Income Taxes

12 Months Ended

Feb. 29, 2020

INCOME TAXES

Tax Reform. The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was enacted on December 22, 2017, and, among other changes, reduced the federal statutory tax rate from 35.0% to 21.0%. In accordance with U.S. GAAP for income taxes, as well as SEC Staff Accounting Bulletin No. 118 (“SAB 118”), the company made a reasonable estimate of the impacts of the 2017 Tax Act and recorded this estimate in its results for the year ended February 28, 2018. SAB 118 allows for a measurement period of up to one year, from the date of enactment, to complete the company’s accounting for the impacts of the 2017 Tax Act. As of February 28, 2019, our analysis under SAB 118 was completed and resulted in no material adjustments to the provisional amounts recorded as of February 28, 2018.

The provision for income taxes and effective tax rate for fiscal 2018 included a $32.7 million increase in tax expense related to the revaluation of our net deferred tax asset at the lower federal statutory tax rate. This increase was partially offset by a $20.8 million benefit from the reduction in the federal statutory tax rate in the fourth quarter of fiscal 2018.

Income Tax Provision



	Years Ended February 29 or 28
(In thousands)	2020			2019			2018
Current:
Federal	$	225,858		$	218,497		$	276,597
State	47,797			49,596			41,892
Total	273,655			268,093			318,489
Deferred:
Federal	146			3,601			81,486
State	(1,248		)	(1,301		)	(479		)
Total	(1,102		)	2,300			81,007
Income tax provision	$	272,553		$	270,393		$	399,496

Effective Income Tax Rate Reconciliation



	Years Ended February 29 or 28
	2020		2019		2018
Federal statutory income tax rate	21.0	%	21.0	%	32.7	%
State and local income taxes, net of federal benefit	3.4		3.4		3.1
2017 Tax Act	—		(0.1	)	3.1
Share-based compensation	(1.1	)	(0.3	)	(1.3	)
Nondeductible and other items	0.7		0.7		0.2
Credits	(0.5	)	(0.4	)	(0.2	)
Effective income tax rate	23.5	%	24.3	%	37.6	%

The 2017 Tax Act above includes the following impacts for fiscal 2018:


•	Revaluation of deferred taxes that existed on December 22, 2017, the enactment date of the 2017 Tax Act.


•	Deferred taxes that were created after December 22, 2017. These items were recognized in fiscal 2018 at the federal statutory tax rate of 32.7% but will reverse at the newly enacted 21% federal rate.

Temporary Differences Resulting in Deferred Tax Assets and Liabilities



	As of February 29 or 28
(In thousands)	2020			2019
Deferred tax assets:
Accrued expenses and other	$	39,576		$	42,331
Partnership basis	89,359			71,455
Operating lease liabilities	119,558			—
Share-based compensation	51,039			48,818
Derivatives	10,346			—
Capital loss carry forward	917			677
Total deferred tax assets	310,795			163,281
Less: valuation allowance	(917		)	(677		)
Total deferred tax assets after valuation allowance	309,878			162,604
Deferred tax liabilities:
Prepaid expenses	19,742			16,960
Property and equipment	67,589			59,537
Operating lease assets	114,212			—
Inventory	18,493			17,279
Profit-sharing revenues	—			6,599
Derivatives	—			883
Total deferred tax liabilities	220,036			101,258
Net deferred tax asset	$	89,842		$	61,346

Except for amounts for which a valuation allowance has been provided, we believe it is more likely than not that the results of future operations and the reversals of existing deferred taxable temporary differences will generate sufficient taxable income to realize the deferred tax assets. The valuation allowance as of February 29, 2020, relates to capital loss carryforwards that are not more likely than not to be utilized prior to their expiration.

Reconciliation of Unrecognized Tax Benefits



	Years Ended February 29 or 28
(In thousands)	2020			2019			2018
Balance at beginning of year	$	30,270		$	28,685		$	29,955
Increases for tax positions of prior years	3,493			2,035			—
Decreases for tax positions of prior years	(2,913		)	(266		)	(607		)
Increases based on tax positions related to the current year	4,170			2,498			3,342
Settlements	(326		)	(44		)	(304		)
Lapse of statute	(3,829		)	(2,638		)	(3,701		)
Balance at end of year	$	30,865		$	30,270		$	28,685

As of February 29, 2020, we had $30.9 million of gross unrecognized tax benefits, $9.2 million of which, if recognized, would affect our effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefit will increase or decrease during the next 12 months; however, we do not expect the change to have a significant effect on our results of operations, financial condition or cash flows. As of February 28, 2019, we had $30.3 million of gross unrecognized tax benefits, $10.7 million of which, if recognized, would affect our effective tax rate. As of February 28, 2018, we had $28.7 million of gross unrecognized tax benefits, $9.6 million of which, if recognized, would affect our effective tax rate.

Our continuing practice is to recognize interest and penalties related to income tax matters in SG&A expenses. Our accrual for interest and penalties was $4.0 million, $3.2 million and $2.8 million as of February 29, 2020 and February 28, 2019 and 2018, respectively.

CarMax is subject to U.S. federal income tax as well as income tax of multiple states and local jurisdictions. With a few insignificant exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to fiscal 2016.