Income Taxes

12 Months Ended

Jan. 31, 2020

The following is a reconciliation of the federal statutory tax rate to the effective tax rate:



	2019		2018		2017
Statutory federal income tax rate ¹	21.0	%	21.0	%	33.7	%
State income taxes, net of federal tax benefit	4.1		4.8		2.9
Valuation allowance	1.3		—		(0.6	)
Goodwill impairment	—		5.5		—
Mexico impairment	(1.4	)	1.5		—
Other, net	(1.1	)	(1.0	)	1.2
Effective tax rate	23.9	%	31.8	%	37.2	%


¹	The Company utilized a blended rate in 2017 due to the Tax Cuts and Job Act enacted on December 22, 2017.

The components of the income tax provision are as follows:



(In millions)	2019		2018			2017
Current:
Federal	$	935	$	963		$	1,734
State	268		274			252
Total current ¹	1,203		1,237			1,986
Deferred:
Federal	121		(102		)	60
State	18		(55		)	(4		)
Total deferred ¹	139		(157		)	56
Total income tax provision	$	1,342	$	1,080		$	2,042


¹	Amounts applicable to foreign income taxes were insignificant for all periods presented.

The tax effects of cumulative temporary differences that gave rise to the deferred tax assets and liabilities were as follows:



(In millions)	January 31, 2020			February 1, 2019
Deferred tax assets:
Self-insurance	$	260		$	252
Share-based payment expense	30			31
Deferred rent	—			58
Operating lease liabilities	1,377			—
Mexico impairment	—			74
Capital loss carryforwards	225			223
Net operating losses	273			239
Other, net	131			119
Total deferred tax assets	2,296			996
Valuation allowance	(561		)	(569		)
Net deferred tax assets	1,735			427

Deferred tax liabilities:
Operating lease assets	(1,198		)	—
Property	(293		)	(76		)
Other, net	(28		)	(57		)
Total deferred tax liabilities	(1,519		)	(133		)

Net deferred tax asset	$	216		$	294

As of January 31, 2020, the Company reported a deferred tax asset of $225 million, for the capital loss realized in 2017 for U.S. federal income tax purposes related to the exit from the Company’s joint venture investment in Australia. Since no present or future capital gains have been identified through which the asset can be realized, the Company has a full valuation allowance against the deferred tax asset. For U.S. federal tax purposes, this loss has a five-year carryforward period expiring at the end of fiscal 2022.

As of January 31, 2020, the Company established a valuation allowance for RONA’s Canadian net deferred tax assets of $72 million. This was a result of management’s assessment of the available positive and negative evidence to estimate the realization of this entity’s existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended January 31, 2020. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present or if estimates of future taxable income are increased.

The Company operates as a branch in various foreign jurisdictions and cumulatively has incurred net operating losses of $738 million and $800 million as of January 31, 2020, and February 1, 2019, respectively. These net operating losses are subject to expiration in 2026 through 2039. Deferred tax assets have been established for these foreign net operating losses in the accompanying consolidated balance sheets. Given the uncertainty regarding the realization of the foreign net deferred tax assets, the Company recorded cumulative valuation allowances of $246 million and $331 million as of January 31, 2020, and February 1, 2019, respectively.

A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:



(In millions)	2019			2018		2017
Unrecognized tax benefits, beginning of year	$	10		$	—	$	6
Additions for tax positions of prior years	2			10		—
Reductions for tax positions of prior years	(3		)	—		(2		)
Settlements	(5		)	—		(1		)
Reductions due to a lapse in applicable statute of limitations	—			—		(3		)
Unrecognized tax benefits, end of year	$	4		$	10	$	—

The amounts of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate were $3 million as of January 31, 2020, and $8 million as of February 1, 2019.

The Company recognized an insignificant amount of interest expense in 2019, $3 million of interest expense in 2018, and $3 million of interest income in 2017 related to uncertain tax positions. The Company had $1 million and $3 million of accrued interest related to uncertain tax positions as of January 31, 2020 and February 1, 2019, respectively.

Penalties recognized related to uncertain tax positions were insignificant for 2019, 2018, and 2017. Accrued penalties were also insignificant as of January 31, 2020 and February 1, 2019.

The Company is subject to examination by various foreign and domestic taxing authorities. There are ongoing U.S. state audits covering tax years 2014 to 2018. An audit of the Company’s Canadian operations by the Canada Revenue Agency for fiscal years 2015 and 2016 is on-going. The Company remains subject to income tax examinations for international income taxes for fiscal years 2014 through 2018. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and open years.