Annual report pursuant to Section 13 and 15(d)

Taxes

v3.20.1
Taxes
12 Months Ended
Feb. 01, 2020
Taxes Payable [Abstract]  
Taxes
Taxes
Income tax expense (benefit) is as follows:
 
 
2019
 
2018
 
2017
 
Current
 
Deferred
 
Total
 
Current
 
Deferred
 
Total
 
Current
 
Deferred
 
Total
 
(millions)
Federal
$
137

 
$
4

 
$
141

 
$
156

 
$
79

 
$
235

 
$
367

 
$
(462
)
 
$
(95
)
State and local
33

 
(10
)
 
23

 
54

 
33

 
87

 
15

 
41

 
56

 
$
170

 
$
(6
)
 
$
164

 
$
210

 
$
112

 
$
322

 
$
382

 
$
(421
)
 
$
(39
)

On December 22, 2017, H.R. 1 was enacted into law. This new tax legislation, among other things, reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018.
In applying the impacts of the new tax legislation to its 2017 income tax provision, the Company remeasured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally a 21% federal tax rate and its related impact on the state tax rates. The resulting impact was the recognition of an income tax benefit of $584 million in the fourth quarter of 2017.  In addition, applying the new U.S. federal corporate tax rate of 21% on January 1, 2018, resulted in a federal income tax statutory rate of 33.7% in 2017. Combining the impacts on the Company’s current income tax provision and the remeasurement of its deferred tax balances, the Company’s effective income tax rate was a benefit of 2.6% in 2017.

The income tax expense (benefit) reported differs from the expected tax computed by applying the federal income tax statutory rate of 21% for both 2019 and 2018, and 33.7% for 2017 to income before income taxes net of noncontrolling interest. The reasons for this difference and their tax effects are as follows:
 
 
2019
 
2018
 
2017
 
(millions)
Expected tax
$
153

 
$
300

 
$
515

State and local income taxes, net of federal income tax benefit (a)
13

 
59

 
19

Federal tax reform deferred tax remeasurement

 
(17
)
 
(584
)
Tax impact of equity awards (a)
1

 

 
14

Federal tax credits
(3
)
 
(16
)
 
(16
)
Change in valuation allowance
5

 
10

 
18

Other
(5
)
 
(14
)
 
(5
)
 
$
164

 
$
322

 
$
(39
)

(a) 2017 included the recognition of approximately $15 million of net tax shortfalls associated with share-based payment awards due to the adoption of Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting. Historically, the Company had recognized such amounts as an offset to accumulated excess tax benefits previously recognized in additional paid-in capital.

The Company participates in the Internal Revenue Service (“IRS”) Compliance Assurance Program ("CAP"). As part of the CAP, tax years are audited on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. The IRS has completed examinations of 2016 and all prior tax years.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
 
 
February 1,
2020
 
February 2,
2019
 
(millions)
Deferred tax assets
 
 
 
Post employment and postretirement benefits
$
210

 
$
208

Accrued liabilities accounted for on a cash basis for tax purposes
165

 
222

Lease liabilities
864

 

Unrecognized state tax benefits and accrued interest
40

 
39

State operating loss and credit carryforwards
102

 
103

Other
110

 
172

Valuation allowance
(80
)
 
(75
)
Total deferred tax assets
1,411

 
669

Deferred tax liabilities
 
 
 
Excess of book basis over tax basis of property and equipment
(988
)
 
(987
)
Right of use assets
(707
)
 

Merchandise inventories
(365
)
 
(398
)
Intangible assets
(309
)
 
(308
)
Other
(211
)
 
(214
)
Total deferred tax liabilities
(2,580
)
 
(1,907
)
Net deferred tax liability
$
(1,169
)
 
$
(1,238
)


The valuation allowance at February 1, 2020 and February 2, 2019 relates to net deferred tax assets for state net operating loss and credit carryforwards. The net change in the valuation allowance amounted to an increase of $5 million for 2019. In 2018, the net change in the valuation allowance amounted to an increase of $10 million.
As of February 1, 2020, the Company had no federal net operating loss carryforwards, state net operating loss carryforwards, net of valuation allowances, of $218 million, and state credit carryforwards, net of valuation allowances, of $9 million, which will expire between 2020 and 2039.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 
 
February 1,
2020
 
February 2,
2019
 
February 3,
2018
 
(millions)
Balance, beginning of year
$
149

 
$
140

 
$
167

Additions based on tax positions related to the current year
18

 
17

 
7

Additions for tax positions of prior years
11

 
13

 

Reductions for tax positions of prior years
(20
)
 
(12
)
 
(23
)
Settlements
(16
)
 

 
(2
)
Statute expirations
(9
)
 
(9
)
 
(9
)
Balance, end of year
$
133

 
$
149

 
$
140

Amounts recognized in the Consolidated Balance Sheets
 
 
 
 
 
Current income taxes
$
12

 
$
28

 
$
11

Deferred income taxes
4

 
4

 
4

Other liabilities (a)
117

 
117

 
125

 
$
133

 
$
149

 
$
140


(a) Unrecognized tax benefits not expected to be settled within one year are included within other liabilities on the Consolidated Balance Sheets.

Additional information regarding unrecognized benefits and related interest and penalties is as follow:

 
February 1,
2020
 
February 2,
2019
 
 
(millions)
Amount of unrecognized tax benefits, net of deferred tax assets, that if recognized would affect the effective tax rate
$
106

 
$
120

 
Accrued federal, state and local interest and penalties
60

 
56

 
Amounts recognized in the Consolidated Balance Sheets
 
 
 
 
Current income taxes
4

 
28

 
Other liabilities
56

 
28

 

The Company classifies federal, state and local interest and penalties not expected to be settled within one year as other liabilities on the Consolidated Balance Sheets and follows a policy of recognizing all interest and penalties related to unrecognized tax benefits in income tax expense. The accrued federal, state and local interest and penalties primarily relate to state tax issues and the amount of penalties paid in prior periods, and the amounts of penalties accrued at February 1, 2020 and February 2, 2019, are insignificant. Federal, state and local interest and penalties amounted to an expense of $6 million for 2019, an expense of $5 million for 2018, and a credit of $3 million for 2017.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2016. With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for years before 2010. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been accrued for any adjustments that are expected to result from the years still subject to examination.
As of February 1, 2020, the Company believes it is reasonably possible that certain unrecognized tax benefits ranging from zero to $56 million may be recognized by the end of 2020. It is reasonably possible that there could be other material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues or the reassessment of existing uncertain tax positions; however, the Company is not able to estimate the impact of these items at this time.