Income Taxes

12 Months Ended

Feb. 01, 2020

11. Income Taxes

Reconciliations of the federal statutory income tax rate to income tax expense were as follows ($ in millions):



	2020			2019			2018
Federal income tax at the statutory rate	$	419		$	396		$	613
State income taxes, net of federal benefit		62			58			44
Benefit from foreign operations		(2)			-			(85)
Other		(27)			(7)			(37)
Tax Act		-			(23)			283
Income tax expense	$	452		$	424		$	818
Effective income tax rate		22.7	%		22.4	%		45.0	%

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.

Earnings from continuing operations before income tax expense by jurisdiction were as follows ($ in millions):



	2020		2019		2018
United States	$	1,704	$	1,574	$	1,480
Foreign		289		314		337
Earnings from continuing operations before income tax expense	$	1,993	$	1,888	$	1,817

Income tax expense was comprised of the following ($ in millions):



	2020		2019		2018
Current:
Federal	$	261	$	275	$	547
State		73		75		59
Foreign		48		64		50
		382		414		656
Deferred:
Federal		56		4		141
State		8		-		11
Foreign		6		6		10
		70		10		162
Income tax expense	$	452	$	424	$	818

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 1, 2020		February 2, 2019
Deferred revenue	$	57	$	52
Compensation and benefits		57		74
Stock-based compensation		34		35
Other accrued expenses		37		40
Accrued property expenses		13		46
Operating lease liabilities		734		-
Loss and credit carryforwards		127		134
Other		46		38
Total deferred tax assets		1,105		419
Valuation allowance		(96)		(91)
Total deferred tax assets after valuation allowance		1,009		328
Inventory		(40)		(61)
Property and equipment		(237)		(184)
Operating lease assets		(692)		-
Goodwill and intangibles		(45)		(12)
Other		(15)		(16)
Total deferred tax liabilities		(1,029)		(273)
Net deferred tax assets (liabilities)	$	(20)	$	55

Deferred taxes were presented as follows ($ in millions):



Balance Sheet Location	February 1, 2020		February 2, 2019
Other assets	$	9	$	55
Long-term liabilities		(29)		-
Net deferred tax assets (liabilities)	$	(20)	$	55

At February 1, 2020, we had deferred tax assets for net operating loss carryforwards from international operations of $78 million, of which $73 million will expire in various years through 2037 and the remaining amounts have no expiration; acquired U.S. federal net operating loss carryforwards of $15 million, of which $11 million will expire in various years between 2023 and 2037 and the remaining amounts have no expiration; U.S. federal foreign tax credit carryforwards of $6 million, which expire between 2024 and 2030; U.S. federal capital loss carryforwards of $4 million, which expire between 2023 and 2025; state credit carryforwards of $8 million, which expire between 2022 and 2039; state net operating loss carryforwards of $6 million, which expire between 2021 and 2039; international credit carryforwards of $2 million, which have no expiration; and international capital loss carryforwards of $8 million, which have no expiration.

At February 1, 2020, a valuation allowance of $96 million had been established, of which $5 million is against U.S. federal foreign tax credit carryforwards; $8 million is against international capital loss carryforwards; $78 million is against international and state net operating loss carryforwards; $1 million is against international credit carryforwards; and $4 million is against other state deferred tax assets. The $5 million increase from February 2, 2019, is primarily due to the current year loss activity from international net operating loss carryforwards, as well as the acquired state net operating loss carryforwards, partially offset by the expiration of certain international net operating loss carryforwards.

Reconciliations of changes in unrecognized tax benefits were as follows ($ in millions):



	2020		2019		2018
Balances at beginning of period	$	300	$	279	$	374
Gross increases related to prior period tax positions		1		4		19
Gross decreases related to prior period tax positions		(5)		(12)		(126)
Gross increases related to current period tax positions		34		36		29
Settlements with taxing authorities		-		(1)		(12)
Lapse of statute of limitations		(12)		(6)		(5)
Balances at end of period	$	318	$	300	$	279

Unrecognized tax benefits of $300 million, $282 million and $263 million at February 1, 2020, February 2, 2019, and February 3, 2018, 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 $11 million, interest expense of $10 million and interest income of $10 million was recognized in fiscal 2020, fiscal 2019 and fiscal 2018, respectively. At February 1, 2020, February 2, 2019, and February 3, 2018, we had accrued interest of $67 million, $53 million and $42 million, 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.

Changes in state, federal, and foreign tax laws may increase or decrease our tax contingencies. The timing of the resolution of income tax examinations and controversies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next twelve months we will receive additional assessments by various tax authorities or reach resolutions of income tax examinations or controversies in one or more jurisdictions. These assessments, resolutions, or law changes could result in changes to our gross unrecognized tax benefits. The actual amount of any changes could vary significantly depending on the ultimate timing and nature of any assessments, resolutions or law changes. An estimate of the amount or range of such changes cannot be made at this time.