Income Taxes

12 Months Ended

Jan. 30, 2021

Income Taxes [Abstract]

Income Taxes

11.   Income Taxes

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

	2021			2020			2019
Federal income tax at the statutory rate	$	499		$	419		$	396
State income taxes, net of federal benefit		79			62			58
Expense (benefit) from foreign operations		29			(2)			-
Other		(28)			(27)			(7)
Tax Act		-			-			(23)
Income tax expense	$	579		$	452		$	424
Effective income tax rate		24.3	%		22.7	%		22.4	%

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. During fiscal 2019, we completed the accounting for the income tax effects of the Tax Act and recorded a $23 million reduction to the fiscal 2018 provisional tax expense.

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

	2021		2020		2019
United States	$	2,203	$	1,704	$	1,574
Foreign		174		289		314
Earnings before income tax expense	$	2,377	$	1,993	$	1,888

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

	2021		2020		2019
Current:
Federal	$	447	$	261	$	275
State		117		73		75
Foreign		51		48		64
		615		382		414
Deferred:
Federal		(25)		56		4
State		(16)		8		-
Foreign		5		6		6
		(36)		70		10
Income tax expense	$	579	$	452	$	424

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):

	January 30, 2021		February 1, 2020
Deferred revenue	$	67	$	57
Compensation and benefits		122		57
Stock-based compensation		29		34
Other accrued expenses		64		37
Operating lease liabilities		698		734
Loss and credit carryforwards		143		127
Other		48		59
Total deferred tax assets		1,171		1,105
Valuation allowance		(127)		(96)
Total deferred tax assets after valuation allowance		1,044		1,009
Inventory		(13)		(40)
Property and equipment		(258)		(237)
Operating lease assets		(662)		(692)
Goodwill and intangibles		(55)		(45)
Other		(39)		(15)
Total deferred tax liabilities		(1,027)		(1,029)
Net deferred tax assets (liabilities)	$	17	$	(20)

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

Balance Sheet Location	January 30, 2021		February 1, 2020
Other assets	$	17	$	9
Long-term liabilities		-		(29)
Net deferred tax assets (liabilities)	$	17	$	(20)

As of January 30, 2021, we had deferred tax assets for net operating loss carryforwards from international operations of $109 million, of which $103 million will expire in various years through 2038 and the remaining amounts have no expiration; acquired U.S. federal net operating loss carryforwards of $9 million, of which $8 million will expire in various years between 2024 and 2037 and the remaining amounts have no expiration; U.S. federal foreign tax credit carryforwards of $6 million, which expire between 2024 and 2031; state credit carryforwards of $5 million, which expire between 2023 and 2028; state net operating loss carryforwards of $4 million, which expire between 2022 and 2040; international credit carryforwards of $2 million, which have no expiration; and international capital loss carryforwards of $8 million, which have no expiration.

As of January 30, 2021, a valuation allowance of $127 million had been established, of which $6 million is against U.S. federal foreign tax credit carryforwards, $8 million is against international capital loss carryforwards, $111 million is against international and state net operating loss carryforwards, and $2 million is against international credit carryforwards. The $31 million increase in fiscal 2021 is primarily due to the current year loss activity from international net operating loss carryforwards, partially offset by the expiration of certain international net operating loss carryforwards, the release of a valuation allowance relating to other state deferred tax assets, and the exchange rate impact on the valuation allowance against certain international net operating loss carryforwards.

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

	2021		2020		2019
Balances at beginning of period	$	318	$	300	$	279
Gross increases related to prior period tax positions		17		1		4
Gross decreases related to prior period tax positions		(25)		(5)		(12)
Gross increases related to current period tax positions		29		34		36
Settlements with taxing authorities		(1)		-		(1)
Lapse of statute of limitations		(11)		(12)		(6)
Balances at end of period	$	327	$	318	$	300

Unrecognized tax benefits of $307 million, $300 million and $282 million as of January 30, 2021, February 1, 2020, and February 2, 2019, 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 $4 million, $11 million and $10 million was recognized in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. As of January 30, 2021, February 1, 2020, and February 2, 2019, we had accrued interest of $74 million, $67 million and $53 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 taxing 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 taxing 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. Although the timing is uncertain, it is reasonably possible that within the next 12 months, the gross unrecognized tax benefits could decrease by as much as $120 million.