Income Taxes

12 Months Ended

Feb. 01, 2020

Income, including income (loss) from equity investment in TSL, before income taxes consisted of the following:



	Fiscal
(in thousands)	2019		2018			2017
Domestic income	$	111,021	$	123,172		$	131,131
Foreign income (loss), including income (loss) from equity investment in TSL	8,753		(113,805		)	(4,112		)
Income, including income (loss) from equity investment in TSL, before income taxes	$	119,774	$	9,367		$	127,019

Income tax provision consisted of the following:



	Fiscal
(in thousands)	2019			2018			2017
Current:
Federal	$	21,196		$	29,073		$	60,041
Foreign	205			188			901
State and local	6,596			12,268			11,382
Total current tax expense	27,997			41,529			72,324
Deferred:
Federal	(620		)	(2,234		)	(10,431		)
Foreign	(1,241		)	(9,273		)	927
State and local	(859		)	(189		)	(3,253		)
Total deferred tax expense	(2,720		)	(11,696		)	(12,757		)
Income tax provision	$	25,277		$	29,833		$	59,567

The following presents a reconciliation of the income tax provision based on the U.S. federal statutory tax rate to the total tax provision (the U.S. federal statutory tax rate used below for fiscal 2017 excludes the impact of the revised rate due to the U.S. Tax Reform as that change is reflected in the net impact of implementing the U.S. Tax Reform):



	Fiscal
(in thousands)	2019			2018			2017
Income tax provision at federal statutory rate	$	25,152		$	1,966		$	44,457
State and local taxes, net of federal benefit	4,809			5,688			3,896
Foreign tax rate differential	546			(3,270		)	922
Foreign impairment charges	—			11,196			—
Change in valuation allowance	(3,949		)	8,157			834
Non-deductible compensation	344			2,219			54
Change in uncertain tax positions	(527		)	2,611			1,245
Net impact of implementing the U.S. Tax Reform	—			2,144			10,079
Other	(1,098		)	(878		)	(1,920		)
Income tax provision	$	25,277		$	29,833		$	59,567

On December 22, 2017, the U.S. Tax Reform was enacted in the U.S., which significantly changed how the U.S. taxes corporations. The U.S. Tax Reform reduced the federal statutory tax rate from 35% to 21% and requires complex computations to be performed that were not previously required in U.S. tax law. The U.S. Treasury Department, the U.S. Internal Revenue Service, and other standard-setting bodies could interpret or issue guidance on how provisions of the U.S. Tax Reform will be applied or otherwise administered that is different from our interpretation. During fiscal 2017, we recognized $10.1 million of additional net tax expense based on our initial assessment of implementing the U.S. Tax Reform. During fiscal 2018, we completed our determination of the accounting implications of the U.S. Tax Reform and recognized $2.1 million of additional net tax expense as a result of implementing the U.S. Tax Reform.

For fiscal 2019, the impact of taxation of the foreign operations on our total effective income tax rate was primarily related to valuation allowances taken.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:



(in thousands)	February 1, 2020			February 2, 2019
Deferred tax assets:
State bonus depreciation	$	3,342		$	3,233
Inventory	11,669			11,131
Construction and tenant allowances	—			3,048
Stock-based compensation	10,987			9,081
Gift cards	3,801			2,763
Accrued expenses	4,193			3,389
Accrued rewards	3,405			3,356
Accrued rent	—			13,441
Lease liability	259,846			—
Foreign net operating losses	9,251			13,627
Acquisition-related transaction costs	4,194			2,832
Other	6,341			4,540
	317,029			70,441
Less: valuation allowance	(9,472		)	(14,097		)
Total deferred tax assets, net of valuation allowance	307,557			56,344
Deferred tax liabilities:
Right of use asset	(242,733		)	—
Property and equipment	(25,359		)	(23,423		)
Intangible assets	(5,634		)	(3,287		)
Prepaid expenses and other	(3,977		)	(2,611		)
	(277,703		)	(29,321		)
Net deferred tax assets	$	29,854		$	27,023

Deferred income taxes are reported within the consolidated balance sheets as follows:



(in thousands)	February 1, 2020			February 2, 2019
Deferred tax assets	$	31,863		$	30,283
Deferred tax liabilities included in other non-current liabilities	(2,009		)	(3,260		)
Net deferred tax assets as shown above	$	29,854		$	27,023

We establish valuation allowances for deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. As of February 1, 2020, the valuation allowance is primarily related to foreign net operating losses, which, if not utilized, a portion of the carryovers will begin to expire in fiscal 2034. The following presents the changes in valuation allowance:



	Fiscal
(in thousands)	2019			2018			2017
Valuation allowance - beginning of period	$	14,097		$	2,736		$	1,972
Additions charged to income tax provision	—			8,157			834
Additions related to acquisitions	—			6,124			—
Allowances taken or written off	(3,949		)	(2,920		)	(70		)
Other adjustments	(676		)	—			—
Valuation allowance - end of period	$	9,472		$	14,097		$	2,736

The U.S. Tax Reform included a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been previously accrued have now been subject to

U.S. tax. Notwithstanding the U.S. taxation of these amounts, we intend to continue to invest all of these earnings, as well as our capital in these subsidiaries, indefinitely outside of the U.S. and we do not expect to incur any significant, additional taxes related to such amounts.

Changes in gross unrecognized tax benefits were as follows:



	Fiscal
(in thousands)	2019			2018			2017
Unrecognized tax benefits - beginning of period	$	11,608		$	7,925		$	6,773
Additions for tax positions taken in the current year	1,692			4,105			1,835
Reductions for tax positions taken in prior years:
Changes in estimates	(340		)	—			—
Lapses of applicable statutes of limitations	—			—			(233		)
Settlements	(2,196		)	(422		)	(450		)
Unrecognized tax benefits - end of period	$	10,764		$	11,608		$	7,925

Of the $10.8 million, $11.6 million and $7.9 million of total unrecognized tax benefits at February 1, 2020, February 2, 2019 and February 3, 2018, respectively, approximately $9.2 million, $10.2 million and $6.7 million, respectively, represent the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate in future periods. While it is expected that the amount of unrecognized tax benefits will change in the next 12 months, any changes are not expected to have a material impact on our financial position, results of operations or cash flows. We recognize interest and penalties related to unrecognized tax benefits as a component of the income tax provision. As of February 1, 2020, February 2, 2019 and February 3, 2018, interest and penalties were $2.3 million, $1.8 million and $0.9 million, respectively.

We are no longer subject to U.S. federal income tax examinations for years prior to fiscal 2014 and state income tax examinations for years prior to 2015. We have a federal income tax return and three state income tax returns in the process of examination at this time. We estimate the range of possible changes that may result from any future tax examinations to be insignificant at this time.