|12 Months Ended|
Feb. 03, 2018
|Taxes Payable [Abstract]|
Income tax expense (benefit) is as follows:
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 $571 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 1.9% in 2017.
The income tax expense (benefit) reported differs from the expected tax computed by applying the federal income tax statutory rate of 33.7% for 2017 and 35% for 2016 and 2015 to income before income taxes. The reasons for this difference and their tax effects are as follows:
(a) 2017 included the recognition of approximately $15 million of net tax deficiencies 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:
The valuation allowance at February 3, 2018 and January 28, 2017 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 $29 million for 2017 which includes $11 million due to the impact of the deferred tax remeasurement associated with the 2017 U.S. federal tax reform. In 2016, the net change in the valuation allowance amounted to an increase of $9 million.
As of February 3, 2018, the Company had no federal net operating loss carryforwards, state net operating loss carryforwards, net of valuation allowances, of $138 million, and state credit carryforwards, net of valuation allowances, of $16 million, which will expire between 2018 and 2037.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
As of February 3, 2018 and January 28, 2017, the amount of unrecognized tax benefits, net of deferred tax assets, that, if recognized would affect the effective income tax rate, was $111 million and $109 million, respectively.
The Company classifies unrecognized tax benefits not expected to be settled within one year as other liabilities on the Consolidated Balance Sheets.
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. Federal, state and local interest and penalties, which amounted to a credit of $3 million for 2017, an expense of $2 million for 2016, and an expense of $1 million for 2015, are reflected in income tax expense.
The Company had $51 million and $55 million accrued for the payment of federal, state and local interest and penalties at February 3, 2018 and January 28, 2017, respectively. The accrued federal, state and local interest and penalties primarily relates to state tax issues and the amount of penalties paid in prior periods, and the amount of penalties accrued at February 3, 2018 and January 28, 2017 are insignificant. At February 3, 2018, $27 million of federal, state and local interest and penalties is included in other liabilities and $24 million is included in current income taxes on the Consolidated Balance Sheets.
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 2014. 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 2008. 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.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/presentationRef