Income Taxes

Tax Cuts and Jobs Act

On December 22, 2017 the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Act”). The Act makes broad and complex changes to the U.S. tax code, including but not limited to, reducing the U.S. federal corporate rate from 35% to 21% effective as of January 1, 2018, allowing full expensing of qualified property acquired and placed in service after September 27, 2017, and imposing new limits on executive compensation and net interest expense.

The Company has recognized the income tax effects of the Act in its financial statements for the year ended February 3, 2018 in accordance with Staff Accounting Bulletin No. 118, which provides guidance for the application of ASC 740 - Income Taxes in the period in which the Act was signed into law. While the Company has not yet completed its analysis, based on reasonable assumptions and available information, the Company has determined that its blended federal income tax rate for the year ended February 3, 2018 will be 33.7% and has recorded approximately $419,000 of tax expense associated with the revaluation of its deferred tax asset and liability balances based on the new federal rate of 21%. If additional taxable items which are temporary in nature are later identified, this will increase the Company’s current federal taxes payable at 33.7% and increase its deferred federal tax asset at 21%, resulting in additional expense.

The Company will continue to refine the calculations as additional analysis is completed. In addition, these estimates may also be affected as the Company gains a more thorough understanding of the tax law, including those related to state tax treatment.

Income Tax Provision

The Company’s income tax expense is computed based on the federal statutory rates and the state statutory rates, net of related federal benefit. The Company’s provision for income taxes consists of the following (in thousands):



	53 Weeks Ended February 3, 2018			52 Weeks Ended January 28, 2017			52 Weeks Ended January 30, 2016
Current tax expense:
Federal	$	5,141		$	7,325		$	8,120
State	876			845			761
Deferred tax (benefit) expense:
Federal	(1,207		)	(1,379		)	601
State	(290		)	(862		)	42
	$	4,520		$	5,929		$	9,524

Income tax expense differs from the amount computed by applying the statutory federal income tax rate to pre-tax income. A reconciliation of income tax expense at the statutory federal income tax rate to the amount provided is as follows (in thousands):



	53 Weeks Ended February 3, 2018			52 Weeks Ended January 28, 2017			52 Weeks Ended January 30, 2016
Tax at federal statutory rate	$	3,308		$	5,941		$	9,134
State income taxes, net of federal benefit	559			598			844
Tax credits	(174		)	(255		)	(506		)
Enactment of tax legislation	419			—			—
Unrecognized tax positions	(185		)	(202		)	—
Stock based compensation programs	575			23			22
Other	18			(176		)	30
Income tax expense	$	4,520		$	5,929		$	9,524

Deferred income taxes reflect the net tax effects of temporary differences between the carrying 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 3, 2018			January 28, 2017
Deferred tax assets:
Accruals	$	2,884		$	3,208
Inventory valuation	671			898
State tax credit carryforwards	197			190
State net operating loss carryforwards	14			—
Deferred rent	3,966			5,745
Other	3,933			5,922
Total deferred tax assets	11,665			15,963
Valuation allowance for deferred tax assets	(73		)	(56		)
Net deferred tax assets	11,592			15,907
Deferred tax liabilities:
Depreciation	(8,742		)	(14,421		)
Prepaid assets	(634		)	(767		)
Total deferred tax liabilities	(9,376		)	(15,188		)
Net deferred tax assets	$	2,216		$	719

As of February 3, 2018, the Company has state net operating loss carryforwards of approximately $268,000 expiring in 2032 and state tax credit carryforwards of approximately $249,000 expiring in years 2023 through 2028.

Future utilization of the deferred tax assets is evaluated by the Company and any valuation allowance is adjusted accordingly. At February 3, 2018, the Company recorded a $73,000 valuation allowance related to state tax credit carryforwards. At January 28, 2017, there was a $56,000 valuation allowance against the Company’s deferred tax assets. Adjustments could be required in the future if the Company estimates that the amount of deferred tax assets to be realized is more or less than the net amount the Company has recorded.

The Company and one or more of its subsidiaries file 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 authorities for years prior to 2014. With few exceptions, the Company is no longer subject to state and local income tax examinations for years prior to 2011. The Company is not currently engaged in any U.S. federal, state or local income tax examinations.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	53 Weeks Ended February 3, 2018			52 Weeks Ended January 28, 2017
	(In thousands)
Balance at the beginning of the year	$	144		$	307
Reductions due to lapse of the statute of limitations	(144		)	(163		)
Balance at the end of the year	$	—		$	144

Included in the January 28, 2017 balance were $144,000 of unrecognized tax benefits that, if recognized, would decrease the Company’s effective tax rate. In fiscal 2017, the Company’s unrecognized tax benefits were reduced by $144,000 as a result of a lapse of the statute of limitations.

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 approximately $122,000 accrued for the payment of interest and penalties associated with unrecognized tax benefits at January 28, 2017 and no amounts accrued as of February 3, 2018.