Note D – Income Taxes

The components of income from continuing operations before income taxes are as follows:


	Year Ended
(in thousands)	August 25, 2018		August 26, 2017		August 27, 2016
Domestic	$	1,412,963	$	1,737,401	$	1,737,727
International		223,366		188,088		174,987

	$	1,636,329	$	1,925,489	$	1,912,714

The provision for income tax expense consisted of the following:


	Year Ended
(in thousands)	August 25, 2018			August 26, 2017			August 27, 2016
Current:
Federal	$	328,963		$	487,492		$	534,621
State		36,389			31,733			39,223
International		57,702			50,493			52,844

		423,054			569,718			626,688
Deferred:
Federal		(131,926	)		72,208			48,509
State		8,167			7,769			9,453
International		(502	)		(5,075	)		(12,943	)

		(124,261	)		74,902			45,019

Income tax expense	$	298,793		$	644,620		$	671,707

A reconciliation of the provision for income taxes to the amount computed by applying the federal statutory tax rate to income before income taxes is as follows:


	Year Ended
(in thousands)	August 25, 2018			August 26, 2017			August 27, 2016
Federal tax at statutory U.S. income tax rate		25.9	%		35.0	%		35.0	%
State income taxes, net		1.9	%		1.3	%		1.6	%
Transition tax		1.6	%		—			—
Share-based compensation		(1.6	%)		(1.4	%)		—
Impact of tax reform		(9.6	%)		—			—
Other		0.1	%		(1.4	%)		(1.5	%)

Effective tax rate		18.3	%		33.5	%		35.1	%

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Reform”) was enacted into law. Tax Reform significantly revises the U.S. federal corporate income tax by, among other things, lowering the statutory federal corporate rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries, and changing how foreign earnings are subject to U.S. federal tax.

As a result of the decrease in the federal tax rate from 35% to 21%, effective January 1, 2018, the Company has computed its income tax expense for the year ended August 25, 2018 using a blended federal tax rate of 25.9%, which provided a benefit of $119.2 million on fiscal 2018 earnings before taxes. The Company’s federal statutory tax rate will be 21% for the year ending August 31, 2019 and each subsequent year.

For the year ended August 25, 2018 and August 26, 2017, the Company recognized excess tax benefits from stock option exercises of $31.3 million and $31.2 million, respectively.

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations where 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 Tax Reform. To the extent that a company’s accounting for certain income tax effects of Tax Reform is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of Tax Reform. The ultimate impact may differ from provisional amounts recorded, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, and additional regulatory guidance that may be issued. The accounting must be completed within one year from the enactment date of Tax Reform.

As a result of the statutory rate changes of Tax Reform, the Company must remeasure its deferred tax assets and liabilities using the federal tax rate that will apply when the related temporary differences are expected to reverse. During the year ended August 25, 2018, the Company recorded a provisional tax benefit of $157.3 million related to the remeasurement of deferred taxes as a result of Tax Reform. The Company is continuing to analyze certain aspects of Tax Reform and is refining its calculations which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.

As part of the transition to the new territorial tax system, Tax Reform imposes a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries. For the year ended August 25, 2018, the Company recorded a provisional tax expense of $25.8 million related to the transition tax. Our analysis of the transition tax is not completed as of the year ended August 25, 2018, as the Company continues to finalize the calculation of foreign earnings and profits and the amounts held in cash or other specified assets. The provisional amount may also change as new guidance and clarifications are issued by the US federal and state jurisdictions. The Company will complete the accounting for these items during the measurement period. The Company intends to file an election to pay the transition tax liability over the following eight years as prescribed under the enacted law.

The other provisions of Tax Reform are either immaterial or not applicable for the year ended August 25, 2018. The provisions applicable for the year ended August 25, 2018, including the deductibility of certain expenditures, are provisional amounts that may also change as new guidance and clarifications are issued.

