Income taxes

12 Months Ended

Jan. 31, 2020

Income taxes

Income taxes

3.Income taxes

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

(In thousands)	2019		2018		2017
Current:
Federal	$	368,451	$	320,361	$	426,933
Foreign		102		159		105
State		65,215		53,091		79,011
		433,768		373,611		506,049
Deferred:
Federal		45,966		48,262		(159,728)
Foreign		(15)		(38)		(22)
State		9,456		4,109		22,021
		55,407		52,333		(137,729)
	$	489,175	$	425,944	$	368,320

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)	2019				2018				2017
U.S. federal statutory rate on earnings before income taxes	$	462,364	21.0	%	$	423,237	21.0	%	$	643,326	33.7	%
Impact of federal tax rate changes		—	—			(12,222)	(0.6)			(310,756)	(16.3)
State income taxes, net of federal income tax benefit		60,936	2.8			44,584	2.2			61,201	3.2
Jobs credits, net of federal income taxes		(27,768)	(1.3)			(27,506)	(1.4)			(26,759)	(1.4)
Increase (decrease) in valuation allowances, net of federal taxes		(356)	(0.0)			—	—			4,435	0.2
Stock-based compensation programs		(6,177)	(0.3)			(3,682)	(0.2)			(2,227)	(0.1)
Increase (decrease) in income tax reserves		(513)	(0.0)			3,952	0.2			(1,837)	(0.1)
Other, net		689	0.0			(2,419)	(0.1)			937	0.1
	$	489,175	22.2	%	$	425,944	21.1	%	$	368,320	19.3	%

The effective income tax rate for 2019 was 22.2% compared to a rate of 21.1% for 2018 which represents a net increase of 1.1 percentage points. The effective income tax rate was higher in 2019 primarily due to an increase in income taxes resulting from changes in state income tax laws and a federal income tax benefit arising from the Tax Cuts and Jobs Act (the “TCJA”) in 2018 that did not reoccur in 2019.

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.

On December 22, 2017, the TCJA was signed into law. Among other changes, the TCJA reduced the federal corporate tax rate to 21% from 35% effective January 1, 2018, including a reduction in the Company’s 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 TCJA.

The Company’s 2017 provision for income taxes reflected an estimate due to the changes in the federal income tax law arising from the TCJA. The provisional tax benefit consisted of $310.8 million related to the one-time remeasurement of the federal portion of our 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. Subsequent to the signing of the TCJA, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which allowed companies to record provisional amounts during a measurement period not to extend beyond one year after the enactment date while the accounting impact is still under analysis. In 2018, the Company concluded its analysis of the accounting impact of the TCJA pursuant to SAB 118 and recorded immaterial adjustments related to its 2017 provision for income taxes.

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:

	January 31,		February 1,
(In thousands)	2020		2019
Deferred tax assets:
Deferred compensation expense	$	7,556	$	6,490
Accrued expenses		16,788		3,278
Accrued rent		401		22,668
Operating lease liabilities		2,167,780		—
Accrued insurance		5,895		6,869
Accrued incentive compensation		16,721		15,219
Share based compensation		16,321		15,713
Interest rate hedges		1,076		1,421
Tax benefit of income tax and interest reserves related to uncertain tax positions		164		472
Deferred gain on sale-leaseback		—		11,649
Other		3,702		3,942
State tax net operating loss carry forwards, net of federal tax		555		598
State tax credit carry forwards, net of federal tax		7,534		8,245
		2,244,493		96,564
Less valuation allowances, net of federal income taxes		(4,077)		(4,433)
Total deferred tax assets		2,240,416		92,131
Deferred tax liabilities:
Property and equipment		(389,080)		(322,575)
Operating lease assets		(2,143,996)		—
Inventories		(59,075)		(56,221)
Trademarks		(310,862)		(308,793)
Prepaid insurance		(11,933)		(12,639)
Other		(697)		(1,590)
Total deferred tax liabilities		(2,915,643)		(701,818)
Net deferred tax liabilities	$	(675,227)	$	(609,687)

In the year ended January 31, 2020, the Company recorded a deferred tax asset related to its operating lease liabilities and a deferred tax liability related to its operating lease assets pursuant to the adoption of a new lease accounting standard as described in Note 1 above.

The Company has state tax credit carryforwards of approximately $7.5 million (net of federal benefit) that will expire beginning in 2022 through 2028 and the Company has approximately $15.6 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 2019, the Company updated its projections, releasing $0.4 million of valuation allowance (net of federal benefit), but management continues to believe that results from operations will not generate sufficient taxable income to realize the remaining state tax credits before they expire.

Management believes that it is more likely than not that the Company’s results of operations and its existing deferred tax liabilities will generate sufficient taxable income to realize the remaining deferred tax assets.

The Company’s 2015 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 2016 through 2018 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 2016 and later tax years remain open for examination by the various state taxing authorities.

As of January 31, 2020, accruals for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $5.1 million, $0.4 million and $0.0 million, respectively, for a total of $5.5 million. 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. These totals are reflected in noncurrent Other liabilities in the consolidated balance sheets.

The Company’s reserve for uncertain tax positions is not expected to be reduced in the coming twelve months as a result of expiring statutes of limitations. As of January 31, 2020 and February 1, 2019, approximately $5.1 million and $5.0 million, respectively, 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)	2019		2018		2017
Income tax expense (benefit)	$	130	$	3,919	$	(2,076)
Income tax related interest expense (benefit)		(406)		133		(123)
Income tax related penalty expense (benefit)		(882)		33		(9)

A reconciliation of the uncertain income tax positions from February 4, 2017 through January 31, 2020 is as follows:

(In thousands)	2019		2018		2017
Beginning balance	$	4,960	$	1,041	$	3,117
Increases—tax positions taken in the current year		—		95		66
Increases—tax positions taken in prior years		1,239		3,914		27
Decreases—tax positions taken in prior years		(1,109)		—		—
Statute expirations		—		—		(2,169)
Settlements		—		(90)		—
Ending balance	$	5,090	$	4,960	$	1,041