Income Taxes

The following is a reconciliation of the federal statutory income tax rate to income tax expense in fiscal 2019, fiscal 2018 and fiscal 2017 ($ in millions):



	2019			2018			2017
Federal income tax at the statutory rate	$	396		$	613		$	635
State income taxes, net of federal benefit	58			44			38
Benefit from foreign operations	—			(85		)	(46		)
Other	(7		)	(37		)	(18		)
Tax Act	(23		)	283			—
Income tax expense	$	424		$	818		$	609
Effective income tax rate	22.4		%	45.0		%	33.5		%

Tax Reform

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“Tax Act”), which significantly changed U.S. tax law. Among other things, the Tax Act lowered the U.S. statutory tax rate from 35% to 21% effective January 1, 2018, broadened the base to which U.S. income tax applies, imposed a one-time deemed repatriation tax on net unremitted earnings of foreign subsidiaries not previously subject to U.S. income tax and changed how foreign earnings are subject to U.S. income tax.

In response to the Tax Act, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provided guidance on accounting for the impact of the Tax Act. SAB 118 allowed companies to record provisional amounts to the extent they were reasonably estimable and adjust them over time as more information became available, not to extend beyond the measurement period of one year from the enactment of the Tax Act.

As a result of the Tax Act, our blended U.S. statutory federal income tax rate was 33.7% for fiscal 2018. In addition, we recorded provisional tax expense in fiscal 2018 of $283 million. The $283 million included a $209 million charge associated with the deemed repatriation tax and a $74 million charge related to the revaluation of deferred tax assets and liabilities to reflect the new 21.0% tax rate.

In accordance with SAB 118, we completed the accounting for the income tax effects of the Tax Act and recorded the following adjustments to the provisional tax expense during fiscal 2019: (1) a $20 million reduction to the deemed repatriation tax liability, resulting in a final tax liability of $189 million, and (2) a $3 million reduction to the revaluation of deferred tax assets and liabilities to reflect the new tax rate, resulting in a net revaluation charge of $71 million.

For periods beginning after January 1, 2018, the Tax Act created a new requirement to include certain earnings of foreign subsidiaries, known as global intangible low tax income (“GILTI”), in U.S. taxable income. Under U.S. GAAP, a company can make an accounting policy election to either recognize deferred taxes for basis differences expected to reverse as GILTI or record the tax on these earnings as a current period expense when incurred. During the fourth quarter of fiscal 2019, we elected to account for the tax effect on these earnings as a current period expense.

We previously considered substantially all the earnings in our non-U.S. subsidiaries to be indefinitely reinvested outside the U.S. and, accordingly, recorded no deferred income taxes on such earnings. Beginning in fiscal 2019, only those earnings in our non-U.S. subsidiaries needed to fund international growth and working capital are considered indefinitely reinvested and there are no deferred taxes on those earnings.

Earnings from continuing operations before income tax expense by jurisdiction were as follows in fiscal 2019, fiscal 2018 and fiscal 2017 ($ in millions):



	2019		2018		2017
United States	$	1,574	$	1,480	$	1,507
Foreign	314		337		309
Earnings from continuing operations before income tax expense	$	1,888	$	1,817	$	1,816

Income tax expense was comprised of the following in fiscal 2019, fiscal 2018 and fiscal 2017 ($ in millions):



	2019		2018		2017
Current:
Federal	$	275	$	547	$	317
State	75		59		37
Foreign	64		50		54
	414		656		408
Deferred:
Federal	4		141		163
State	—		11		21
Foreign	6		10		17
	10		162		201
Income tax expense	$	424	$	818	$	609

Deferred taxes are the result of differences between the bases of assets and liabilities for financial reporting and income tax purposes. Deferred tax assets and liabilities were comprised of the following ($ in millions):



	February 2, 2019			February 3, 2018
Accrued property expenses	$	46		$	52
Other accrued expenses	40			43
Deferred revenue	52			69
Compensation and benefits	74			32
Stock-based compensation	35			32
Goodwill and intangibles	—			102
Loss and credit carryforwards	134			120
Other	38			38
Total deferred tax assets	419			488
Valuation allowance	(91		)	(99		)
Total deferred tax assets after valuation allowance	328			389
Property and equipment	(184		)	(163		)
Goodwill and intangibles	(12		)	—
Inventory	(61		)	(47		)
Other	(16		)	(20		)
Total deferred tax liabilities	(273		)	(230		)
Net deferred tax assets	$	55		$	159

Net deferred tax assets are included on our Consolidated Balance Sheets as Other assets as of February 2, 2019, and February 3, 2018.

At February 2, 2019, we had deferred tax assets for net operating loss carryforwards from international operations of $77 million, of which $71 million will expire in various years through 2036 and the remaining amounts have no expiration; acquired U.S. federal net operating loss carryforwards of $24 million, which expire between 2023 and 2038; U.S. federal foreign tax credit carryforwards of $5 million, which expire between 2024 and 2029; U.S. federal capital loss carryforwards of $4 million, which expire in 2023; state credit carryforwards of $11 million, which expire between 2021 and 2028; state net operating loss carryforwards of $3 million, which expire between 2020 and 2038; international credit carryforwards of $2 million, which have no expiration; and international capital loss carryforwards of $8 million, which have no expiration.

At February 2, 2019, a valuation allowance of $91 million had been established, of which $2 million is against U.S. federal foreign tax credit carryforwards; $8 million is against international and state capital loss carryforwards; $6 million is against state credit carryforwards and other state deferred tax assets; and $75 million is against certain international net operating loss carryforwards and other international deferred tax assets. The $8 million decrease from February 3, 2018, is primarily due to the expiration of certain state credit carryforwards and international net operating loss carryforwards, as well as the expected utilization of federal capital loss carryforwards, partially offset by the current year loss activity from certain international net operating loss carryforwards.

The following table provides a reconciliation of changes in unrecognized tax benefits for fiscal 2019, fiscal 2018 and fiscal 2017 ($ in millions):



	2019			2018			2017
Balance at beginning of period	$	279		$	374		$	469
Gross increases related to prior period tax positions	4			19			11
Gross decreases related to prior period tax positions	(12		)	(126		)	(144		)
Gross increases related to current period tax positions	36			29			55
Settlements with taxing authorities	(1		)	(12		)	(12		)
Lapse of statute of limitations	(6		)	(5		)	(5		)
Balance at end of period	$	300		$	279		$	374

Unrecognized tax benefits of $282 million, $263 million and $346 million at February 2, 2019, February 3, 2018, and January 28, 2017, respectively, would favorably impact our effective income tax rate if recognized.

We recognize interest and penalties (not included in the "unrecognized tax benefits" above), as well as interest received from favorable tax settlements, as components of income tax expense. Interest expense of $10 million, interest income of $10 million and interest income of $9 million was recognized in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. At February 2, 2019, February 3, 2018, and January 28, 2017, we had accrued interest of $53 million, $42 million and $61 million, respectively, along with accrued penalties of $0 million, $0 million and $1 million at February 2, 2019, February 3, 2018, and January 28, 2017, respectively.

We file a consolidated U.S. federal income tax return, as well as income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before fiscal 2011.

Because existing tax positions will continue to generate increased liabilities for us for unrecognized tax benefits over the next 12 months, and since we are routinely under audit by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next 12 months. An estimate of the amount or range of such change cannot be made at this time. However, we do not expect the change, if any, to have a material effect on our consolidated financial condition, results of operations or cash flows within the next 12 months.