TAXES BASED ON INCOME

12 Months Ended

Jan. 28, 2023

TAXES BASED ON INCOME

TAXES BASED ON INCOME

4. TAXES BASED ON INCOME

The provision for taxes based on income consists of:

	2022		2021		2020
Federal
Current	$	401	$	349	$	577
Deferred		162		(46)		75
Subtotal federal		563		303		652
State and local
Current		91		67		133
Deferred		(1)		15		(3)
Subtotal state and local		90		82		130
Total	$	653	$	385	$	782

A reconciliation of the statutory federal rate and the effective rate follows:

	2022		2021		2020
Statutory rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal tax benefit	2.5		3.2		3.0
Credits	(0.8)		(1.3)		(0.7)
Resolution of tax audit examinations	(0.2)		(3.1)		—
Excess tax benefits from share-based payments	(1.9)		(1.3)		(0.8)
Impairment of goodwill related to Vitacost.com	1.2		—		—
Non-deductible executive compensation	0.5		0.6		0.3
Other changes, net	0.2		(0.3)		0.4
	22.5	%	18.8	%	23.2	%

The Company’s effective income tax rates were 22.5% in 2022, 18.8% in 2021, and 23.2% in 2020. 

The 2022 tax rate differed from the federal statutory rate due to the effect of state income taxes and non-deductible goodwill impairment charges related to Vitacost.com, partially offset by the benefits from share-based payments and the utilization of tax credits.

The 2021 tax rate differed from the federal statutory rate primarily due to a discrete benefit of $47 which was primarily from the favorable outcome of income tax audit examinations covering multiple years, the benefit from share-based payments and the utilization of tax credits, partially offset by the effect of state income taxes.

The 2020 tax rate differed from the federal statutory rate primarily due to the effect of state income taxes, partially offset by the utilization of tax credits and deductions.

The tax effects of significant temporary differences that comprise tax balances were as follows:

	2022		2021
Deferred tax assets:
Compensation related costs	$	409	$	560
Lease liabilities		1,892		1,926
Closed store reserves		51		46
Unrealized losses on hedging instruments		74		—
Net operating loss and credit carryforwards		101		98
Deferred income		104		126
Allowance for uncollectible receivables		26		36
Other		13		25
Subtotal		2,670		2,817
Valuation allowance		(83)		(72)
Total deferred tax assets		2,587		2,745
Deferred tax liabilities:
Depreciation and amortization		(1,954)		(2,006)
Operating lease assets		(1,759)		(1,790)
Insurance related costs		(257)		(54)
Inventory related costs		(281)		(310)
Equity investments in excess of tax basis		(8)		(147)
Total deferred tax liabilities		(4,259)		(4,307)
Deferred taxes	$	(1,672)	$	(1,562)

At January 28, 2023, the Company had net operating loss carryforwards for state income tax purposes of $1,468. These net operating loss carryforwards expire from 2023 through 2042.  The utilization of certain of the Company’s state net operating loss carryforwards may be limited in a given year. Further, the Company has recorded a valuation allowance against certain deferred tax assets resulting from its state net operating losses.

At January 28, 2023, the Company had state credit carryforwards of $34. These state credit carryforwards expire from 2023 through 2036.  The utilization of certain of the Company’s credits may be limited in a given year. Further, the Company has recorded a valuation allowance against certain deferred tax assets resulting from its state credits.

The Company regularly reviews all deferred tax assets on a tax filer and jurisdictional basis to estimate whether these assets are more likely than not to be realized based on all available evidence. This evidence includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies. Projected future taxable income is based on expected results and assumptions as to the jurisdiction in which the income will be earned. The expected timing of the reversals of existing temporary differences is based on current tax law and the Company’s tax methods of accounting. Unless deferred tax assets are more likely than not to be realized, a valuation allowance is established to reduce the carrying value of the deferred tax asset until such time that realization becomes more likely than not. Increases and decreases in these valuation allowances are included in "Income tax expense" in the Consolidated Statements of Operations. As of January 28, 2023, January 29, 2022 and January 28, 2021 the total valuation allowance was $83, $72 and $53, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, including positions impacting only the timing of tax benefits, is as follows:

	2022		2021		2020
Beginning balance	$	100	$	193	$	174
Additions based on tax positions related to the current year		8		10		7
Additions for tax positions of prior years		6		9		16
Reductions for tax positions of prior years		(4)		(108)		—
Settlements		(9)		—		—
Lapse of statute		(8)		(4)		(4)
Ending balance	$	93	$	100	$	193

As of January 28, 2023, January 29, 2022 and January 30, 2021, the amount of unrecognized tax benefits that, if recognized, would effect the effective tax rate was $66, $73 and $85, respectively.

To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense. During the years ended January 28, 2023, January 29, 2022 and January 30, 2021, the Company recognized approximately $(6), $(15) and $7, respectively, in interest and penalties (recoveries). The Company had accrued approximately $14, $22 and $38 for the payment of interest and penalties as of January 28, 2023, January 29, 2022 and January 30, 2021, respectively.

As of January 28, 2023, the years ended February 1, 2020 and forward remain open for review for federal income tax purposes.