INCOME TAXES

The income tax provision (benefit) for the fiscal years 2018, 2017 and 2016 consisted of the following:



	2018		2017			2016
Current:
Federal	$	32	$	74		$	1
State	12		9			—
Current income tax provision	44		83			1
Deferred:
Federal	31		(133		)	(15		)
State	14		10			(65		)
Deferred income tax provision (benefit)	45		(123		)	(80		)
Total income tax provision (benefit)	$	89	$	(40	)	$	(79	)

The Company’s effective income tax rates for the fiscal years ended December 29, 2018, December 30, 2017 and December 31, 2016 were 18.0%, (10.0)% and (60.0)%, respectively. The determination of the Company’s overall effective tax rate requires the use of estimates. The effective tax rate reflects the income earned and taxed in U.S. federal and various state jurisdictions based on enacted tax law, permanent differences between book and tax items, tax credits and the Company’s change in relative contribution to income for each jurisdiction. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and the Company’s effective tax rate in the future.

On December 22, 2017, the U.S. federal government enacted comprehensive tax legislation referred to herein as the Tax Act. The Tax Act made broad and complex changes to the U.S. federal income tax code, including, but not limited to (1) a reduction of the U.S. federal corporate tax rate and (2) the full expensing of qualified property.

The Securities and Exchange Commission staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740, Income Taxes is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740, Income Taxes on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

The Tax Act reduced the federal corporate income tax rate to 21%, effective January 1, 2018 and provided for bonus depreciation that allows for full expensing of qualified assets placed into service after September 27, 2017. For the fiscal year ended December 30, 2017, the Company recorded provisional amounts of the impact of the corporate tax rate reduction and bonus depreciation that allows for the full expensing of qualified property. Consequently, the Company recorded a provisional decrease to deferred tax liabilities of $173 million with a corresponding adjustment to deferred income tax benefit of $173 million for the fiscal year 2017 related to the reduction of the federal corporate income tax rate. Additionally, the Company recorded a provisional increase in net deferred tax liabilities of $4 million with a corresponding adjustment of $4 million to other long-term liabilities for the fiscal year 2017 related to bonus depreciation that allowed for the full expensing of qualified property.

For fiscal year 2018, the Company recorded adjustments to finalize provisional amounts recorded as of December 30, 2017. The Company recognized a decrease to deferred tax liabilities of $7 million and a decrease to current taxes payable of $1 million with a corresponding adjustment to income tax benefit of $8 million related to the reduction of the federal corporate income tax rate. The $8 million income tax benefit was primarily the result of the $35 million of incremental contributions to the Company’s defined benefit and other postretirement plans and changes in the method of accounting reflected in the 2017 tax returns as filed.

As of December 29, 2018, the Company has completed its accounting of the tax effects of the Tax Act.

The reconciliation of the provision (benefit) for income taxes from continuing operations at the U.S. federal statutory income tax rate (21% in 2018, and 35% in 2017 and 2016, respectively) to the Company’s income tax provision (benefit) for the fiscal years 2018, 2017 and 2016 is shown below.



	2018			2017			2016
Federal income taxes computed at statutory rate	$	104		$	141		$	46
State income taxes, net of federal income tax benefit	20			16			2
Stock-based compensation	(6		)	(26		)	(3		)
Non-deductible expenses	3			5			5
Change in the valuation allowance for deferred tax assets	1			(1		)	(128		)
Net operating loss expirations	3			1			2
Tax credits	(6		)	(3		)	(3		)
Change in unrecognized tax benefits	(21		)	(1		)	1
Change in U.S. federal statutory tax rate	(8		)	(173		)	—
Other	(1		)	1			(1		)
Total income tax provision (benefit)	$	89		$	(40	)	$	(79	)

Temporary differences and carryforwards that created significant deferred tax assets and liabilities were as follows:



	December 29, 2018			December 30, 2017
Deferred tax assets:
Allowance for doubtful accounts	$	8		$	7
Accrued employee benefits	13			7
Restructuring reserves	3			5
Workers’ compensation, general and fleet liabilities	40			43
Deferred financing costs	2			2
Postretirement benefit obligations	9			23
Net operating loss carryforwards	73			86
Other accrued expenses	13			10
Total gross deferred tax assets	161			183
Less valuation allowance	(30		)	(29		)
Total net deferred tax assets	131			154
Deferred tax liabilities:
Property and equipment	(121		)	(92		)
Inventories	(39		)	(30		)
Intangibles	(262		)	(274		)
Total deferred tax liabilities	(422		)	(396		)
Net deferred tax liability	$	(291	)	$	(242	)

The net deferred tax liabilities presented in the Company's Consolidated Balance Sheets were as follows.



