Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation under the Tax Act. As a result of the Tax Act in fiscal 2017, the Company recorded a provisional income tax charge of $6.0 million related to the deemed repatriation of accumulated but undistributed earnings of foreign operations. The re-measurement of the Company’s net deferred tax liability resulted in a provisional income tax benefit of $5.3 million.

In response to the Tax Act, the Securities and Exchange Commission staff issued Staff Accounting Bulletin ("SAB") 118 during fiscal 2018, which provides guidance on the application of U.S. GAAP and the accounting for the income tax effects of the Tax Act. SAB 118 provides a measurement period time frame that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting requirements of ASC 740, "Income Taxes". Upon completion of the Company's tax return filings during fiscal 2018, any changes in management's estimates related to the Tax Act did not have a significant impact on the Company's Consolidated Financial Statements. Additionally, the Tax Act includes a provision designed to tax Global Intangible Low Tax Income ("GILTI") earned by non-U.S. corporate subsidiaries of large U.S. shareholders starting in 2018. The Company has elected to account for any future GILTI tax liabilities as period costs and will expense those liabilities in the period incurred. The Company therefore will not record deferred taxes associated with the GILTI provision of the Tax Act.

The tax owed on the Company’s estimated deemed repatriation resulting from the Tax Act is payable in uneven annual installments through 2025. As such, $5.2 million of the tax on undistributed foreign earnings not payable within the next 12 months is presented within long-term deferred rent and other liabilities on the Consolidated Balance Sheet.

The components of the provision for income taxes are as follows for the fiscal years ended (in thousands):



	2018			2017		2016
Current:
Federal	$	94,729		$	114,443	$	184,636
State	22,585			20,996		31,426
	117,314			135,439		216,062
Deferred:
Federal	(3,943		)	38,805		(38,138		)
State	(1,315		)	3,648		(6,898		)
	(5,258		)	42,453		(45,036		)
Total provision	$	112,056		$	177,892	$	171,026

The provision for income taxes differs from the amounts computed by applying the federal statutory rate as follows for the following fiscal years:



	2018		2017		2016
Federal statutory rate	21.0	%	33.7	%	35.0	%
State tax, net of federal benefit	3.8	%	3.3	%	3.3	%
Valuation allowance	—	%	(0.8	)%	(0.1	)%
Other permanent items	1.1	%	(0.7	)%	(0.9	)%
Effective income tax rate	25.9	%	35.5	%	37.3	%

Components of deferred tax assets (liabilities) consist of the following as of the fiscal years ended (in thousands):



	2018			2017
Inventory	$	35,487		$	35,613
Employee benefits	33,591			32,909
Deferred rent	27,648			29,710
Stock-based compensation	19,005			18,315
Gift cards	14,458			13,006
Deferred revenue currently taxable	7,263			7,801
Store closing expense	1,178			2,739
Other accrued expenses not currently deductible for tax purposes	5,895			4,590
Net operating loss carryforward	2,056			3,031
Non income-based tax reserves	5,464			5,518
Capital loss carryforward	922			910
Uncertain income tax positions	1,218			2,152
Insurance	2,298			2,060
Other	120			78
Valuation allowance	—			—
Total deferred tax assets	156,603			158,432
Property and equipment	(115,726		)	(117,925		)
Inventory valuation	(26,871		)	(28,430		)
Intangibles	(5,068		)	(4,844		)
Prepaid expenses	(3,723		)	(3,826		)
Other	(3,748		)	—
Total deferred tax liabilities	(155,136		)	(155,025		)
Net deferred tax asset	$	1,467		$	3,407

The deferred tax asset from net operating loss carryforwards of $2.1 million represents approximately $6.7 million of federal net operating losses, which expire in 2036, and $10.6 million of state net operating losses, which expire in 2034. In 2018, of the $1.5 million net deferred tax asset, approximately $13.2 million is included within other long-term assets and approximately $11.8 million is included within other long-term liabilities on the Consolidated Balance Sheet. In 2017, of the $3.4 million net deferred tax asset, $13.6 million was included within other long-term assets and $10.2 million was included within other long-term liabilities.

The Company does not provide for deferred taxes on the excess of the financial reporting basis over the tax basis related to our investments in foreign subsidiaries. It is the Company’s intention to permanently reinvest the earnings from foreign subsidiaries outside the United States. Under the Tax Act, the associated transition tax resulted in the elimination of the excess of the amount of financial reporting basis over the tax basis in the foreign subsidiaries and subjected $66.6 million of undistributed foreign earnings to tax. An actual repatriation from our international subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes. We do not anticipate the need to repatriate funds to the United States to satisfy domestic liquidity needs and accordingly do not provide for foreign withholding taxes and U.S. state taxes.

As of February 2, 2019, the total liability for uncertain tax positions, including related interest and penalties, was approximately $5.8 million.

The following table represents a reconciliation of the Company's total balance of unrecognized tax benefits, excluding interest and penalties (in thousands):



	2018			2017			2016
Beginning of fiscal year	$	8,047		$	8,293		$	9,784
Increases as a result of tax positions taken in a prior period	456			124			—
Decreases as a result of tax positions taken in a prior period	(411		)	(142		)	(831		)
Increases as a result of tax positions taken in the current period	—			—			2,067
Decreases as a result of settlements during the current period	(2,977		)	(228		)	(2,534		)
Reductions as a result of a lapse of statute of limitations during the current period	(797		)	—			(193		)
End of fiscal year	$	4,318		$	8,047		$	8,293

The balance at February 2, 2019 includes $3.4 million of unrecognized tax benefits that would impact our effective tax rate if recognized. The Company recognizes accrued interest and penalties from unrecognized tax benefits in income tax expense.

As of February 2, 2019, the liability for uncertain tax positions includes $1.5 million for the accrual of interest. During fiscal 2018, 2017 and 2016, the Company recorded $0.3 million, $0.4 million and $0.3 million, respectively, for the accrual of interest and penalties in the Consolidated Statements of Income. The Company has ongoing federal, state and local examinations. It is possible that these examinations may be resolved within 12 months. Due to the potential for resolution of these examinations, and the expiration of various statutes of limitation, it is reasonably possible that $3.1 million of the Company's gross unrecognized tax benefits and interest at February 2, 2019 could be recognized within the next 12 months. The Company does not anticipate that changes in its unrecognized tax benefits will have a material impact on the Consolidated Statements of Income during fiscal 2019.

The Company participates in the Internal Revenue Service ("IRS") Compliance Assurance Program ("CAP"). As part of 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 2017 and all prior tax years. The Company is no longer subject to examination in any of its major state jurisdictions for years prior to 2014.