NOTE 13: INCOME TAXES

In December 2017, the Tax Act was signed into law. Among numerous other provisions, the Tax Act significantly revises the U.S. federal corporate income tax by reducing the statutory rate from 35% to 21%, imposing a mandatory one-time transition tax on accumulated unrepatriated earnings of foreign subsidiaries and enhancing and extending the option to claim accelerated depreciation on qualified property. The Tax Act also revises tax laws that will affect 2018, including, but not limited to, eliminating certain deductions for executive compensation and limiting the deduction for interest. We have reasonably estimated the effects of the Tax Act and recorded provisional amounts in our Consolidated Financial Statements as of February 3, 2018. Net earnings included $42 related to the Tax Act, which includes a provisional one-time, non-cash charge of $51 related to the revaluation of our net deferred tax assets for the change in statutory tax rate and for the impacts associated with the future limitations on executive compensation, partially offset by cash tax savings from a lower federal tax rate. As we complete our analysis of the Tax Act and interpret any additional guidance issued by the U.S. Treasury Department, the IRS and other standard-setting bodies, we may make adjustments to the provisional amounts, which may materially impact our provision for income taxes in the period in which the adjustments are recorded.

U.S. and foreign components of earnings before income taxes were as follows:



Fiscal year	2017			2016			2015
U.S.		$803			$687			$996
Foreign	(13		)	(3		)	(20		)
Earnings before income taxes		$790			$684			$976

Income tax expense consists of the following:



Fiscal year	2017		2016			2015
Current income taxes:
Federal		$291		$290			$202
State and local	51		54			32
Foreign	—		1			—
Total current income tax expense	342		345			234
Deferred income taxes:
Federal	10		(17		)	123
State and local	1		(5		)	23
Foreign	—		7			(4		)
Total deferred income tax (benefit) expense	11		(15		)	142
Total income tax expense		$353		$330			$376

A reconciliation of the statutory federal income tax rate to the effective tax rate on earnings before income taxes is as follows:



Fiscal year	2017		2016		2015
Statutory rate¹	33.7	%	35.0	%	35.0	%
Tax Act impact	6.1	%	—		—
Goodwill impairment	—		10.1	%	—
State and local income taxes, net of federal income taxes	4.5	%	5.1	%	4.1	%
Non-deductible acquisition-related items	0.3	%	0.6	%	0.4	%
Federal credits	(0.7	%)	(0.6	%)	(0.6	%)
Other, net	0.8	%	(2.0	%)	(0.3	%)
Effective tax rate	44.7	%	48.2	%	38.6	%

¹ The statutory rate in 2017 is reduced due to tax reform.

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



	February 3, 2018			January 28, 2017
Compensation and benefits accruals		$148			$209
Allowance for sales returns	50			76
Credit card receivable transaction	8			13
Accrued expenses	27			39
Merchandise inventories	12			43
Gift cards	27			33
Federal benefit of state taxes	16			18
Net operating losses	22			12
(Loss) Gain on sale of interest rate swap	(1		)	4
Other	3			18
Total deferred tax assets	312			465
Valuation allowance	(51		)	(37		)
Total net deferred tax assets	261			428
Land, property and equipment basis and depreciation differences	(109		)	(258		)
Debt exchange premium	(14		)	(23		)
Total deferred tax liabilities	(123		)	(281		)
Net deferred tax assets		$138			$147

As of February 3, 2018, our state and foreign net operating loss carryforwards for income tax purposes were approximately $11 and $64. As of January 28, 2017, our state and foreign net operating loss carryforwards for income tax purposes were approximately $11 and $37. The net operating loss carryforwards are subject to certain statutory limitations of the Internal Revenue Code, applicable state laws and applicable foreign laws. If not utilized, a portion of our state and foreign net operating loss carryforwards will begin to expire in 2031 and 2033. Management believes it is more likely than not that certain state and foreign net operating loss carryforwards and deferred tax assets of foreign subsidiaries will not be realized in the foreseeable future. As such, a valuation allowance of $51 and $37 have been recorded as of February 3, 2018 and January 28, 2017.

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



Fiscal year	2017			2016			2015
Unrecognized tax benefit at beginning of year		$32			$19			$15
Gross increase to tax positions in prior periods	2			16			6
Gross decrease to tax positions in prior periods	(7		)	—			(2		)
Gross increase to tax positions in current period	5			2			2
Lapses in statute	(1		)	(5		)	(2		)
Unrecognized tax benefit at end of year		$31			$32			$19

At the end of 2017 and 2016, $18 and $19 of the ending gross unrecognized tax benefit related to items which, if recognized, would affect the effective tax rate.

Our income tax expense included an increase to expense of $1 in 2017 for tax-related interest and penalties. There were no significant changes to expense in 2016 and 2015. At the end of 2017 and 2016, our liability for interest and penalties was $3 and $2.

We file income tax returns in the U.S. and a limited number of foreign jurisdictions. With few exceptions, we are no longer subject to federal, state and local, or non-U.S. income tax examinations for years before 2013. Unrecognized tax benefits related to federal, state and local tax positions may decrease by $6 by February 2, 2019, due to the completion of examinations and the expiration of various statutes of limitations.