Income Taxes

12 Months Ended

Jan. 25, 2020

Income Taxes

Income Taxes

9.    Income Taxes

Our income tax provision is as follows (in thousands):

	Fiscal Year Ended
	January 25, 2020		January 26, 2019		January 27, 2018
Current income tax expense
Federal	$	16,867	$	16,620	$	23,786
State		3,058		2,607		2,885
Deferred income tax expense (benefit)
Federal		4,156		(16,343)		9,208
State		(909)		(2,901)		(2,034)
Income tax provision (benefit)	$	23,172	$	(17)	$	33,845

On December 22, 2017, the Tax Act was adopted into law. The Tax Act makes broad and complex changes to the Internal Revenue Code of 1986, including, but not limited to, (i) reducing the U.S. federal corporate tax rate from 35% to 21%; (ii) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits are realized; (iii) creating a new limitation on deductible interest expense; and (iv) changing rules related to the use and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017. As a result of the adoption of the Tax Act, for the fiscal year ended January 27, 2018, the statutory federal corporate tax rate was prorated to 34.0%, with the statutory rate for the fiscal year ended January 26, 2019 and beyond at 21.0%.

Deferred tax assets and liabilities are determined based on the estimated future tax effects of the difference between the financial statement and tax basis of asset and liability balances using statutory tax rates. Tax effects of temporary differences that give rise to significant components of the deferred tax assets and liabilities are as follows (in thousands):

	January 25, 2020		January 26, 2019
Deferred tax assets
Inventory	$	12,566	$	9,283
Accruals		4,257		3,835
Deferred rent		—		11,311
Net operating losses		109		290
Deferred gains		—		33,181
Deferred compensation		7,370		16,400
Financing obligations		—		5,636
Deferred revenue		986		1,200
Prepaid rent		1,452		1,514
Operating lease liabilities		310,817		—
Intangible assets		1,338		1,184
Other, net		722		479
Total deferred tax assets		339,617		84,313
Deferred tax liabilities
Property and equipment		(33,153)		(31,420)
Operating lease right-of-use assets		(289,537)		—
Trade name		(112)		(88)
Total deferred tax liabilities		(322,802)		(31,508)
Net deferred tax asset	$	16,815	$	52,805

We are required to assess the available positive and negative evidence to estimate if sufficient future income will be generated to utilize deferred tax assets. We believe the cumulative pre-tax income is a significant piece of positive evidence that allows us to consider other subjective evidence such as future forecasted pre-tax income. For the fiscal year ended January 25, 2020, after excluding impairment charges, and the fiscal years ended January 26, 2019 and

January 27, 2018, we continued to have three years of cumulative pre-tax income. In addition, taxable income exceeded pre-tax income for the fiscal years ended January 25, 2020, January 26, 2019 and January 27, 2018. We concluded that because of this positive evidence, as well as cumulative pre-tax income in recent fiscal years, it was more likely than not that our deferred tax assets would be realized in future years. Accordingly, during fiscal year 2020, we determined no valuation allowance was required.

We had approximately $3.0 million and $6.4 million of state net operating loss carryforwards at January 25, 2020 and January 26, 2019, respectively. The state net operating losses begin to expire in fiscal year 2024. During fiscal year 2018, we determined that the valuation allowance for state net operating losses was no longer necessary as we expect to fully utilize all net operating loss carryforward prior to expiration.

The reconciliation between the actual income tax provision and the income tax provision calculated at the federal statutory tax rate is as follows (dollars in thousands):

	Fiscal Year Ended
	January 25, 2020			January 26, 2019			January 27, 2018
Income tax provision at the federal statutory rate	$	(40,165)		$	10,286		$	22,297
Permanent differences		399			340			325
Impairment charges		52,500			—			—
State income taxes, net of federal income tax effect		1,843			(112)			596
Change in unrecognized tax benefits		(249)			(495)			(130)
Change in valuation allowance		—			—			(314)
Effect of the Tax Act		—			(524)			16,694
Equity-based compensation		9,115			(9,293)			(5,826)
Tax credits		(319)			(278)			(208)
Deferred adjustment		48			59			411
Income tax provision (benefit)	$	23,172		$	(17)		$	33,845
Effective tax rate		(12.1)	%		(0.0)	%		51.5	%

Uncertain Tax Positions

We operate in a number of tax jurisdictions and are subject to examination of its income tax returns by tax authorities in those jurisdictions who may challenge any item on these returns. Because the tax matters challenged by tax authorities are typically complex, the ultimate outcome of these challenges is uncertain. In accordance with ASC 740 (Topic 740, “Income Taxes”), we recognize the benefits of uncertain tax positions in our consolidated financial statements only after determining that it is more likely than not that the uncertain tax positions will be sustained.

The total amount of unrecognized tax benefits as of January 25, 2020 was $0.6 million, $0.4 million of which would favorably impact the effective tax rate if resolved in our favor.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	January 25, 2020		January 26, 2019
Balance, beginning of period	$	716	$	1,688
Additions based on tax positions related to the current year		102		—
Additions based on tax positions related to the prior year		249		—
Subtractions based on tax positions related to the prior year		—		(443)
Settlements		(69)		(5)
Expiration of statute of limitations		(447)		(524)
Balance, end of period	$	551	$	716

We recognize accrued interest and penalties related to unrecognized tax benefits in our provision for income taxes. As of January 25, 2020 and January 26, 2019, there was an immaterial amount in accrued penalties. As of January 25, 2020 and January 26, 2019, there was approximately $0.1 million in accrued interest. In addition, we released approximately $0.1 million in interest expense and penalties during each of the fiscal years ended January 25, 2020 and January 26, 2019 and recognized an immaterial amount of interest expense and penalties during the fiscal year ended January 27, 2018.

In the normal course of business, we are subject to examination by taxing authorities in U.S. Federal and U.S. state jurisdictions. The period subject to examination for our federal return is fiscal year 2017 and later and fiscal year 2016 and later for all major state tax returns. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with management's expectations, we could be required to adjust the provision for income tax in the period such resolution occurs.