INCOME TAXES

On December 22, 2017, the U.S. government enacted the Tax Act, making broad and complex changes to the U.S. tax code that affect our current fiscal year, including, but not limited to, (1) reducing the U.S. federal corporate tax rate, (2) creating a new limitation on deductible interest expense and (3) changing rules related to uses and limitations of net operating losses generated in tax years ending after December 31, 2017.

The Tax Act reduced the federal corporate tax rate from 35.0% to 21.0% effective January 1, 2018. In accordance with Section 15 of the Internal Revenue Code, we have utilized a blended rate of 33.7% for our fiscal 2017 tax year, by applying a prorated percentage of the number of days prior to and after the January 1, 2018 effective date. The Act required the remeasurement of the deferred tax assets at enactment date resulting in an adjustment of $0.3 million to our income tax expense.

Existing accounting guidance required remeasurement for amounts recorded through accumulated other comprehensive income to run through tax expense. This impact is commonly referred to as the “stranded tax effect”. In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to address concerns regarding the “stranded tax effect”. ASU 2018-02 provides entities an election to reclassify the difference between the new and old corporate tax rates resulting from the Tax Act between retained earnings and accumulated other comprehensive income for fiscal years beginning after December 15, 2018, with early adoption permitted. We made an election under ASU 2018-02 to reclassify the income tax rate change effects on items originally recorded in accumulated other comprehensive income to retained earnings in the amount of $1.2 million. Currently, only changes to the minimum pension liability are recorded into accumulated other comprehensive income. The amount of the reclassification was determined based on the amount of the federal tax rate change on the deferred tax liability remaining in accumulated other comprehensive income including the federal tax effect on future state tax benefits at the enactment date. Our current accounting policy related to releasing tax effects from accumulated other comprehensive income for minimum pension liability is on a plan approach.

On December 22, 2017, the SEC issued SAB 118, which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for entities to complete the accounting under ASC 740. In accordance with SAB 118, an entity must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that an entity’s accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. If an entity cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 based on the provision of the tax laws that were in effect immediately before the enactment of the Tax Act. Our accounting for the impact of the reduction in U.S. federal corporate rate is complete.

We record valuation allowances when it is more-likely-than-not that some portion or all of our deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the appropriate taxing jurisdictions in the future. If we do not meet our expectations with respect to taxable income, we may not realize the full benefit from our deferred tax assets which would require us to record a valuation allowance in our tax provision in future years. Management assesses all available positive and negative evidence to estimate our ability to generate sufficient future taxable income of the appropriate character, and in the appropriate taxing jurisdictions, to permit use of our existing deferred tax assets. In determining the need for valuation allowances, we have considered and made judgments and estimates regarding estimated future taxable income and ongoing prudent and feasible tax planning strategies. These estimates and judgments include some degree of uncertainty and changes in these estimates and assumptions could require us to adjust the valuation allowances for our deferred tax assets. The ultimate realization of the deferred tax assets depends on the generation of sufficient taxable income in the applicable taxing jurisdictions

We believe that the reversal of existing deferred tax liabilities will create taxable income that will allow us to recognize an equal amount of tax assets. In the current year, we have recorded a valuation allowance against net tax assets of $6.1 million. We also generated federal and state net operating losses estimated at $21.0 million which are included in deferred tax assets. Under the Tax Act, the federal losses generated in tax years ending after December 31, 2017, can be carried forward indefinitely; states are still considering conformity with the new law.

As of February 3, 2018, we had no unrecognized tax benefits. We file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. We recognize penalty and interest accrued related to unrecognized tax benefits, if any, as an income tax expense. We are subject to U.S. federal income tax examinations by tax authorities for 2014 forward. We are also subject to audit by the taxing authorities of 38 states for years generally after 2013 and 3 additional states relating to the Gordmans Acquisition beginning in 2017. The outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with our expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs.

All of our operations are domestic. Income tax (benefit) expense consisted of the following (in thousands):



	Fiscal Year
	2017			2016			2015
Federal income tax (benefit) expense:
Current	$	(12,216	)	$	(5,234	)	$	3,380
Deferred	428			(19,052		)	(2,156		)
	(11,788		)	(24,286		)	1,224
State income tax (benefit) expense:
Current	193			292			765
Deferred	(1,473		)	(1,172		)	(174		)
	(1,280		)	(880		)	591
Total income tax (benefit) expense	$	(13,068	)	$	(25,166	)	$	1,815

A reconciliation between the federal income tax (benefit) expense computed at statutory tax rates and the actual income tax (benefit) expense recorded is as follows (in thousands):



	Fiscal Year
	2017			2016			2015
Federal income tax (benefit) expense at the blended statutory rate	$	(16,992	)	$	(22,072	)	$	1,958
State income taxes, net	(1,345		)	(1,084		)	332
Uncertain tax position	—			(743		)	128
Other	1,375			654			474
Tax deficiencies related to share-based payments^(a)	1,948			—			—
Tax credits	(4,386		)	(1,921		)	(1,077		)
Valuation allowance on net deferred tax assets	6,077			—			—
Tax Act	255			—			—
Total income tax (benefit) expense	$	(13,068	)	$	(25,166	)	$	1,815

^(a) We recognized tax deficiencies of $2.1 million related to share-based payments in 2017, of which $0.2 million was for state income taxes.

Deferred tax assets (liabilities) consisted of the following (in thousands):



	February 3, 2018			January 28, 2017
Gross deferred tax assets:
Net operating loss	$	6,758		$	10,184
Accrued expenses	2,203			2,893
Lease obligations	9,355			16,762
Deferred compensation	7,147			12,048
Deferred income	2,583			3,956
Other	4,650			4,434
	32,696			50,277
Gross deferred tax liabilities:
Inventory	(1,862		)	(4,706		)
Depreciation and amortization	(24,342		)	(45,703		)
	(26,204		)	(50,409		)

Valuation allowance	(6,492		)	(415		)
Net deferred tax liabilities	$	—		$	(547	)