Income Taxes

12 Months Ended

Feb. 01, 2020

NOTE 14: INCOME TAXES

In December 2017, the Tax Act was signed into law. Among numerous other provisions, the Tax Act significantly revised the U.S. federal corporate income tax by reducing the statutory rate from 35% to 21%. In accordance with SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, we made a reasonable estimate of the Tax Act’s impact and provisionally recorded this estimate in our 2017 results. As of February 2, 2019, we completed our accounting for the impacts of the Tax Act, resulting in no material changes to previously recorded provisional amounts.

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



Fiscal year	2019		2018			2017
U.S.		$654		$792			$803
Foreign	28		(59		)	(13		)
Earnings before income taxes		$682		$733			$790

Income tax expense consists of the following:



Fiscal year	2019		2018			2017
Current income taxes:
Federal		$90		$147			$291
State and local	44		56			51
Total current income tax expense	134		203			342
Deferred income taxes:
Federal	43		(5		)	10
State and local	3		(3		)	1
Foreign	6		(26		)	—
Total deferred income tax expense (benefit)	52		(34		)	11
Total income tax expense		$186		$169			$353

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



Fiscal year	2019		2018		2017
Statutory rate	21.0	%	21.0	%	33.7	%
Tax Act impact	—		(0.1	%)	6.1	%
State and local income taxes, net of federal income taxes	5.4	%	5.8	%	4.5	%
Federal credits	(0.9	%)	(1.5	%)	(0.7	%)
Valuation allowance release	—		(1.2	%)	—
Other, net	1.8	%	(0.9	%)	1.1	%
Effective tax rate	27.3	%	23.1	%	44.7	%

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



	February 1, 2020			February 2, 2019
Deferred tax assets:
Lease liabilities		$555			$—
Compensation and benefits accruals	145			139
Allowance for sales returns	47			52
Accrued expenses	29			28
Merchandise inventories	20			20
Gift cards	39			26
Loyalty program	10			12
Net operating losses	33			41
Other	5			5
Total deferred tax assets	883			323
Valuation allowance	(41		)	(43		)
Total net deferred tax assets	842			280
Deferred tax liabilities:
ROU assets	(377		)	—
Land, property and equipment basis and depreciation differences	(312		)	(94		)
Debt exchange premium	(13		)	(13		)
Total deferred tax liabilities	(702		)	(107		)
Net deferred tax assets		$140			$173

As of February 1, 2020, our state and foreign net operating loss carryforwards for income tax purposes were approximately $25 and $102. As of February 2, 2019, our state and foreign net operating loss carryforwards for income tax purposes were approximately $12 and $132. The net operating loss carryforwards are subject to certain statutory limitations of applicable state and foreign laws. If not utilized, a portion of our state and foreign net operating loss carryforwards will begin to expire in 2023 and 2033.

As of February 1, 2020 and February 2, 2019, we believe there are certain foreign net operating loss carryforwards and deferred tax assets that will not be realized in the foreseeable future. As such, valuation allowances of $41 and $43 have been recorded as of February 1, 2020 and February 2, 2019. The net change in valuation allowance for 2019 and 2018 was a decrease of $2 and $8, respectively.

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



Fiscal year	2019			2018			2017
Unrecognized tax benefit at beginning of year		$30			$31			$32
Gross increase to tax positions in prior periods	—			9			2
Gross decrease to tax positions in prior periods	—			(14		)	(7		)
Gross increase to tax positions in current period	3			6			5
Lapses in statute	(1		)	(2		)	(1		)
Settlements	(10		)	—			—
Unrecognized tax benefit at end of year		$22			$30			$31

At the end of 2019 and 2018, $22 and $26 of the ending gross unrecognized tax benefit related to items which, if recognized, would affect the effective tax rate.

There was no material expense for interest and penalties in 2019, 2018 and 2017. At the end of 2019 and 2018, our liability for interest and penalties was $3 and $3.

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. As of February 1, 2020, we believe unrecognized tax benefits related to federal, state and local tax positions will not decrease by January 30, 2021.