Taxes on Earnings

12 Months Ended

Feb. 01, 2020

The provision for income taxes consisted of the following:


($000)	2019		2018		2017
Current
Federal	$	414,823	$	357,170	$	660,017
State	56,528		74,472		52,853
	471,351		431,642		712,870
Deferred
Federal	28,244		33,913		(40,468)
State	3,765		(2,136)		5,565
	32,009		31,777		(34,903)
Total	$	503,360	$	463,419	$	677,967

The provision for taxes for financial reporting purposes is different from the tax provision computed by applying the statutory federal income tax rate. The differences are reconciled below:


	2019		2018		2017
Federal income taxes at the statutory rate	21	%	21	%	34	%
State income taxes (net of federal benefit) and other, net	2		3		2
Tax audit settlements	—		(1)		—
Impact of the Tax Act on deferred taxes	—		—		(3)
Total	23	%	23	%	33	%

In November 2019, the Company resolved uncertain tax positions with a state tax authority. As a result, the Company recognized a tax benefit of approximately $10.0 million in the Consolidated Statement of Earnings. In fiscal 2018, the Company resolved uncertain tax positions related to fiscal 2015 with the Internal Revenue Service. As a result, the Company recognized a tax benefit of approximately $26.0 million in the Consolidated Statement of Earnings.

In fiscal 2017, The Tax Cuts and Jobs Act (the “Tax Act” or "tax reform") was signed into law. The Tax Act made significant changes to U.S. corporate taxation including reducing the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018, the last month of fiscal 2017. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. The Company applied a blended U.S. federal income tax rate of approximately 34% for fiscal 2017. This reduced tax rate resulted in a tax benefit of $24.9 million in fiscal 2017. The Company recorded an additional tax benefit of $55.2 million due to the remeasurement of its deferred tax assets and liabilities in fiscal 2017.

Also, in fiscal 2017, the Company adopted ASU 2016-09. Prior to adoption of ASU 2016-09, the Company recorded tax benefits related to employee equity programs in additional paid-in capital. As a result of adopting ASU 2016-09, the Company recorded tax benefits of $13.3 million, $12.6 million and $16.3 million in 2019, 2018 and 2017, respectively, as a reduction to its provision for income taxes.

The components of deferred taxes at February 1, 2020 and February 2, 2019 are as follows:


($000)	2019			2018
Deferred Tax Assets
Accrued liabilities	$	35,242		$	38,367
Deferred compensation	33,108			30,886
Stock-based compensation	35,290			36,118
Deferred rent	—			19,824
State taxes and credits	20,178			20,310
Employee benefits	18,425			18,845
Operating lease liabilities	797,467		¹	—
Other	3,353			1,412
Gross Deferred Tax Assets	943,063			165,762
Less: Valuation allowance	(4,590)			(4,639)
Deferred Tax Assets	938,473			161,123

Deferred Tax Liabilities
Depreciation	(273,255)			(238,631)
Merchandise inventory	(26,376)			(25,686)
Supplies	(10,972)			(10,308)
Operating lease assets	(766,874)		¹	—
Other	(10,675)			(10,806)
Deferred Tax Liabilities	(1,088,152)			(285,431)
Net Deferred Tax Liabilities	$	(149,679)		$	(124,308)

¹Fiscal 2019 reflects the impact of adoption of ASU 2016-02, Leases (ASC 842) on a modified retrospective basis; fiscal 2018 was not restated.

At the end of fiscal 2019 and 2018, the Company’s state tax credit carryforwards for income tax purposes were approximately $12.8 million and $13.6 million, respectively. The state tax credit carryforwards will begin to expire in fiscal 2020. The Company has provided a valuation allowance of $4.6 million as of the end of fiscal 2019 for deferred tax assets related to state tax credits that are not expected to be realized.

The changes in amounts of unrecognized tax benefits (gross of federal tax benefits and excluding interest and penalties) at fiscal 2019, 2018, and 2017 are as follows:


($000)	2019		2018		2017
Unrecognized tax benefits - beginning of year	$	65,787	$	98,666	$	81,122
Gross increases:
Tax positions in current period	13,864		14,722		26,837
Tax positions in prior period	2,672		1,843		—
Gross decreases:
Tax positions in prior periods	(9,559)		(40,600)		(2,755)
Lapse of statutes of limitations	(8,653)		(8,584)		(6,068)
Settlements	(4,224)		(260)		(470)
Unrecognized tax benefits - end of year	$	59,887	$	65,787	$	98,666

At the end of fiscal 2019, 2018, and 2017, the reserves for unrecognized tax benefits were $67.1 million, $78.8 million, and $121.3 million inclusive of $7.2 million, $13.0 million, and $22.6 million of related reserves for interest and penalties, respectively. In November 2019, the Company resolved uncertain tax positions with a state tax authority. As a result, the Company recognized a decrease in reserves for tax positions in prior periods of $16.2

million, inclusive of $6.6 million of related reserves for interest and penalties. In fiscal 2018, the Company resolved uncertain tax positions related to fiscal 2015 with the Internal Revenue Service. As a result, the Company recognized a decrease in reserves for tax positions in prior periods of $52.4 million, inclusive of $12.6 million of related reserves for interest and penalties. The Company accounts for interest and penalties related to unrecognized tax benefits as a part of its provision for taxes on earnings. If recognized, $53.3 million would impact the Company’s effective tax rate. The difference between the total amount of unrecognized tax benefits and the amounts that would impact the effective tax rate relates to amounts attributable to deferred tax assets and liabilities. These amounts are net of federal and state income taxes.

It is reasonably possible that certain state tax matters may be concluded or statutes of limitations may lapse during the next twelve months. Accordingly, the total amount of unrecognized tax benefits may decrease by up to $10.3 million.

The Company is open to audit by the Internal Revenue Service under the statute of limitations for fiscal years 2016 through 2019. The Company’s state income tax returns are generally open to audit under the various statutes of limitations for fiscal years 2015 through 2019. Certain state tax returns are currently under audit by various tax authorities. The Company does not expect the results of these audits to have a material impact on the consolidated financial statements.