Income Taxes

The following table sets forth the components of income tax expense from continuing operations for each of the following fiscal years (in thousands):



	2017		2016			2015
Currently payable:
Federal	$	9,422	$	13,553		$	21,055
State	1,115		579			1,713
	10,537		14,132			22,768
Deferred:
Federal	6,944		533			20,567
State	1,279		(1,103		)	1,856
	8,223		(570		)	22,423
Total income tax expense	$	18,760	$	13,562		$	45,191

Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):



	February 25, 2017			February 27, 2016
Deferred tax assets:
Deferred credits from landlords	$	3,243		$	10,719
Share-based compensation	8,655			6,462
Compensation accrual	1,253			1,091
Deferred compensation	2,151			2,149
Other	9,199			8,692
Total deferred tax assets	24,501			29,113
Deferred tax liabilities:
Property and equipment	(38,094		)	(39,350		)
Merchandise inventories	(18,520		)	(12,286		)
Other	(113		)	(2,918		)
Total deferred tax liabilities	(56,727		)	(54,554		)
Net deferred tax liability	$	(32,226	)	$	(25,441	)

The effective income tax rate from continuing operations varies from the statutory federal income tax rate for fiscal 2017, 2016, and 2015 due to the following:



	2017		2016		2015
Tax at statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	4.1		0.7		2.0
Tax contingencies	(0.7	)	—		(0.3	)
Research and development tax credits	(0.6	)	(4.4	)	—
Benefit of worthless stock deduction	—		—		(3.2	)
Retired executive officer’s compensation	(2.9	)	—		—
Other	(0.1	)	0.6		0.2
	34.8	%	31.9	%	33.7	%

During fiscal 2017, the Company’s Executive Chairman retired. As a result of the retirement, the executive’s compensation was no longer subject to the Internal Revenue Code Section 162 limitation on the deduction for non-performance based compensation as he was not an employee at the end of the fiscal year. The Company claimed a tax benefit upon retirement for expenses not deducted in prior years related to the executive’s time based restricted stock that had not vested in prior years, but did vest during fiscal 2017. During fiscal 2017, the increase in state income taxes, net of federal benefit, compared to fiscal 2016 is primarily attributable to state research and development credits generated during fiscal 2016 that were not generated in fiscal 2017. During fiscal 2016, the reduction in the state income taxes compared to fiscal 2015, net of the federal benefit above, is primarily attributable to state research and development credits generated during fiscal 2016.

As of February 25, 2017, the Company had $46.8 million of net operating loss carryforwards for state tax purposes. If not used, these carryforwards will expire between fiscal 2023 and 2033. As of February 25, 2017, the Company also had state tax credit carryforwards of $1.4 million. If not used, these state tax credit carryforwards will expire between fiscal 2025 and 2027.

The Company recorded a valuation allowance of $0.6 million in fiscal 2017 that is included in the “Other” section of total deferred tax assets. In assessing the realizability of the deferred tax asset related to certain state net operating losses and credits, the Company considered whether it was more likely than not to utilize the state net operating losses and credits before they would expire. The ultimate realization of the state net operating losses and state credits is contingent on whether a substantial amount of income may be generated in that specific state in the future allowing a benefit of the loss and credit before they expire. Based on current estimates of future taxable income in certain states, the Company does not believe it is more likely than not to generate enough taxable income allowing for full utilization of certain state net operating losses and credits before they would expire.

Payments (refunds) of income taxes for fiscal 2017, 2016, and 2015 equaled $(15.1) million, $29.6 million, and $39.3 million, respectively.

The Company is subject to U.S. federal income tax as well as income tax by multiple state and local jurisdictions. The Company has substantially concluded all U.S. federal income tax matters through fiscal 2012 and all state and local income tax matters through fiscal 2009. In the future, the Company may resolve some or all of the issues related to tax matters of open fiscal years, which may require the Company to make payments to settle agreed upon liabilities.

Uncertain Tax Positions

As of February 25, 2017 and February 27, 2016, the Company had $2.6 million and $3.2 million of unrecognized tax benefits respectively, included in other long-term liabilities on the consolidated balance sheets, $1.9 million and $2.3 million respectively, of which, if recognized, would affect the effective income tax rate. Of the total unrecognized tax benefits as of February 25, 2017, it is reasonably possible that the total unrecognized tax benefits could decrease by up to $0.4 million during the next twelve months due to audit settlements, expiration of statute of limitations, or other resolution of uncertainties. Due to the uncertain and complex application of tax rules and regulations, it is possible that the ultimate resolution of audits may result in liabilities that could be different from this estimate. In such case, the Company will record additional tax expense or tax benefit in the tax provision or reclassify amounts on the consolidated balance sheets in the period in which such matter is effectively settled with the tax authority.

The Company recognizes interest and penalty expense, as well as reversal of expense, related to unrecognized tax benefits as components of income tax expense. In fiscal 2017, 2016, and 2015, $(0.3) million, $(0.8) million, and $(0.5) million, respectively, of interest and penalties were included in income tax expense on the consolidated statements of operations. The Company has accrued $0.4 million and $0.7 million for the payment of interest and penalties as of February 25, 2017 and February 27, 2016, respectively.

The following table summarizes by fiscal year the activity related to the Company’s unrecognized tax benefits for U.S. federal and state tax jurisdictions and excludes accrued interest and penalties (in thousands):



	2017			2016			2015
Unrecognized tax benefits at beginning of year	$	2,485		$	1,999		$	7,638
Increases in tax positions for prior years	212			1,167			—
Decreases in tax positions for prior years	(26		)	(259		)	(5,595		)
Increases in unrecognized tax benefits as a result of current year activity	19			176			50
Decreases to unrecognized tax benefits relating to settlements with taxing authorities	—			—			(29		)
Decreases to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations	(535		)	(598		)	(65		)
Unrecognized tax benefits at end of year	$	2,155		$	2,485		$	1,999

The significant decrease in unrecognized tax benefits during fiscal 2015 reflects the completion of an IRS audit covering the years ending February 26, 2011, March 3, 2012, and March 2, 2013 and the filing of an automatic accounting method change to change the tax accounting treatment for a deferred tax asset. As a result of the resolution of the IRS audit and the filing of the automatic accounting method change, certain items reserved for in prior years no longer required a reserve.