Income Taxes

On December 22, 2017, the President of the United States signed and enacted comprehensive tax legislation into law H.R. 1, commonly referred to as the Tax Act. Except for certain provisions, the Tax Act is effective for tax years beginning on or after January 1, 2018. As a fiscal year U.S. taxpayer, the majority of the provisions will apply to our fiscal 2019, such as eliminating the domestic manufacturing deduction, creating new taxes on certain foreign sourced income and introducing new limitations on certain business deductions. For fiscal 2018 and effective in the first fiscal quarter, the most significant impacts included: lowering of the U.S. federal corporate income tax rate; remeasuring certain net deferred tax liabilities; and requiring the transition tax on the deemed repatriation of certain foreign earnings. The phase in of the lower corporate income tax rate resulted in a blended rate of 24.5% for fiscal 2018, as compared to the previous 35%. The tax rate will be reduced to 21% in subsequent fiscal years. We recorded net income tax benefit for the provisional remeasurement of certain deferred taxes and related amounts of $71 million for the year ended September 30, 2018. Additionally, we recorded a provisional $231 million of income tax expense for the estimated effects of the transition tax, net of adjustments related to uncertain tax positions for the year ended September 30, 2018. Of the total provisional transition tax obligation recorded to date, $237 million of income taxes payable was included in other long-term liabilities on the consolidated balance sheet as of September 30, 2018.

Based on our current interpretation of the Tax Act, we made reasonable estimates to record provisional adjustments during fiscal 2018, as described above. Collectively, these items did not have a material impact to our consolidated financial statements. Since we are still accumulating and processing data to finalize the underlying calculations and expect regulators to issue further guidance, among other things, we believe our estimates may change. We continue to refine such amounts within the measurement period allowed, which will be completed no later than the first quarter of fiscal 2019.

Components of earnings before income taxes (in millions):



Fiscal Year Ended	Sep 30, 2018		Oct 1, 2017		Oct 2, 2016
United States	$	4,826.0	$	3,393.0	$	3,415.7
Foreign	954.0		924.5		782.9
Total earnings before income taxes	$	5,780.0	$	4,317.5	$	4,198.6

Provision/(benefit) for income taxes (in millions):



Fiscal Year Ended	Sep 30, 2018			Oct 1, 2017			Oct 2, 2016
Current taxes:
U.S. federal	$	156.2		$	931.0		$	704.1
U.S. state and local	52.0			170.8			166.5
Foreign	327.0			216.6			218.5
Total current taxes	535.2			1,318.4			1,089.1
Deferred taxes:
U.S. federal	633.7			121.2			351.3
U.S. state and local	101.5			14.2			25.8
Foreign	(8.4		)	(21.2		)	(86.5		)
Total deferred taxes	726.8			114.2			290.6
Total income tax expense	$	1,262.0		$	1,432.6		$	1,379.7

Reconciliation of the statutory U.S. federal income tax rate with our effective income tax rate:



Fiscal Year Ended	Sep 30, 2018		Oct 1, 2017		Oct 2, 2016
Statutory rate	24.5	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	2.1		2.8		3.0
Benefits and taxes related to foreign operations	(0.1	)	(2.8	)	(2.2	)
Domestic production activity deduction	—		(1.8	)	(1.9	)
Gain resulting from acquisition of joint venture	(5.8	)	—		—
Impact of the Tax Act	2.8		—		—
Other, net	(1.7	)	—		(1.0	)
Effective tax rate	21.8	%	33.2	%	32.9	%

The Company continues to evaluate its plans for reinvestment or repatriation of unremitted foreign earnings and thus has not adjusted its previous indefinite reinvestment assertions for the effects of the Tax Act. In the event we determine that all or a portion of such unremitted foreign earnings are no longer indefinitely reinvested, we may be subject to additional U.S. federal and state income taxes and foreign withholding taxes, beyond the Tax Act's one-time transition tax, which could be material.

Tax effect of temporary differences and carryforwards that comprise significant portions of deferred tax assets and liabilities (in millions):



	Sep 30, 2018			Oct 1, 2017
Deferred tax assets:
Property, plant and equipment	$	67.4		$	71.3
Accrued occupancy costs	109.0			118.0
Accrued compensation and related costs	64.2			95.0
Stored value card liability and deferred revenue	144.2			130.7
Stock-based compensation	96.7			125.9
Net operating losses	79.2			80.8
Litigation charge⁽¹⁾	—			792.0
Other	129.5			180.8
Total	$	690.2		$	1,594.5
Valuation allowance	(129.3		)	(80.1		)
Total deferred tax asset, net of valuation allowance	$	560.9		$	1,514.4
Deferred tax liabilities:
Property, plant and equipment	(348.1		)	(477.2		)
Intangible assets and goodwill	(274.2		)	(159.0		)
Other	(74.1		)	(89.1		)
Total	(696.4		)	(725.3		)
Net deferred tax asset (liability)	$	(135.5	)	$	789.1
Reported as:
Deferred income tax assets	134.7			795.4
Deferred income tax liabilities (included in Other long-term liabilities)	(270.2		)	(6.3		)
Net deferred tax asset (liability)	$	(135.5	)	$	789.1

⁽¹⁾ The tax deduction for litigation charges was accelerated during fiscal 2018.

The valuation allowance as of September 30, 2018 and October 1, 2017 is primarily related to net operating losses and other deferred tax assets of consolidated foreign subsidiaries.

As of September 30, 2018, we had state net operating loss carryforwards of $32.0 million which will begin to expire in fiscal 2024, state tax credit carryforwards of $9.7 million, of which $9.3 million will begin to expire in fiscal 2024 and the remainder will begin to expire in fiscal 2019, and foreign net operating loss carryforwards of $290.7 million, of which $180.8 million have an indefinite carryforward period and the remainder expire at various dates starting from fiscal 2019.

Uncertain Tax Positions

As of September 30, 2018, we had $224.6 million of gross unrecognized tax benefits of which $157.3 million, if recognized, would affect our effective tax rate. We recognized a benefit of $0.5 million, an expense of $5.2 million and a benefit of $3.6 million of interest and penalties in income tax expense, prior to the benefit of the federal tax deduction, for fiscal 2018, 2017 and 2016, respectively. As of September 30, 2018 and October 1, 2017, we had accrued interest and penalties of $12.8 million and $11.2 million, respectively, within our consolidated balance sheets.

The following table summarizes the activity related to our unrecognized tax benefits (in millions):



	Sep 30, 2018			Oct 1, 2017			Oct 2, 2016
Beginning balance	$	196.9		$	146.5		$	150.4
Increase related to prior year tax positions	17.5			10.4			—
Decrease related to prior year tax positions	(41.8		)	—			(23.6		)
Increase related to current year tax positions	62.4			41.3			33.7
Decreases related to settlements with taxing authorities	(4.5		)	—			(3.1		)
Decrease related to lapsing of statute of limitations	(5.9		)	(1.3		)	(10.9		)
Ending balance	$	224.6		$	196.9		$	146.5

We are currently under examination, or may be subject to examination, by various U.S. federal, state, local and foreign tax jurisdictions for fiscal years 2006 through 2017. We are no longer subject to U.S. federal or state examination for years prior to fiscal year 2011, with the exception of one state. We are no longer subject to examination in any material international markets prior to 2006.

It is reasonably possible that a portion of the Company's gross unrecognized tax benefits may be recognized by the end of fiscal 2019 for reasons such as a lapse of the statute of limitations or resolution of examinations with tax authorities. We estimate this range to be approximately $79 million to $117 million.