Taxes

Income tax expense (benefit) is as follows:



	2018						2017								2016
	Current		Deferred		Total		Current		Deferred			Total			Current		Deferred			Total
	(millions)
Federal	$	156	$	79	$	235	$	367	$	(462	)	$	(95	)	$	433	$	(121	)	$	312
State and local	53		34		87		16		40			56			37		(3		)	34
	$	209	$	113	$	322	$	383	$	(422	)	$	(39	)	$	470	$	(124	)	$	346

On December 22, 2017, H.R. 1 was enacted into law. This new tax legislation, among other things, reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018.

In applying the impacts of the new tax legislation to its 2017 income tax provision, the Company remeasured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally a 21% federal tax rate and its related impact on the state tax rates. The resulting impact was the recognition of an income tax benefit of $584 million in the fourth quarter of 2017. In addition, applying the new U.S. federal corporate tax rate of 21% on January 1, 2018, resulted in a federal income tax statutory rate of 33.7% in 2017. Combining the impacts on the Company’s current income tax provision and the remeasurement of its deferred tax balances, the Company’s effective income tax rate was a benefit of 2.6% in 2017.

The income tax expense (benefit) reported differs from the expected tax computed by applying the federal income tax statutory rate of 21% for 2018, 33.7% for 2017, and 35% for 2016 to income before income taxes net of noncontrolling interest. The reasons for this difference and their tax effects are as follows:



	2018			2017			2016
	(millions)
Expected tax	$	300		$	515		$	341
State and local income taxes, net of federal income tax benefit (a)	59			19			12
Federal tax reform deferred tax remeasurement	(17		)	(584		)	—
Tax impact of equity awards (a)	—			14			—
Federal tax credits	(16		)	(16		)	(12		)
Change in valuation allowance	10			18			9
Other	(14		)	(5		)	(4		)
	$	322		$	(39	)	$	346

(a) 2017 included the recognition of approximately $15 million of net tax shortfalls associated with share-based payment awards due to the adoption of Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting. Historically, the Company had recognized such amounts as an offset to accumulated excess tax benefits previously recognized in additional paid-in capital.

The Company participates in the Internal Revenue Service (“IRS”) Compliance Assurance Program ("CAP"). As part of the CAP, tax years are audited on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. The IRS has completed examinations of 2016 and all prior tax years.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:



	February 2, 2019			February 3, 2018
	(millions)
Deferred tax assets
Post employment and postretirement benefits	$	208		$	188
Accrued liabilities accounted for on a cash basis for tax purposes	222			218
Long-term debt	18			25
Unrecognized state tax benefits and accrued interest	39			39
State operating loss and credit carryforwards	103			101
Other	154			158
Valuation allowance	(75		)	(65		)
Total deferred tax assets	669			664
Deferred tax liabilities
Excess of book basis over tax basis of property and equipment	(987		)	(923		)
Merchandise inventories	(398		)	(389		)
Intangible assets	(308		)	(276		)
Other	(214		)	(224		)
Total deferred tax liabilities	(1,907		)	(1,812		)
Net deferred tax liability	$	(1,238	)	$	(1,148	)

The valuation allowance at February 2, 2019 and February 3, 2018 relates to net deferred tax assets for state net operating loss and credit carryforwards. The net change in the valuation allowance amounted to an increase of $10 million for 2018. In 2017, the net change in the valuation allowance amounted to an increase of $29 million, which includes $11 million due to the impact of the deferred tax remeasurement associated with the U.S. federal tax reform.

As of February 2, 2019, the Company had no federal net operating loss carryforwards, state net operating loss carryforwards, net of valuation allowances, of $374 million, and state credit carryforwards, net of valuation allowances, of $11 million, which will expire between 2019 and 2038.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	February 2, 2019			February 3, 2018			January 28, 2017
	(millions)
Balance, beginning of year	$	140		$	167		$	178
Additions based on tax positions related to the current year	17			7			16
Additions for tax positions of prior years	13			—			—
Reductions for tax positions of prior years	(12		)	(23		)	(12		)
Settlements	—			(2		)	(4		)
Statute expirations	(9		)	(9		)	(11		)
Balance, end of year	$	149		$	140		$	167
Amounts recognized in the Consolidated Balance Sheets
Current income taxes	$	28		$	11		$	6
Deferred income taxes	4			4			4
Other liabilities (a)	117			125			157
	$	149		$	140		$	167

(a) Unrecognized tax benefits not expected to be settled within one year are included within other liabilities on the Consolidated Balance Sheets.

Additional information regarding unrecognized benefits and related interest and penalties is as follow:



	February 2, 2019		February 3, 2018
	(millions)
Amount of unrecognized tax benefits, net of deferred tax assets, that if recognized would affect the effective tax rate	$	120	$	111
Accrued federal, state and local interest and penalties	56		51
Amounts recognized in the Consolidated Balance Sheets
Current income taxes	28		27
Other liabilities	28		24

The Company classifies federal, state and local interest and penalties not expected to be settled within one year as other liabilities on the Consolidated Balance Sheets and follows a policy of recognizing all interest and penalties related to unrecognized tax benefits in income tax expense. The accrued federal, state and local interest and penalties primarily relate to state tax issues and the amount of penalties paid in prior periods, and the amount of penalties accrued at February 2, 2019 and February 3, 2018, are insignificant. Federal, state and local interest and penalties amounted to expense of $5 million for 2018, a credit of $3 million for 2017, and an expense of $2 million for 2016.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2015. With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for years before 2009. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been accrued for any adjustments that are expected to result from the years still subject to examination.

As of February 2, 2019, the Company believes it is reasonably possible that certain unrecognized tax benefits ranging from zero to $55 million may be recognized by the end of 2019. It is reasonably possible that there could be other material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues or the reassessment of existing uncertain tax positions; however, the Company is not able to estimate the impact of these items at this time.