Income Taxes

12 Months Ended

Aug. 28, 2021

Income Taxes

Income Taxes

Note D – Income Taxes

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

		Year Ended
	August 28,		August 29,		August 31,
(in thousands)	2021		2020		2019
Domestic	$	2,436,548	$	1,960,320	$	1,745,625
International		312,642		256,194		285,708
	$	2,749,190	$	2,216,514	$	2,031,333

The provision for income tax expense consisted of the following:

	Year Ended
	August 28,		August 29,		August 31,
(in thousands)	2021		2020		2019
Current:
Federal	$	438,686	$	324,156	$	274,504
State		79,271		47,880		45,457
International		95,351		60,429		59,100
		613,308		432,465		379,061
Deferred:
Federal		(21,366)		43,706		25,757
State		(1,707)		12,544		6,914
International		(11,359)		(5,173)		2,380
		(34,432)		51,077		35,051
Income tax expense	$	578,876	$	483,542	$	414,112

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 28,		August 29,		August 31,
(in thousands)	2021		2020		2019
Federal tax at statutory U.S. income tax rate	21.0	%	21.0	%	21.0	%
State income taxes, net	2.2	%	2.2	%	2.0	%
Share-based compensation	(1.7)	%	(0.7)	%	(1.8)	%
Impact of tax reform	—		—		(0.4)	%
Global intangible lower-taxed income ("GILTI")	0.8	%	1.0	%	1.3	%
Foreign Tax Credits	(1.7)	%	(1.1)	%	(1.1)	%
Other	0.5	%	(0.6)	%	(0.6)	%
Effective tax rate	21.1	%	21.8	%	20.4	%

For the year ended August 28, 2021, August 29, 2020, and August 31, 2019, the Company recognized excess tax benefits from stock option exercises of $56.4 million, $20.9 million, and $46.0 million, respectively.

Beginning with the year ended August 31, 2019, the Company is subject to a new tax on global intangible low-taxed income (“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 ending August 28, 2021, August 29, 2020 and August 31, 2019.

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

	August 28,		August 29,
(in thousands)	2021		2020
Deferred tax assets:
Net operating loss and credit carryforwards	$	41,825	$	41,437
Accrued benefits		126,086		88,226
Operating lease liabilities		646,938		617,002
Other		69,340		69,788
Total deferred tax assets		884,189		816,453
Valuation allowances		(31,098)		(28,373)
Net deferred tax assets		853,091		788,080
Deferred tax liabilities:
Property and equipment		(185,985)		(173,696)
Inventory		(316,736)		(298,585)
Prepaid expenses		(28,676)		(55,827)
Operating lease assets		(609,336)		(581,381)
Other		(8,440)		(4,934)
Deferred tax liabilities		(1,149,173)		(1,114,423)
Net deferred tax liabilities	$	(296,082)	$	(326,343)

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 basis differences and accumulated earnings through fiscal 2020 with respect to its foreign subsidiaries. For the year ended August 28, 2021, the Company does not assert permanent reinvestment of current year earnings with respect to its Mexican subsidiaries while maintaining its assertion of indefinite reinvestment of earnings of other foreign subsidiaries. Where necessary, taxes resulting from foreign distributions of current and accumulated earnings (e.g., withholding taxes) have been considered in the Company’s provision for income taxes.

As of August 28, 2021, we have not recorded incremental income taxes for outside basis differences of $443.3 million in our investments in foreign subsidiaries, as these amounts are indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to the outside basis differences in these entities is not practicable.

At August 28, 2021 and August 29, 2020, the Company had net operating loss (“NOL”) carryforwards totaling $259.1 million ($35.9 million tax effected) and $247.1 million ($32.2 million tax effected), respectively. Certain NOLs have no expiration date and others will expire, if not utilized, in various years from fiscal 2022 through 2041. At August 28, 2021 and August 29, 2020, the Company had deferred tax assets for income tax credit carryforwards of $6.0 and $9.2 million, respectively. Income tax credit carryforwards will expire, if not utilized, in various years from fiscal 2022 through 2037.

At August 28, 2021 and August 29, 2020, the Company had a valuation allowance of $31.1 million and $28.4 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 28,		August 29,
(in thousands)	2021		2020
Beginning balance	$	31,942	$	30,892
Additions based on tax positions related to the current year		10,806		8,512
Additions for tax positions of prior years		4,009		946
Reductions for tax positions of prior years		(886)		(4,124)
Reductions due to settlements		(2,204)		—
Reductions due to statute of limitations		(3,870)		(4,284)
Ending balance	$	39,797	$	31,942

Included in the August 28, 2021 and the August 29, 2020 balances are $25.8 million and $18.9 million, respectively, of unrecognized tax benefits that, if recognized, would reduce the Company’s effective tax rate. The balances above also include amounts of $10.4 million and $10.5 million for August 28, 2021 and the August 29, 2020, 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 $2.4 million and $1.6 million accrued for the payment of interest and penalties associated with unrecognized tax benefits at August 28, 2021 and August 29, 2020, 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 2016 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 28, 2021, the Company estimates that the amount of unrecognized tax benefits could be reduced by approximately $2.2 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.