year ending approximately one month after the effective date of the Act.

Under accounting standards for income taxes, the impact of new tax legislation must be taken into account in the period in which the new legislation is enacted, including the remeasurement of deferred tax assets and liabilities at the tax rates that such items are expected to reverse in future periods. Subsequent to the Act, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), allowing companies to record provisional amounts during a measurement period not to exceed one year after the enactment date while the accounting impact remains under analysis. The Company’s 2017 provision for income taxes reflected such estimates due to the changes in income tax law, including a provisional tax benefit of $335 million. The provisional tax benefit consisted of $310.8 million related to the one-time remeasurement of the federal portion of the Company’s deferred tax assets and liabilities at the 21% rate and $24.2 million related to the reduced statutory tax rate of 33.7%, compared to 35% in prior years. The Company concluded its analysis of the accounting impact of the Act pursuant to SAB 118 and recorded immaterial adjustments related to its 2017 provision for income taxes in 2018.

The effective income tax rate for 2018 was 21.1% compared to a rate of 19.3% for 2017 which represents a net increase of 1.8 percentage points. The effective income tax rate was higher in 2018 primarily due to the one-time remeasurement of the deferred tax assets and liabilities at 21% in 2017, which was offset by the reduction in the current federal tax rate from 33.7% in 2017 to 21% in 2018.

The effective income tax rate for 2017 was 19.3% compared to a rate of 36.3% for 2016 which represents a net decrease of 17 percentage points. The effective income tax rate was lower in 2017 primarily due to the one-time remeasurement of the federal portion of the Company’s deferred tax assets and liabilities at 21%, and the changes in the federal income tax laws pursuant to the Act that lowered the Company’s federal statutory tax rate to 33.7% for 2017, compared to 35% in 2016.

The 2016 effective tax rate was an expense of 36.3%. This expense was greater than the federal statutory tax rate of 35% due primarily to the inclusion of state income taxes in the total effective tax rate. The effective income tax rate was lower in 2016 as compared to 2015 due principally to the adoption of a change in accounting guidance related to employee share-based payments, requiring the recognition of excess tax benefits in the statement of income rather than in the balance sheet, as reported in prior years.

Deferred taxes reflect the effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:


	February 1,		February 2,
(In thousands)	2019		2018
Deferred tax assets:
Deferred compensation expense	$	6,490	$	6,522
Accrued expenses		3,278		3,324
Accrued rent		22,668		23,418
Accrued insurance		6,869		8,630
Accrued incentive compensation		15,219		6,394
Share based compensation		15,713		13,442
Interest rate hedges		1,421		1,765
Tax benefit of income tax and interest reserves related to uncertain tax positions		472		365
Deferred gain on sale-leaseback		11,649		12,847
Other		3,942		3,900
State tax net operating loss carry forwards, net of federal tax		598		602
State tax credit carry forwards, net of federal tax		8,245		8,350
		96,564		89,559
Less valuation allowances, net of federal income taxes		(4,433)		(4,435)
Total deferred tax assets		92,131		85,124
Deferred tax liabilities:
Property and equipment		(322,575)		(255,215)
Inventories		(56,221)		(46,244)
Trademarks		(308,793)		(269,820)
Prepaid insurance		(12,639)		(22,875)
Other		(1,590)		(6,672)
Total deferred tax liabilities		(701,818)		(600,826)
Net deferred tax liabilities	$	(609,687)	$	(515,702)

The Company has state tax credit carryforwards of approximately $8.2 million that will expire beginning in 2022 through 2028 and the Company has approximately $17.2 million of state apportioned net operating loss carryforwards, which will begin to expire in 2033 and will continue through 2039.

The Company established a valuation allowance for the state tax credit carryforwards, in the amount of $4.4 million (net of federal benefit) increasing income tax expense in 2017. In 2018, management continues to believe that results from operations will not generate sufficient taxable income to realize certain state tax credits before they expire. In 2016, the Company reversed all of the previously recorded valuation allowance for state tax credit carryforwards in the amount of $1.5 million, which was recorded as a reduction in income tax expense.

Based upon expected future income, management believes that it is more likely than not that the results of operations will generate sufficient taxable income to realize the remaining deferred tax assets.

The Company’s 2014 and earlier tax years are not open for further examination by the Internal Revenue Service (“IRS”). The IRS, at its discretion, may choose to examine the Company’s 2015 through 2017 fiscal year income tax filings. The Company has various state income tax examinations that are currently in progress. Generally, with few exceptions, the Company’s 2015 and later tax years remain open for examination by the various state taxing authorities.

As of February 1, 2019, accruals for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $5.0 million, $0.8 million and $0.9 million, respectively, for a total of $6.7 million. This total amount is reflected in noncurrent Other liabilities in the consolidated balance sheet.

As of February 2, 2018, accruals for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $1.0 million, $0.7 million and $0.8 million, respectively, for a total of $2.5 million. This total amount is reflected in noncurrent Other liabilities in the consolidated balance sheet.

The Company’s reserve for uncertain tax positions will not be reduced in the coming twelve months as a result of expiring statutes of limitations. As of February 1, 2019, approximately $5.0 million of the uncertain tax positions would impact the Company’s effective income tax rate if the Company were to recognize the tax benefit for these positions.

The amounts associated with uncertain tax positions included in income tax expense consists of the following:


(In thousands)	2018		2017		2016
Income tax expense (benefit)	$	3,919	$	(2,076)	$	(3,795)
Income tax related interest expense (benefit)		133		(123)		(31)
Income tax related penalty expense (benefit)		33		(9)		50

A reconciliation of the uncertain income tax positions from January 29, 2016 through February 1, 2019 is as follows:


(In thousands)	2018		2017		2016
Beginning balance	$	1,041	$	3,117	$	6,964
Increases—tax positions taken in the current year		95		66		41
Increases—tax positions taken in prior years		3,914		27		52
Decreases—tax positions taken in prior years		—		—		(1,435)
Statute expirations		—		(2,169)		(2,453)
Settlements		(90)		—		(52)
Ending balance	$	4,960	$	1,041	$	3,117