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Income Taxes

12 Months Ended

Aug. 29, 2020

Note D – Income Taxes

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


		Year Ended
	August 29,		August 31,		August 25,
(in thousands)	2020		2019		2018

Domestic	$	1,960,320	$	1,745,625	$	1,412,963
International		256,194		285,708		223,366
	$	2,216,514	$	2,031,333	$	1,636,329

The provision for income tax expense consisted of the following:


	Year Ended
	August 29,		August 31,		August 25,
(in thousands)	2020		2019		2018

Current:
Federal	$	324,156	$	274,504	$	328,963
State		47,880		45,457		36,389
International		60,429		59,100		57,702
		432,465		379,061		423,054
Deferred:
Federal		43,706		25,757		(131,926)
State		12,544		6,914		8,167
International		(5,173)		2,380		(502)
		51,077		35,051		(124,261)
Income tax expense	$	483,542	$	414,112	$	298,793

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
	August 29,		August 31,		August 25,
(in thousands)	2020		2019		2018

Federal tax at statutory U.S. income tax rate	21.0	%	21.0	%	25.9	%
State income taxes, net	2.2	%	2.0	%	1.9	%
Transition tax	—		—		1.6	%
Share-based compensation	(0.7)	%	(1.8)	%	(1.6)	%
Impact of tax reform	—		(0.4)	%	(9.6)	%
Global intangible lower-taxed income (“GILTI”)	1.0	%	1.3	%	—
Foreign Tax Credits	(1.1)	%	(1.1)	%	—
Other	(0.6)	%	(0.6)	%	0.1	%
Effective tax rate	21.8	%	20.4	%	18.3	%

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. Also in December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when the registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of Tax Reform.

During the year ended August 25, 2018, the Company recorded provisional tax benefit of $131.5 million related to Tax Reform, comprised of $157.3 million remeasurement of its net DTA, offset by $25.8 million of transition tax. During the year ended August 31, 2019, the Company completed its analysis of Tax Reform and recorded adjustments to the previously-recorded provisional amounts, resulting in an $8.8 million tax benefit, primarily related to transition tax.

For the year ended August 29, 2020, August 31, 2019, and August 25, 2018, the Company recognized excess tax benefits from stock option exercises of $20.9 million, $46.0 million, and $31.3 million, respectively.

Beginning with the year ending August 31, 2019, the Company is subject to GILTI which is imposed on foreign earnings. The Company has made the election to record this tax as a period cost, thus has not adjusted the deferred tax assets or liabilities of its foreign subsidiaries for the new tax. Net impacts for GILTI are included in the provision for income taxes for the years ended August 31, 2019 and August 29, 2020. Significant components of the Company’s deferred tax assets and liabilities were as follows:


	August 29,		August 31,
(in thousands)	2020		2019

Deferred tax assets:
Net operating loss and credit carryforwards	$	41,437	$	42,958
Accrued benefits		88,226		58,900
Operating lease liabilities		617,002		—
Other		69,788		59,237
Total deferred tax assets		816,453		161,095
Less: Valuation allowances		(28,373)		(23,923)
Net deferred tax assets		788,080		137,172
Deferred tax liabilities:
Property and equipment		(173,696)		(114,956)
Inventory		(298,585)		(259,827)
Prepaid expenses		(55,827)		(46,487)
Operating lease assets		(581,381)		—
Other		(4,934)		(1,021)
Total deferred tax liabilities		(1,114,423)		(422,291)
Net deferred tax liabilities	$	(326,343)	$	(285,119)

For the year ended August 31, 2019, the Company held the assertion, with few exceptions, that current and accumulated earnings from foreign operations were not indefinitely reinvested. During the year ended August 29, 2020, the Company asserted indefinite reinvestment for other basis differences and accumulated earnings through fiscal 2020 between its Luxembourg parent and Mexico subsidiaries. In addition, the Company has maintained its assertion of indefinite reinvestment of earnings between its Dutch parent and Puerto Rican subsidiary. 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 29, 2020 and August 31, 2019, the Company had deferred tax assets of $32.2 million and $29.9 million, respectively, from net operating loss (“NOL”) carryforwards available to reduce future taxable income totaling approximately $247.1 million and $226.3 million, respectively. Certain NOLs have no expiration date and others will expire, if not utilized, in various years from fiscal 2021 through 2040. At August 29, 2020 and August 31, 2019, the Company had deferred tax assets for income tax credit carryforwards of $9.2 million and $13.0 million, respectively. Income tax credit carryforwards will expire, if not utilized, in various years from fiscal 2021 through 2037.

At August 29, 2020 and August 31, 2019, the Company had a valuation allowance of $28.4 million and $23.9 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:


	August 29,		August 31,
(in thousands)	2020		2019

Beginning balance	$	30,892	$	26,077
Additions based on tax positions related to the current year		8,512		8,621
Additions for tax positions of prior years		946		2,115
Reductions for tax positions of prior years		(4,124)		(1,219)
Reductions due to settlements		—		(1,918)
Reductions due to statute of limitations		(4,284)		(2,784)
Ending balance	$	31,942	$	30,892

Included in the August 29, 2020 and the August 31, 2019 balances are $18.9 million and $16.8 million, respectively, of unrecognized tax benefits that, if recognized, would reduce the Company’s effective tax rate. The balances above also include amounts of $10.5 million and $11.9 million for August 29, 2020 and the August 31, 2019, respectively, that are accounted for as reductions to deferred tax assets for NOL carryforwards and tax credit carryforwards. It is anticipated that in the event the associated uncertain tax positions are disallowed, the NOL carryforwards and tax credit carryforwards would be utilized to settle the liability.

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 $1.6 million and $1.4 million accrued for the payment of interest and penalties associated with unrecognized tax benefits at August 29, 2020 and August 31, 2019, 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 29, 2020, the Company estimates that the amount of unrecognized tax benefits could be reduced by approximately $1.5 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.