INCOME TAXES

On December 22, 2017, the President of the United States signed into law legislation commonly referred to as the Tax Cut and Jobs Act (“TCJA”). The legislation significantly changed U.S. tax law, including permanently lowering the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018, expanding the disallowance of deductions for executive compensation and accelerating tax depreciation for certain assets placed in service after September 27, 2017.

The provision for income taxes was comprised of the following:



(In thousands)	2018		2017		2016
Current:
U.S. Federal	$	35,025	$	63,743	$	87,521
U.S. State and local	10,341		9,201		13,122
Total current tax expense	45,366		72,944		100,643
Deferred:
U.S. Federal	5,300		28,336		(7,965		)
U.S. State and local	53		4,242		(1,207		)
Total deferred tax expense	5,353		32,578		(9,172		)
Income tax provision	$	50,719	$	105,522	$	91,471

In 2017, we estimated the effects of the corporate income tax rate reduction on our net deferred tax assets resulting in the provisional recognition of an additional $4.5 million of income tax expense in our consolidated statement of operations.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. As noted above, we recorded the provisional tax impacts of the TCJA on existing current and deferred tax amounts in 2017. The ultimate impact differed from those provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions we made, and additional regulatory guidance that was issued. During the third quarter of 2018, we made approximately $0.6 million in adjustments to our previously recorded provisional amounts related to the TCJA. During the fourth quarter of 2018, we finalized our estimate related to the TCJA and the adjustment was immaterial.

Net deferred tax assets fluctuated by items that are not reflected in deferred tax expense in the above table in 2017 and 2016. In 2017, net deferred tax assets increased by $0.1 million as a result of ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Net deferred tax assets decreased by $10.4 million in 2016, principally from pension-related charges recorded in accumulated other comprehensive loss.

Reconciliation between the statutory federal income tax rate and the effective income tax rate was as follows:



	2018		2017		2016
Statutory federal income tax rate	21.0	%	33.7	%	35.0	%
Effect of:
State and local income taxes, net of federal tax benefit	4.0		3.0		3.2
Executive compensation limitations - permanent difference	0.7		—		—
Provisional effect of the TCJA	(0.3	)	1.5		—
Work opportunity tax and other employment tax credits	(1.4	)	(1.0	)	(1.1	)
Excess tax detriment (benefit) from share-based compensation	0.4		(1.3	)	—
Other, net	—		(0.2	)	0.3
Effective income tax rate	24.4	%	35.7	%	37.4	%

Since the TCJA rate reduction was effective on January 1, 2018, our 2017 federal statutory tax rate was a blended rate of 33.7%.

In 2017, we adopted ASU 2016-09. Prior to the adoption of ASU 2016-09, differences between the tax deduction ultimately realized from an equity award and the deferred tax asset recognized as compensation cost were generally credited (“excess tax benefits”) or charged (“deficiencies”) to equity. Under ASU 2016-09, all tax effects of share-based compensation, including excess tax benefits and tax deficiencies, are recognized in income tax expense. In 2018, we recognized net tax deficiencies which increased income tax expense by $1.0 million. In 2017, we recognized net excess tax benefits which reduced income tax expense by $4.3 million.

Income tax payments and refunds were as follows:



(In thousands)	2018			2017			2016
Income taxes paid	$	59,691		$	99,693		$	103,323
Income taxes refunded	(474		)	(888		)	(16,187		)
Net income taxes paid	$	59,217		$	98,805		$	87,136

Deferred taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax, including income tax uncertainties. Significant components of our deferred tax assets and liabilities were as follows:



(In thousands)	February 2, 2019			February 3, 2018
Deferred tax assets:
Workers’ compensation and other insurance reserves	$	20,841		$	21,106
Uniform inventory capitalization	18,454			13,591
Compensation related	17,218			14,308
Accrued rent	16,208			15,292
Depreciation and fixed asset basis differences	10,497			8,435
State tax credits, net of federal tax benefit	3,856			4,246
Accrued state taxes	3,416			3,749
Accrued operating liabilities	1,316			537
Other	11,767			11,623
Valuation allowances, net of federal tax benefit	(2,940		)	(2,311		)
Total deferred tax assets	100,633			90,576
Deferred tax liabilities:
Accelerated depreciation and fixed asset basis differences	66,016			51,310
Lease construction reimbursements	13,917			11,542
Prepaid expenses	4,285			5,559
Workers’ compensation and other insurance reserves	2,477			2,424
Other	5,305			5,755
Total deferred tax liabilities	92,000			76,590
Net deferred tax assets	$	8,633		$	13,986

We have the following income tax loss and credit carryforwards at February 2, 2019 (amounts are shown net of tax excluding the federal income tax effect of the state and local items):



(In thousands)
U.S. State and local:
State net operating loss carryforwards	$	15	Expires fiscal years 2020
California enterprise zone credits	4,566		Predominately expires fiscal year 2023
Other state credits	315		Expires fiscal years through 2025
Total income tax loss and credit carryforwards	$	4,896

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for 2018, 2017, and 2016:



(In thousands)	2018			2017			2016
Unrecognized tax benefits - beginning of year	$	11,673		$	13,121		$	13,772
Gross increases - tax positions in current year	1,649			361			822
Gross increases - tax positions in prior period	1,025			1,329			171
Gross decreases - tax positions in prior period	(1,827		)	(1,385		)	(80		)
Settlements	403			(319		)	(236		)
Lapse of statute of limitations	(937		)	(1,434		)	(1,328		)
Unrecognized tax benefits - end of year	$	11,986		$	11,673		$	13,121

At the end of 2018 and 2017, the total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is $9.4 million and $9.2 million, respectively, after considering the federal tax benefit of state and local income taxes of $1.8 million and $2.1 million, respectively. Unrecognized tax benefits of $0.8 million and $0.6 million in 2018 and 2017, respectively, relate to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The uncertain timing items could result in the acceleration of the payment of cash to the taxing authority to an earlier period.

We recognized an expense (benefit) associated with interest and penalties on unrecognized tax benefits of approximately $(0.7) million, $0.1 million, and $0.2 million during 2018, 2017, and 2016, respectively, as a component of income tax expense. The amount of accrued interest and penalties recognized in the accompanying consolidated balance sheets at February 2, 2019 and February 3, 2018 was $5.4 million and $6.1 million, respectively.

We are subject to U.S. federal income tax, and income tax of multiple state and local jurisdictions. The statute of limitations for assessments on our federal income tax returns for periods prior to 2015 has lapsed. In addition, the state income tax returns filed by us are subject to examination generally for periods beginning with 2006, although state income tax carryforward attributes generated prior to 2006 and non-filing positions may still be adjusted upon examination. We have various state returns in the process of examination or administrative appeal. After acquiring Canadian operations on July 18, 2011 and prior to dissolution on June 10, 2014, we also were subject to Canadian and provincial taxes. Generally, the time limit for reassessing returns for Canadian and provincial income taxes for periods prior to the fiscal year ended February 2, 2013 have lapsed.

We have estimated the reasonably possible expected net change in unrecognized tax benefits through February 1, 2020, based on expected cash and noncash settlements or payments of uncertain tax positions and lapses of the applicable statutes of limitations for unrecognized tax benefits. The estimated net decrease in unrecognized tax benefits for the next 12 months is approximately $4.0 million. Actual results may differ materially from this estimate.