NOTE 9—INCOME TAXES

The components of Income from Continuing Operations before Provision for Income Taxes are as follows (amounts in millions):


	Fiscal Year Ended
	February 3,		January 28,		January 29,
	2019		2018		2017
United States	$	516	$	352	$	112
Foreign		10		8		5
Total	$	526	$	360	$	117

The Provision for Income Taxes consisted of the following (amounts in millions):


	Fiscal Year Ended
	February 3,		January 28,		January 29,
	2019		2018		2017
Current:
Federal	$	—	$	5	$	(1)
State		8		3		1
Foreign		3		2		5
		11		10		5
Deferred:
Federal		108		186		41
State		16		(3)		5
		124		183		46
Total	$	135	$	193	$	51

The Company’s combined federal, state and foreign effective tax rate for continuing operations for fiscal 2018, fiscal 2017, and fiscal 2016 was approximately 25.7%, 53.6%, and 43.6%, respectively.

The Company’s effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions where it operates, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. The changes include, but are not limited to, a federal statutory rate reduction from 35% to 21%, the elimination of U.S. federal alternative minimum tax, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings.

As a result of the Tax Act’s effective date for the change in tax rate of January 1, 2018, the Company’s federal statutory rate for fiscal 2017 was 33.9%. The Tax Act requires the Company, and other fiscal year taxpayers, to compute a blended statutory tax rate based on the ratio of the number of fiscal year days in calendar year 2017 at the 35% statutory rate versus the number of fiscal year days in calendar year 2018 at the new 21% statutory rate.

The Company’s deferred tax assets and liabilities are measured at the enacted tax rate expected to apply when these temporary items are expected to be realized or settled. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, in fiscal 2017 the Company re-measured its U.S. deferred tax assets and liabilities and recognized a non-cash $72 million tax expense.

The reconciliation of the provision for income taxes from continuing operations at the federal statutory rate of 21% to the actual tax provision for fiscal 2018, the federal statutory rate of 33.9% to the actual tax provision for fiscal 2017, and the federal statutory rate of 35% to the actual tax provision for fiscal 2016 is as follows (amounts in millions):


	Fiscal year Ended
	February 3,		January 28,			January 29,
	2019		2018		2017
Income taxes at federal statutory rate	$	110	$	122	$	41
State income taxes, net of federal income tax benefit		24		13		5
Foreign rate differential		—		(1)		(1)
Legal entity restructuring		—		—		1
Valuation allowance		—		1		(1)
Adjustments to tax reserves		—		(1)		2
Tax Cuts and Jobs Act of 2017		—		72		—
Excess tax benefits related to stock-based compensation(1)		(2)		(16)		—
Global Intangible Low-Tax Income		2		—		—
Other, net		1		3		4
Total provision (benefit)	$	135	$	193	$	51

(1)

The adoption of ASU 2016-09 in fiscal 2017 requires excess tax benefits from share-based awards activity to be reflected as a reduction of the provision for income taxes, whereas they were previously recognized in Stockholders’ Equity.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of February 3, 2019 and January 28, 2018 were as follows (amounts in millions):


	February 3,		January 28,
	2019		2018
Deferred Tax Assets:
Accrued compensation	$	12	$	10
Accrued self-insurance liabilities		9		9
Other accrued liabilities		13		14
Restructuring liabilities		7		6
Net operating loss carryforward		99		239
Fixed assets		1		2
Allowance for doubtful accounts		4		3
Inventory		26		22
Tax credit carryforward		40		38
Cash flow hedge		5		—
Other		—		3
Valuation allowance		(7)		(7)
Noncurrent deferred tax assets		209		339
Deferred Tax Liabilities:
Prepaid expense	$	—	$	(1)
Deferred financing costs		(2)		(23)
Software costs		(11)		(5)
Intangible assets		(118)		(95)
Income from discharge of indebtedness		—		(10)
Noncurrent deferred tax liabilities		(131)		(134)
Deferred tax assets, net	$	78	$	205

During fiscal 2018, the Company completed the evaluation of its indefinite reinvestment assertion as a result of the Tax Act and has asserted that its Canadian earnings are permanently reinvested until such time that the Canadian borrowings under the Senior ABL Facility, which was initially drawn on during fiscal 2016, are paid off. No provision for U.S. federal and state income taxes or foreign withholding taxes has been made in the Company’s current year consolidated financial statements for those non-U.S. subsidiaries whose earnings are considered to be permanently reinvested.

