INCOME TAXES

The components of continuing operations (loss) income before income taxes are as follows:



	Fiscal Years
	2018			2017		2016
	(Dollars in thousands)
(Loss) income before income taxes:
U.S.	$	(10,251	)	$	4,652	$	16,305
International	6,703			3,676		1,943
	$	(3,548	)	$	8,328	$	18,248

The (benefit) provision for income taxes consists of:



	Fiscal Years
	2018			2017		2016
	(Dollars in thousands)
Current:
U.S.	$	2,151		$	994	$	819
International	1,894			268		1,207
Deferred:
U.S.	(69,350		)	7,901		6,997
International	(129		)	61		26
	$	(65,434	)	$	9,224	$	9,049

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to earnings (loss) before income taxes, as a result of the following:



	Fiscal Years
	2018		2017		2016
U.S. statutory rate	28.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	37.6		6.9		3.9
Valuation allowance (1)	1,532.3		73.4		35.6
Foreign income taxes at other than U.S. rates	(1.3	)	(3.9	)	(0.3	)
Officer life insurance	(3.2	)	(5.6	)	(5.2	)
Work Opportunity and Welfare-to-Work Tax Credits	43.7		(19.1	)	(16.9	)
Deferred tax rate remeasurement	296.4		—		—
FIN48 - Uncertain tax positions	(45.8	)	—		—
Stock-based compensation	(45.4	)	17.9		—
Other, net (2)	2.0		6.2		(2.5	)
	1,844.3	%	110.8	%	49.6	%

_______________________________________________________________________________

(1) See Note 1 to the Consolidated Financial Statements.

(2) The 2.0% of Other, net in fiscal year 2018 does not include the rate impact of any items in excess of 5% of computed tax.

The 6.2% of Other, net in fiscal year 2017 includes the rate impact of meals and entertainment expense disallowance, adjustments resulting from charitable contributions and miscellaneous items of 4.5%, 7.1%, and (5.4)%, respectively. Miscellaneous items do not include any items in excess of 5% of computed tax.

The (2.5)% of Other, net in fiscal year 2016 does not include the rate impact of any items in excess of 5% of computed tax.

The components of the net deferred tax assets and liabilities are as follows:



	June 30,
	2018			2017
	(Dollars in thousands)
Deferred tax assets:
Deferred rent	$	5,251		$	13,581
Payroll and payroll related costs	14,083			24,519
Net operating loss carryforwards	41,570			28,378
Tax credit carryforwards	35,102			32,852
Inventories	1,103			1,930
Fixed assets	1,036			6,419
Accrued advertising	2,211			2,723
Insurance	1,893			4,153
Other	13,185			7,499
Subtotal	$	115,434		$	122,054
Valuation allowance	(67,912		)	(119,082		)
Total deferred tax assets	$	47,522		$	2,972
Deferred tax liabilities:
Goodwill and intangibles	$	(72,670	)	$	(103,761	)
Other	(7,081		)	(7,398		)
Total deferred tax liabilities	$	(79,751	)	$	(111,159	)
Net deferred tax liability	$	(32,229	)	$	(108,187	)

In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) changing rules related to net operating losses ("NOL") carryforwards and carrybacks; (3) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (4) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (5) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (6) allowing full expensing of qualified property; (7) creating a new base erosion anti-abuse minimum tax (“BEAT”) and provisions designed to tax global intangible low-taxed income (“GILTI”); (8) adding rules that limit the deductibility of interest expense; and (9) adding new provisions that further restrict the deductibility of certain executive compensation.

Due to the Company's fiscal year end, different provisions of the Tax Act will become applicable at varying dates. Nonetheless, the Company is required to recognize the effects of the rate change and enacted legislation on its deferred tax assets and liabilities in the period of enactment.

The SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification (ASC) 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

In connection with the Tax Act, the Company recorded a provisional net tax benefit of $68.1 million in continuing operations for the twelve months ended June 30, 2018. The $68.1 million net tax benefit is comprised of $30.5 million for the partial release of the U.S. valuation allowance and $37.6 million associated with remeasurement of the deferred tax accounts. The benefit recognized on current losses and the partial valuation allowance release is solely attributable to tax reform and the law change that allows for the indefinite carryforward of NOLs arising in tax years ending after December 31, 2017. Prior law limited the carryforward period to 20 years. As a result of the new tax rules, the Company can now consider its indefinite lived deferred tax liabilities as a source of income to support the realization of its existing deferred tax assets that upon reversal are expected to generate indefinite lived NOLs. Consequently, the Company is able to remove the valuation allowance associated with these deferred tax assets. The Company continues to maintain a valuation allowance on the historical balance of its finite lived federal NOLs, tax credits and various state tax attributes. We are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of our deferred tax balances and ultimately cause us to revise our provisional estimate in future periods in accordance with SAB 118. In addition, changes in interpretations, assumptions, and guidance regarding the new tax legislation, as well as the potential for technical corrections to the Tax Act, could have a material impact to the Company’s effective tax rate in future periods.

At June 30, 2018, the Company has tax effected federal, state, Canada and U.K. net operating loss carryforwards of approximately $28.2, $12.7, $0.5 and $0.2 million, respectively. The federal loss carryforward will expire from fiscal years 2034 to 2037. The state loss carryforwards will expire from fiscal years 2019 to 2038. The Canada loss carryforward will expire from fiscal years 2036 to 2038. The U.K. loss carryforward has no expiration.

The Company's tax credit carryforward of $35.1 million consists of $33.1 million that will expire from fiscal years 2030 to 2038, $0.5 million that will expire from fiscal years 2020 to 2028 and $1.5 million of carryforward that has no expiration date.

As of June 30, 2018, the Company has not provided deferred taxes on approximately $14.5 million of undistributed earnings of attributable to its international subsidiaries that have been considered to be reinvested indefinitely. The Company has multiple avenues to repatriate these earnings tax efficiently and therefore it does not expect to incur significant U.S. or foreign income taxes upon repatriation.

The Company files tax returns and pays tax primarily in the U.S., Canada, the U.K. and Luxembourg as well as states, cities, and provinces within these jurisdictions. The IRS examination associated with the Company’s U.S. federal income tax returns for fiscal years 2010 through 2013 was finalized during fiscal year 2018. Closure of the examination resulted in adjustments to existing tax attributes and did not result in any cash outflow. The Company is no longer subject to IRS examinations for years before 2013. With limited exceptions, the Company is no longer subject to state and international income tax examination by tax authorities for years before 2012.

A rollforward of the unrecognized tax benefits is as follows:



	Fiscal Years
	2018			2017			2016
	(Dollars in thousands)
Balance at beginning of period	$	1,388		$	1,357		$	1,496
Additions based on tax positions related to the current year	553			259			138
Additions based on tax positions of prior years	1,608			80			170
Reductions on tax positions related to the expiration of the statute of limitations	(177		)	(179		)	(207		)
Settlements	(345		)	(129		)	(240		)
Balance at end of period	$	3,027		$	1,388		$	1,357

If the Company were to prevail on all unrecognized tax benefits recorded, a benefit of approximately $2.4 million would be recorded in the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During the fiscal years 2018, 2017 and 2016, we recorded interest and penalties of approximately $0.1 million as additions to the accrual net of the respective reversal of previously accrued interest and penalties. As of June 30, 2018, the Company had accrued interest and penalties related to unrecognized tax benefits of $1.2 million. This amount is not included in the gross unrecognized tax benefits noted above.

It is reasonably possible the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions will increase or decrease during the next fiscal year. However, an estimate of the amount or range of the change cannot be made at this time.