Income Taxes

12 Months Ended

Jan. 02, 2021

The income tax (benefit) provision for the fiscal years 2020, 2019 and 2018 consisted of the following:


	2020		2019		2018
Current:
Federal	$	(20)	$	102	$	32
State	3		17		12
Current income tax (benefit) provision	(17)		119		44
Deferred:
Federal	(39)		(6)		31
State	(12)		13		14
Deferred income tax (benefit) provision	(51)		7		45
Total income tax (benefit) provision	$	(68)	$	126	$	89

The Company’s effective income tax rates for the fiscal years ended January 2, 2021, December 28, 2019 and December 29, 2018 were 23.0%, 25.0% and 18.0%, respectively. The determination of the Company’s overall effective income tax rate requires the use of estimates. The effective income 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 income in each jurisdiction. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and the Company’s effective income tax rate in the future.

The reconciliation of the provision (benefit) for income taxes at the U.S. federal statutory income tax rate of 21% to the Company’s income tax provision (benefit) for the fiscal years 2020, 2019 and 2018 is shown below:


	2020		2019		2018
Federal income taxes computed at statutory rate	$	(62)	$	107	$	104
State income taxes, net of federal income tax benefit	(10)		24		20
Stock-based compensation	1		(4)		(6)
Non-deductible expenses	7		4		3
Change in the valuation allowance for deferred tax assets	(1)		6		1
Net operating loss expirations	3		—		3
Tax credits	(3)		(10)		(6)
Change in unrecognized tax benefits	(3)		(1)		(21)
Change in U.S. federal statutory tax rate	—		—		(8)
Other	—		—		(1)
Total income tax (benefit) provision	$	(68)	$	126	$	89

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


	January 2, 2021		December 28, 2019
Deferred tax assets:
Operating lease liabilities	$	71	$	38
Workers’ compensation, general and fleet liabilities	40		36
Financing lease and other long term liabilities	78		90
Net operating loss carryforwards	64		64
Other deferred tax assets	100		63
Total gross deferred tax assets	353		291
Less valuation allowance	(35)		(36)
Total net deferred tax assets	318		255
Deferred tax liabilities:
Property and equipment	(201)		(221)
Operating lease assets	(70)		(37)
Inventories	(21)		(35)
Intangibles	(274)		(259)
Other deferred tax liabilities	(21)		(11)
Total deferred tax liabilities	(587)		(563)
Net deferred tax liability	$	(269)	$	(308)

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


	January 2, 2021		December 28, 2019
Noncurrent deferred tax assets	$	1	$	—
Noncurrent deferred tax liability	(270)		(308)
Net deferred tax liability	$	(269)	$	(308)

The Company had tax affected state net operating loss carryforwards of $64 million as of January 2, 2021. The Company’s net operating loss carryforwards expire as follows:


	State
2021-2025	$	33
2026-2030	17
2031-2035	7
2036-2040	5
Indefinite	2
	$	64

The Company also has state credit carryforwards of $21 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.

The Company 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.

A summary of the activity in the valuation allowance for the fiscal years 2020, 2019 and 2018 is as follows:


	2020		2019		2018
Balance as of beginning of year	$	36	$	30	29
(Benefit) expense recognized	(1)		6		1
Balance as of end of year	$	35	$	36	$	30

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 2020, 2019, and 2018 was as follows:


Balance as of 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 as of December 29, 2018	40
Decreases due to lapses of statute of limitations	(1)
Balance as of December 28, 2019	39
Gross increases due to positions taken in prior years	3
Decreases due to lapses of statute of limitations	(1)
Decreases due to changes in tax rates	(5)
Positions assumed in business acquisition	3
Balance as of January 2, 2021	$	39

The Company does not expect the liability for unrecognized tax benefits to change significantly in the next 12 months.

Included in the balance of unrecognized tax benefits as of the end of fiscal years 2020, 2019 and 2018 was $34 million, $35 million and $36 million, respectively, of tax benefits that, if recognized, would affect the effective income 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 $7 million and $5 million as of January 2, 2021 and December 28, 2019, respectively.

The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. Our 2007 through 2019 U.S. federal income tax years, and various state income tax years from 2000 through 2019, 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.