As of February 3, 2019 the Company had tax-effected U.S. federal net operating loss carryforwards of $46 million which expire beginning in fiscal 2034. The Company also had $66 million of tax effected state net operating loss carryforwards which expire in various years between fiscal 2019 and fiscal 2038. The Company also had $30 million of U.S. federal alternative minimum tax credits. As result of the Tax Act, the federal alternative minimum tax credits can be used to offset 100% of future regular tax liability and are 50% refundable for any tax years beginning after fiscal 2017 and before fiscal 2021 with any remaining credits 100% refundable in fiscal 2021. The Company also had $4 million of U.S. federal research and development credits which expire between fiscal 2031 and fiscal 2038 and $6 million of tax-effected state tax credits which expire in various years between fiscal 2019 and fiscal 2029.

The future utilization of the Company’s net operating loss carryforwards could be limited if the Company experiences an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended. In general, an ownership change may result from transactions increasing the aggregate direct or indirect ownership of certain persons (or groups of persons) in the Company’s stock by more than 50 percentage points over a testing period (generally 3 years). Future direct or indirect changes in the ownership of the Company’s common stock, including sales or acquisitions of the Company’s common stock by stockholders and purchases and issuances of the Company’s common stock by the Company, some of which are not in our control, could result in an ownership change. Any resulting limitation on the use of the Company’s net operating loss carryforwards could result in the payment of taxes above the amounts currently anticipated and have a negative effect on the Company’s future results of operations and financial position.

Upon adoption of ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”) at the beginning of fiscal 2017, the Company recorded a $56 million cumulative-effect adjustment to retained earnings in order to recognize a deferred tax asset on the excess deduction for stock option exercises over the expense recorded for book purposes. In fiscal 2018 and fiscal 2017, the application of stock-based compensation guidance in ASU 2016-09 resulted in discrete tax benefits of $2 million and $16 million from the exercise and vesting of stock based awards.

Prior to ASU 2016-09, deferred tax assets relating to tax benefits of employee stock option grants were reduced to reflect exercises in fiscal 2016. Some exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant (“windfalls”). Although these additional tax benefits, or windfalls, are reflected in the Company’s net operating loss carryforwards, pursuant to ASC 718, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable.

For fiscal 2018, the Company recorded a $1 million net income tax benefit related to discontinued operations. For fiscal 2017, the Company recorded a $240 million net income tax expense related to discontinued operations mainly from the operations and sale of the Waterworks business. For fiscal 2016, the Company recorded an $87 million net income tax expense related to discontinued operations mainly from the operations of its Waterworks business.

Federal, state and foreign income taxes net current receivable total $9 million and $8 million as of fiscal 2018 and fiscal 2017, respectively.

Accounting for uncertain tax positions

The Company follows the GAAP guidance for uncertain tax positions within ASC 740, “Income Taxes.” ASC 740 requires application of a “more likely than not” threshold to the recognition and de-recognition of tax positions. It further requires that a change in judgment related to prior years’ tax positions be recognized in the quarter of such change. A reconciliation of the beginning and ending amount of unrecognized tax benefits for continuing operations for fiscal 2018, fiscal 2017, and fiscal 2016 is as follows (amounts in millions):


	Fiscal Year Ended
	February 3,		January 28,		January 29,
	2019		2018		2017
Unrecognized Tax Benefits beginning of period	$	16	$	10	$	9
Gross increases for tax positions in current period		1		6		—
Gross increases for tax positions in prior period		—		—		1
Unrecognized Tax Benefits end of period	$	17	$	16	$	10

The resolution of the unrecognized tax benefits could affect the annual effective income tax rate.

The Company did not change its accrual for net interest and penalties related to unrecognized tax benefits in fiscal 2018, fiscal 2017, or fiscal 2017. The Company’s ending net accrual for interest and penalties related to unrecognized tax benefits at fiscal 2018, fiscal 2017, and fiscal 2016, was zero for each of the three periods, respectively. The Company’s accounting policy is to classify interest and penalties as components of income tax expense. Accrued interest and penalties from unrecognized tax benefits are included as a component of other liabilities on the Consolidated Balance Sheet.

The Company is subject to audits and examinations of its tax returns by tax authorities in various jurisdictions, including the Internal Revenue Service (“IRS”). Management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of provisions for income taxes. Certain of the Company’s tax years from 2007 and forward remain open for audit by the IRS and various state governments.