	December 29, 2018			December 30, 2017
Noncurrent deferred tax assets	$	7		$	21
Noncurrent deferred tax liability	(298		)	(263		)
Net deferred tax liability	$	(291	)	$	(242	)

As of December 29, 2018, the Company had tax affected state net operating loss carryforwards of $73 million, which will expire at various dates from 2019 to 2038. The Company’s net operating loss carryforwards expire as follows:



	State
2019-2023	$	33
2024-2028	26
2029-2033	9
2034-2038	5
	$	73

The Company also has state credit carryforwards of $16 million.

The U.S. federal and state net operating loss carryforwards in the income tax returns filed included unrecognized tax benefits taken in prior years. The net operating losses for which a deferred tax asset is recognized for financial statement purposes in accordance with ASC 740, Income Taxes, are presented net of these unrecognized tax benefits.

Because of the change of ownership provisions of the Tax Reform Act of 1986, use of a portion of the Company’s domestic net operating losses and tax credit carryforwards may be limited in future periods. Further, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities.

We released the previously recorded valuation allowance against our U.S. federal net deferred tax assets and certain of our state net deferred tax assets in fiscal year 2016 as we determined it was more likely than not that the deferred tax assets would be realized. We maintained a valuation allowance on certain state net operating loss and tax credit carryforwards expected to expire unutilized as a result of insufficient forecasted taxable income in the carryforward period or the utilization of which is subject to limitation. The decision to release the valuation allowance was made after management considered all available evidence, both positive and negative, including but not limited to, historical operating results, cumulative income in recent years, forecasted earnings, and a reduction of uncertainty regarding forecasted earnings as a result of developments in certain customer and strategic initiatives during fiscal year 2016.

A summary of the activity in the valuation allowance for the fiscal years 2018, 2017 and 2016 is as follows:



	2018		2017		2016
Balance at beginning of year	$	29	$	24	152
Expense (benefit) recognized	1		5		(128		)
Balance at end of year	$	30	$	29	$	24

The calculation of the Company’s tax liabilities involves uncertainties in the application of complex tax laws and regulations in U.S. federal and state jurisdictions. The Company (1) records unrecognized tax benefits as liabilities in accordance with ASC 740, Income Taxes and (2) adjusts these liabilities when the Company’s judgment changes because of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of liabilities for unrecognized tax benefits. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. The Company recognizes an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits.

Reconciliation of the beginning and ending amount of unrecognized tax benefits as of fiscal years 2018, 2017, and 2016 was as follows:



Balance at January 2, 2016	$	45
Gross increases due to positions taken in prior years	5
Decreases due to lapses of statute of limitations	(1		)
Balance at December 31, 2016	49
Gross increases due to positions taken in prior years	72
Gross decreases due to positions taken in prior years	(4		)
Gross decreases due to positions taken in current year	(5		)
Decreases due to changes in tax rates	(4		)
Balance at December 30, 2017	108
Gross increases due to positions taken in prior years	2
Gross decreases due to positions taken in prior years	(64		)
Decreases due to lapses of statute of limitations	(1		)
Decreases due to changes in tax rates	(5		)
Balance at December 29, 2018	$	40

The Company believes it is reasonably possible that the liability for unrecognized tax benefits will decrease by approximately $1 million in the next 12 months as a result of the completion of tax audits or the expiration of the statute of limitations.

Included in the balance of unrecognized tax benefits at the end of fiscal years 2018, 2017 and 2016 was $36 million, $60 million and $43 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate. The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company had accrued interest and penalties of approximately $5 million as of December 29, 2018 and December 30, 2017.

The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. Our 2007 through 2017 U.S. federal income tax years, and various state income tax years from 2000 through 2016, remain subject to income tax examinations by the relevant taxing authorities. Prior to 2007, the Company was owned by Royal Ahold N.V. (“Ahold”). Ahold indemnified the Company for 2007 pre-closing consolidated U.S. federal and certain combined state income taxes, and the Company is responsible for all other taxes, interest and penalties.