NOTE 7 – INCOME TAXES

The components of income before taxes for each of the last three fiscal years, by tax jurisdiction, were as follows (in thousands):

	2018		2017		2016
Domestic	$	13,882	$	39,818	$	54,887
Foreign		4,015		5,441		8,278
Income before income taxes	$	17,897	$	45,259	$	63,165

The provision for income taxes for each of the last three fiscal years consisted of (in thousands):

	2018			2017			2016
Federal:
Current	$	549		$	30,062		$	14,600
Deferred		5,742			(17,842	)		2,352
State:
Current		(701	)		3,491			2,248
Deferred		270			(1,803	)		2,265
Foreign:
Current		411			1,222			2,066
Deferred		—			—			—
Total income tax provision	$	6,271		$	15,130		$	23,531

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law. The Tax Act revised many aspects of the U.S. corporate income tax including, but not limited to, a corporate income tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, a limitation on the deductibility of net interest expense and a 100% immediate deduction for certain new investments placed in service before 2023, and the modification or repealing of many business deductions and credits including the limitation on deductions for certain executive compensation arrangements under Section 162(m) of the Internal Revenue Code. SEC Staff Accounting Bulletin (“SAB”) 118 allows the Company to provide a provisional estimate of the impact of the Tax Act due to the complexities involved in accounting for its enactment. SAB 118 provides a measurement period that should not extend beyond one year from the enactment of the Tax Act to complete the accounting under ASC 740, Income Taxes.

Since the Company has a fiscal year rather than a calendar year, it is subject to a blended U.S. corporate income tax rate of 32.7% for fiscal year 2018. The Company made a provisional estimate of the remeasurement of its federal deferred tax assets and liabilities at the new lower U.S. corporate income tax rate and recorded a non-cash tax benefit of $323,000. The differences between income taxes at the statutory federal income tax rate of 32.7% in fiscal 2018, and 35% in fiscal 2017 and 2016, and income tax reported in the consolidated statements of operations were as follows (in thousands):

	2018			2017			2016
Tax provision at statutory federal income tax rate	$	5,852		$	15,841		$	22,108
State income taxes, net of federal provision (benefit)		664			352			2,488
Change in valuation allowance		263			168			232
Foreign income taxes		411			1,222			2,066
Foreign and other tax credits		(772	)		(2,161	)		(4,924	)
Non-deductible penalty		1,021			40			39
Provisional remeasurement of U.S. federal deferred tax assets and liabilities		(323	)		—			—
Share-based compensation shortfall		436			—			—
Uncertain tax positions		(1,482	)		825			578
Other, net		201			(1,157	)		944
Provision for income taxes	$	6,271		$	15,130		$	23,531
Effective tax rate		35.0	%		33.4	%		37.3	%

In accordance with SAB 118, the Company has determined that the $323,000 deferred tax benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities is a provisional amount and a reasonable estimate at March 3, 2018. Any subsequent adjustment to this amount, if necessary, will be recorded in tax expense in fiscal 2019 when the analysis is complete.

Deferred tax assets and liabilities at March 3, 2018 and February 25, 2017, were comprised of the following (in thousands):

	2018			2017
Deferred tax assets:
Deferred compensation	$	9,707		$	23,692
Accrued average rent		9,764			14,130
Self insurance reserves		7,857			11,719
Cumulative foreign currency translation		1,588			3,316
Deferred revenue and revenue reserves		3,584			5,224
Foreign and other tax credits		1,822			2,655
Other		3,650			4,033
Total deferred tax assets	$	37,972		$	64,769
Deferred tax liabilities:
Properties and equipment, net	$	(14,070	)	$	(24,084	)
Inventory		(13,578	)		(18,613	)
Store supplies		(2,393	)		(3,629	)
Deferred gain on debt repurchase		(2,199	)		(7,342	)
Other		(957	)		(1,082	)
Total deferred tax liabilities	$	(33,197	)	$	(54,750	)
Valuation allowance	$	(1,308	)	$	(822	)
Net deferred tax assets ⁽¹⁾	$	3,467		$	9,197

⁽¹⁾	For fiscal 2018 and 2017, state deferred tax assets were $4,354 and $4,590, respectively, and federal deferred tax assets were $0 and $4,607, respectively.

Deferred tax assets related to state net operating losses at March 3, 2018 and February 25, 2017, were $472,000 and $236,000, respectively. State loss carryforwards vary as to the carryforward period and will expire from fiscal 2020 through fiscal 2034. Deferred tax assets related to state tax credits at March 3, 2018 and February 25, 2017, were $1,822,000 and $1,512,000, respectively. State tax credit carryforwards vary as to the carryforward period and will expire from fiscal 2024 through fiscal 2038. The Company believes that it is not more likely than not that the benefit from certain state tax credits will be realized. Accordingly, the Company has provided a valuation allowance of $1,308,000 and $822,000 with respect to the deferred tax assets relating to these state tax credits as of March 3, 2018 and February 25, 2017, respectively.

The Company is subject to taxation in the United States and various state, provincial, local and foreign (primarily Canadian) jurisdictions. With few exceptions, as of fiscal 2018, the Company is no longer subject to U.S. federal or state examinations by tax authorities for years before fiscal 2015. Certain tax years prior to fiscal 2015 are subject to examination by certain state and foreign jurisdictions.

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

	2018			2017			2016
Unrecognized tax benefits — beginning balance	$	6,990		$	2,551		$	765
Gross increases — tax positions in current period		219			4,643			231
Gross increases — tax positions in prior period		47			225			1,862
Gross decreases — tax positions in prior period		(2,065	)		(320	)		(60	)
Settlements		—			(83	)		(81	)
Expiration of statute of limitations		(285	)		(26	)		(166	)
Unrecognized tax benefits — ending balance	$	4,906		$	6,990		$	2,551

As of March 3, 2018 and February 25, 2017, the Company had total unrecognized tax benefits of $4,906,000 and $6,990,000, respectively, the majority of which would, if recognized, affect the Company’s effective tax rate. It is reasonably possible a significant portion of the Company’s gross unrecognized tax benefits could decrease within the next twelve months primarily due to state income tax settlements.

Interest associated with unrecognized tax benefits is recorded in nonoperating (income) and expenses. Penalties associated with unrecognized tax benefits are recorded in SG&A expenses. The Company recorded expenses for tax interest and penalties, net of refunds, of $118,000, $142,000 and $286,000 in fiscal 2018, 2017 and 2016, respectively. The Company had accrued penalties and interest of $602,000 and $379,000 at March 3, 2018 and February 25, 2017, respectively.