TAXES BASED ON INCOME

12 Months Ended

Feb. 01, 2025

TAXES BASED ON INCOME

TAXES BASED ON INCOME

4. TAXES BASED ON INCOME

The provision for taxes based on income consists of:

	2024		2023		2022
Federal
Current	$	622	$	707	$	401
Deferred		(62)		(130)		162
Subtotal federal		560		577		563
State and local
Current		97		114		91
Deferred		13		(24)		(1)
Subtotal state and local		110		90		90
Total	$	670	$	667	$	653

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

	2024		2023		2022
Statutory rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal tax benefit	2.6		2.5		2.5
Credits	(0.8)		(1.1)		(0.8)
Resolution of tax audit examinations	(0.2)		—		(0.2)
Excess tax benefits from share-based payments	(0.9)		(0.7)		(1.9)
Impairment of goodwill related to Vitacost.com	—		—		1.2
Non-deductible legal settlements	(0.1)		1.4		—
Non-deductible executive compensation	0.2		0.3		0.5
Tax benefit from sale of Kroger Specialty Pharmacy	(0.9)		—		—
Other changes, net	(0.9)		0.1		0.2
Effective income tax rate	20.0	%	23.5	%	22.5	%

The 2024 tax rate differed from the federal statutory rate due to a tax benefit from recognizing deferred tax assets related to the sale of Kroger Specialty Pharmacy, the benefit from share-based payments and the utilization of tax credits, partially offset by the effect of state income taxes.

The 2023 tax rate differed from the federal statutory rate due to the effect of state income taxes and the nondeductible portion of opioid settlement charges, partially offset by the benefit from share-based payments and the utilization of tax credits.

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

	2024		2023
Deferred tax assets:
Compensation related costs	$	338	$	361
Lease liabilities		2,126		2,100
Closed store reserves		58		51
Net operating loss and credit carryforwards		70		76
Deferred income		83		102
Legal settlements		303		313
Allowance for uncollectible receivables		24		30
Other		44		—
Subtotal		3,046		3,033
Valuation allowance		(54)		(55)
Total deferred tax assets		2,992		2,978
Deferred tax liabilities:
Depreciation and amortization		(1,895)		(2,038)
Operating lease assets		(2,002)		(1,985)
Insurance related costs		(229)		(241)
Inventory related costs		(283)		(259)
Other		—		(16)
Total deferred tax liabilities		(4,409)		(4,539)
Net deferred tax liabilities	$	(1,417)	$	(1,561)

As of February 3, 2024, deferred tax assets of $18 are included in “Other assets” in the Company’s Consolidated Balance Sheets. At February 1, 2025, the Company had net operating loss carryforwards for state income tax purposes of $1,283. The majority of these net operating loss carryforwards expire from 2025 through 2044.  The utilization of certain of the Company’s state net operating loss carryforwards may be limited in a given year. Further, based on the analysis described below, the Company has recorded a valuation allowance against some of the deferred tax assets resulting from its state net operating losses.

At February 1, 2025, the Company had state credit carryforwards of $7 which expire from 2025 through 2038.  The utilization of certain of the Company’s credits may be limited in a given year. Further, based on the analysis described below, the Company has recorded a valuation allowance against some of the 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 February 1, 2025, February 3, 2024, and January 28, 2023, the total valuation allowance was $54, $55, and $83, respectively.

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

	2024		2023		2022
Beginning balance	$	90	$	93	$	100
Additions based on tax positions related to the current year		11		10		8
Additions for tax positions of prior years		12		3		6
Reductions for tax positions of prior years		—		(9)		(4)
Settlements		(4)		(1)		(9)
Lapse of statute		(7)		(6)		(8)
Ending balance	$	102	$	90	$	93

As of February 1, 2025, February 3, 2024, and January 28, 2023 the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $70, $62, and $66, 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 February 1, 2025, February 3, 2024, and January 28, 2023, the Company recognized approximately $4, $1, and $(6), respectively, in interest and penalties (recoveries). The Company had accrued approximately $19, $15, and $14 for the payment of interest and penalties as of February 1, 2025, February 3, 2024, and January 28, 2023, respectively.

As of February 1, 2025, the years ended January 30, 2021 and forward remain open for review for federal income tax purposes.