Significant components of the Company’s deferred tax assets and liabilities were as follows:


(in thousands)	August 25, 2018			August 26, 2017
Deferred tax assets:
Net operating loss and credit carryforwards	$	47,190		$	48,062
Accrued benefits		62,867			96,664
Other		46,375			56,052

Total deferred tax assets		156,432			200,778
Less: Valuation allowances		(19,619	)		(13,501	)

Net deferred tax assets		136,813			187,277
Deferred tax liabilities:
Property and equipment		(101,049	)		(117,580	)
Inventory		(242,138	)		(333,422	)
Prepaid expenses		(42,019	)		(60,920	)
Other		(2,191	)		(11,158	)

Total deferred tax liabilities		(387,397	)		(523,080	)

Net deferred tax liabilities	$	(250,584	)	$	(335,803	)

The Company has historically asserted its intention to indefinitely reinvest foreign current and accumulated earnings and other basis differences in certain foreign subsidiaries. During the year ended August 25, 2018, the Company has reevaluated its assertion as a result of the enactment of Tax Reform and, with few exceptions, no longer considers the current and accumulated earnings to be indefinitely reinvested in our foreign subsidiaries. Where necessary, withholding tax provisions resulting from foreign distributions of current and accumulated earnings have been considered in the Company’s provision for income taxes.

The Company maintains its assertion related to other basis differences in foreign subsidiaries. It is impracticable for the Company to determine the amount of unrecognized deferred tax liability on these indefinitely reinvested basis differences.

At August 25, 2018 and August 26, 2017, the Company had deferred tax assets of $30.9 million and $30.8 million, respectively, from net operating loss (“NOL”) carryforwards available to reduce future taxable income totaling approximately $219.1 million and $198.2 million, respectively. Certain NOLs have no expiration date and others will expire, if not utilized, in various years from fiscal 2019 through 2038. At August 25, 2018 and August 26, 2017, the Company had deferred tax assets for income tax credit carryforwards of $16.3 million and $17.2 million, respectively. Income tax credit carryforwards will expire, if not utilized, in various years from fiscal 2023 through 2028.

At August 25, 2018 and August 26, 2017, the Company had a valuation allowance of $19.6 million and $13.5 million, respectively, on deferred tax assets associated with NOL and tax credit carryforwards for which management has determined it is more likely than not that the deferred tax asset will not be realized. Management believes it is more likely than not that the remaining deferred tax assets will be fully realized.

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


(in thousands)	August 25, 2018			August 26, 2017
Beginning balance	$	22,201		$	27,726
Additions based on tax positions related to the current year		8,184			7,089
Additions for tax positions of prior years		1,404			278
Reductions for tax positions of prior years		(482	)		(6,954	)
Reductions due to settlements		(1,930	)		(1,964	)
Reductions due to statute of limitations		(3,300	)		(3,974	)

Ending balance	$	26,077		$	22,201

Included in the August 25, 2018 and the August 26, 2017 balances are $13.5 million and $9.9 million, respectively, of unrecognized tax benefits that, if recognized, would reduce the Company’s effective tax rate.

The Company accrues interest on unrecognized tax benefits as a component of income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense. The Company had $0.7 million and $1.2 million accrued for the payment of interest and penalties associated with unrecognized tax benefits at August 25, 2018 and August 26, 2017, respectively.

The Company files U.S. federal, U.S. state and local, and international income tax returns. With few exceptions, the Company is no longer subject to U.S. federal, U.S. state and local, or Non-U.S. examinations by tax authorities for fiscal year 2013 and prior. The Company is typically engaged in various tax examinations at any given time by U.S. federal, U.S. state and local, and Non-U.S. taxing jurisdictions. As of August 25, 2018, the Company estimates that the amount of unrecognized tax benefits could be reduced by approximately $1.1 million over the next twelve months as a result of tax audit settlements. While the Company believes that it is adequately accrued for possible audit adjustments, the final resolution of these examinations cannot be determined at this time and could result in final settlements that differ from current estimates.