6. Income Taxes

Temporary differences, which give rise to deferred tax assets and liabilities, are as follows:


	February 3, 2018			January 28, 2017
Deferred income tax assets:
Employee benefit expense	$	9,359		$	13,983
Deferred rents		10,071			15,874
Net operating loss carryforwards		5,097			206
Other		7,026			5,287
		31,553			35,350
Valuation allowance		(2,384	)		-
Gross deferred income tax assets, net of valuation allowance	$	29,169		$	35,350
Deferred income tax liabilities:
Property and equipment	$	(26,947	)	$	(36,230	)
Inventory		(1,652	)		(744	)
Other		(570	)		(1,598	)
Total deferred income tax liabilities		(29,169	)		(38,572	)

Net deferred income tax assets (liabilities)	$	-		$	(3,222	)

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes including among other items, a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%. Although the Tax Act is generally effective January 1, 2018, GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date, which was December 22, 2017. The effect of the lower corporate tax rate on our net deferreds was not significant.

Further, due to the Tax Act, Net Operating Losses (“NOLs”) for years ending after December 31, 2017 are no longer able to be carried back and are instead only able to be carried forward for an indefinite period. Based on the foregoing, we do not believe that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets and therefore established a full valuation allowance of $2.4 million against our net Deferred Tax Assets, effective for the current fiscal year.

We are required to maintain this valuation allowance against our deferred tax assets until we believe it is more likely than not that these assets will be realized in the future. If sufficient positive evidence arises in the future indicating that all or a portion of the deferred tax assets meet the more-likely-than-not standard under ASC 740, the valuation allowance would be reversed accordingly in the period that such determination is made.

As of February 3, 2018 we have gross NOL carryforwards for Federal income tax purposes of $14.8 million. Additionally, as of February 3, 2018, we have gross NOL carryforwards for State income tax purposes of $25.3 million that will begin to expire in 2023.

Deferred tax assets (liabilities) are reflected on the Consolidated Balance Sheets as follows:


	February 3, 2018		January 28, 2017
Non-current deferred tax assets (included in other assets)	$	-	$	443
Non-current deferred tax liabilities (included in other liabilities)		-		(3,665	)
Net deferred tax asset (liability)	$	-	$	(3,222	)

The components of income tax (benefit) expense are as follows:


	2017			2016			2015
Current:
Federal	$	(7,222	)	$	(2,131	)	$	18,298
State		(1,254	)		(423	)		1,392
Total Current		(8,476	)		(2,554	)		19,690
Deferred:
Federal		(3,665	)		1,870			(4,820	)
State		443			(35	)		(301	)
Total Deferred		(3,222	)		1,835			(5,121	)
Income tax (benefit) expense	$	(11,698	)	$	(719	)	$	14,569

Beginning in 2017, ASU No. 2016-09 required all of the tax effects related to share-based payments to be recorded through the income statement. During 2016 and 2015 we realized a tax shortfall of $0.9 million and an excess tax benefit of $3.6 million respectively, related to share-based compensation plans that were recorded in additional paid-in capital on the Consolidated Balance Sheets.

Income tax expense differs from the amount of income tax determined by applying the statutory U.S. corporate tax rate to pre-tax amounts due to the following items:


	2017			2016			2015
Federal tax at the statutory rate		33.8	%		35.0	%		35.0	%
State income taxes, net of federal benefit		3.5	%		143.7	%		3.7	%
Permanent differences and other		1.8	%		47.1	%		(0.6	)%
Valuation Allowance		(6.6	)%		-			-
Effective tax rate		32.5	%		225.8	%		38.1	%

The effective tax rate (“ETR”) represents the applicable combined federal and state statutory rates reduced by the federal benefit of state taxes deductible on federal returns, adjusted for the impact of permanent differences. The effect of measurement period adjustments from the enacted Tax Cuts and Jobs act on the effective tax rate was 1.8%.

The following is a reconciliation of the change in the amount of unrecognized tax benefits:


	2017		2016		2015
Beginning balance	$	242	$	242	$	341
Decreases due to Settlements		-		-		(99	)
Ending balance	$	242	$	242	$	242

As of February 3, 2018, there were no unrecognized tax benefits (“UTBs”) that, if recognized, would affect the ETR. We recognize interest and penalties related to UTBs in interest expense and penalties. During 2017, 2016, and 2015, the amount of interest and penalties related to UTBs was less than $0.1 million. The total amount of accrued interest and accrued penalties related to UTBs as of February 3, 2018, January 28, 2017, and January 30, 2016, was less than $0.1 million.

We are currently open to audit under the statute of limitations by the Internal Revenue Service for the tax years 2014 through 2016. Our state tax returns are open to audit under statutes of limitations for the tax years 2012 through 2016.