Income Taxes

12 Months Ended

Jan. 01, 2022

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

The income tax provision (benefit) for the fiscal years 2021, 2020 and 2019 consisted of the following:

	2021		2020		2019
Current:
Federal	$	11	$	(20)	$	102
State	1		3		17
Current income tax provision (benefit)	12		(17)		119
Deferred:
Federal	31		(39)		(6)
State	7		(12)		13
Deferred income tax provision (benefit)	38		(51)		7
Total income tax provision (benefit)	$	50	$	(68)	$	126

The Company’s effective income tax rates for the fiscal years ended January 1, 2022, January 2, 2021 and December 28, 2019 were 23%, 23% and 25%, 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 2021, 2020 and 2019 is shown below: 

	2021		2020		2019
Federal income taxes computed at statutory rate	$	45	$	(62)	$	107
State income taxes, net of federal income tax benefit	10		(10)		24
Share-based compensation	(5)		1		(4)
Non-deductible expenses	5		7		4
Change in the valuation allowance for deferred tax assets	(7)		(1)		6
Net operating loss expirations	5		3		—
Tax credits	(1)		(3)		(10)
Change in unrecognized tax benefits	(2)		(3)		(1)
Total income tax provision (benefit)	$	50	$	(68)	$	126

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

	January 1, 2022		January 2, 2021
Deferred tax assets:
Operating lease liabilities	$	70	$	71
Workers’ compensation, general and fleet liabilities	45		40
Financing lease and other long term liabilities	71		78
Net operating loss carryforwards	68		64
Other deferred tax assets	97		100
Total gross deferred tax assets	351		353
Less valuation allowance	(28)		(35)
Total net deferred tax assets	323		318
Deferred tax liabilities:
Property and equipment	(195)		(201)
Operating lease assets	(68)		(70)
Inventories	(40)		(21)
Intangibles	(290)		(274)
Other deferred tax liabilities	(29)		(21)
Total deferred tax liabilities	(622)		(587)
Net deferred tax liability	$	(299)	$	(269)

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

	January 1, 2022		January 2, 2021
Noncurrent deferred tax assets	$	8	$	1
Noncurrent deferred tax liability	(307)		(270)
Net deferred tax liability	$	(299)	$	(269)

The Company had tax affected state net operating loss carryforwards of $68 million as of January 1, 2022. The Company’s net operating loss carryforwards expire as follows:

	State
2022-2026	$	32
2027-2031	10
2032-2036	9
2037-2041	14
Indefinite	3
	$	68

The Company also has state credit carryforwards of $20 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 2021, 2020 and 2019 is as follows:

	2021		2020		2019
Balance as of beginning of year	$	35	$	36	30
(Benefit) expense recognized	(7)		(1)		6
Balance as of end of year	$	28	$	35	$	36

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 2021, 2020, and 2019 was as follows:

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
Gross increases due to positions taken in prior years	5
Gross decreases due to positions taken in prior years	(2)
Decreases due to lapses of statute of limitations	(5)
Decreases due to settlements with taxing authorities	(5)
Balance at January 1, 2022	$	32

The Company estimates it is reasonably possible that the liability for unrecognized tax benefits will decrease by up to $17 million in the next 12 months as a result of the completion of various tax audits currently in process and the expiration of the statute of limitations in several jurisdictions.

Included in the balance of unrecognized tax benefits as of the end of fiscal years 2021, 2020 and 2019 was $28 million, $34 million and $35 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 as of both January 1, 2022 and January 2, 2021.

The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. Our 2007 through 2020 U.S. federal income tax years, and various state income tax years from 2000 through 2020, 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.