Income Taxes

12 Months Ended

Aug. 27, 2022

Income Taxes

Income Taxes

Note D – Income Taxes

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

		Year Ended
	August 27,		August 28,		August 29,
(in thousands)	2022		2021		2020
Domestic	$	2,429,262	$	2,436,548	$	1,960,320
International		649,829		312,642		256,194
	$	3,079,091	$	2,749,190	$	2,216,514

The provision for income tax expense consisted of the following:

	Year Ended
	August 27,		August 28,		August 29,
(in thousands)	2022		2021		2020
Current:
Federal	$	293,022	$	438,686	$	324,156
State		48,490		79,271		47,880
International		122,381		95,351		60,429
		463,893		613,308		432,465
Deferred:
Federal		160,749		(21,366)		43,706
State		34,564		(1,707)		12,544
International		(9,719)		(11,359)		(5,173)
		185,594		(34,432)		51,077
Income tax expense	$	649,487	$	578,876	$	483,542

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 27,		August 28,		August 29,
(in thousands)	2022		2021		2020
Federal tax at statutory U.S. income tax rate	21.0	%	21.0	%	21.0	%
State income taxes, net	2.1	%	2.2	%	2.2	%
Share-based compensation	(1.6)	%	(1.7)	%	(0.7)	%
US Tax on Non-US Income (GILTI and Subpart F)	3.1	%	2.8	%	3.2	%
Non-US Permanent Differences	(1.5)	%	(0.4)	%	(0.5)	%
Foreign Tax Credits	(1.9)	%	(1.7)	%	(1.1)	%
Other	(0.1)	%	(1.1)	%	(2.3)	%
Effective tax rate	21.1	%	21.1	%	21.8	%

For the year ended August 27, 2022, August 28, 2021, and August 29, 2020, the Company recognized excess tax benefits from stock option exercises of $63.2 million, $56.4 million, and $20.9 million, respectively.

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.

On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. The IRA creates new tax provisions while only three are applicable to the Company: 1) Corporate Alternative Minimum Tax (“CAMT”); 2) Excise Tax on Stock Buybacks; and 3) Increased Investment Tax Credit. The CAMT will be effective for the Company’s year beginning August 27, 2023, while the excise tax on stock buybacks will be effective for shares repurchased after December 31, 2022. The Investment Tax Credit for solar assets has increased from 26% to 30% for assets placed in service after December 31, 2021, and before January 1, 2033. The Company does not expect any material impacts from these provisions.

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

	August 27,		August 28,
(in thousands)	2022		2021
Deferred tax assets:
Net operating loss and credit carryforwards	$	33,924	$	41,825
Accrued benefits		60,561		126,086
Operating lease liabilities		692,730		646,938
Other		79,850		69,340
Total deferred tax assets		867,065		884,189
Valuation allowances		(27,790)		(31,098)
Net deferred tax assets		839,275		853,091
Deferred tax liabilities:
Property and equipment		(197,482)		(185,985)
Inventory		(448,273)		(316,736)
Operating lease assets		(650,145)		(609,336)
Other		(25,211)		(37,116)
Deferred tax liabilities		(1,321,111)		(1,149,173)
Net deferred tax liabilities	$	(481,836)	$	(296,082)

For the years ended August 28, 2021, and August 27, 2022, the Company asserts indefinite reinvestment for basis differences and accumulated earnings through fiscal 2020 with respect to its foreign subsidiaries. The Company does not assert permanent reinvestment of fiscal 2021 or current year earnings with respect to its Mexican subsidiaries while maintaining its assertion of indefinite reinvestment of fiscal 2021 and current year 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 27, 2022, we have not recorded incremental income taxes for outside basis differences of $416.2 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 27, 2022 and August 28, 2021, the Company had net operating loss (“NOL”) carryforwards totaling approximately $241.2 million ($28.9 million tax effected) and $259.1 million ($35.9 million tax effected), respectively. Certain NOLs have no expiration date and others will expire, if not utilized, in various years from fiscal 2023 through 2042. At August 27, 2022 and August 28, 2021, the Company had deferred tax assets for income tax credit carryforwards of $5.0 and $6.0 million, respectively. Income tax credit carryforwards will expire, if not utilized, in various years from fiscal 2023 through 2037.

At August 27, 2022 and August 28, 2021, the Company had a valuation allowance of $27.8 million and $31.1 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 27,		August 28,
(in thousands)	2022		2021
Beginning balance	$	39,797	$	31,942
Additions based on tax positions related to the current year		17,488		10,806
Additions for tax positions of prior years		3,008		4,009
Reductions for tax positions of prior years		(6,806)		(886)
Reductions due to settlements		(1,539)		(2,204)
Reductions due to statute of limitations		(2,632)		(3,870)
Ending balance	$	49,316	$	39,797

Included in the August 27, 2022 and the August 28, 2021 balances are $32.4 million and $25.8 million, respectively, of unrecognized tax benefits that, if recognized, would reduce the Company’s effective tax rate. The balances above also include amounts of $11.5 million and $10.4 million for August 27, 2022 and the August 28, 2021, 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 $5.7 million and $2.4 million accrued for the payment of interest and penalties associated with unrecognized tax benefits at August 27, 2022 and August 28, 2021, 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 2018 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 27, 2022, the Company estimates that the amount of unrecognized tax benefits could be reduced by approximately $2.4 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.