Taxes on Earnings

The provision for income taxes consisted of the following:



($000)	2017			2016			2015
Current
Federal	$	660,017		$	632,872		$	497,710
State	52,853			44,333			37,030
	712,870			677,205			534,740
Deferred
Federal	(40,468		)	(8,350		)	55,404
State	5,565			(353		)	954
	(34,903		)	(8,703		)	56,358
Total	$	677,967		$	668,502		$	591,098

Prior to adoption of ASU 2016-09, the Company realized tax benefits of $23.3 million and $42.4 million in 2016 and 2015, respectively, related to employee equity programs that were recorded in additional paid-in capital. In fiscal 2017, the Company adopted ASU 2016-09 and realized tax benefits of $16.3 million as a reduction to its provision for income taxes.

The provision for taxes for financial reporting purposes is different from the tax provision computed by applying the statutory federal income tax rate. The differences are reconciled below:



	2017		2016		2015
Federal income taxes at the statutory rate	34	%	35	%	35	%
Impact of the Tax Cuts and Jobs Act on deferred taxes	(3	)%	—		—
State income taxes (net of federal benefit) and other, net	2	%	2	%	2	%
Total	33	%	37	%	37	%

The Tax Cuts and Jobs Act (the “Tax Act” or "tax reform") was signed into law on December 22, 2017. The Tax Act made significant changes to U.S. corporate taxation including reducing the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018, permitting immediate capital expensing of certain qualified property, and limiting the tax deductions available for certain executive compensation and employee fringe benefits. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. As a result, the Company applied a blended U.S. federal income tax rate of approximately 34% for fiscal 2017, due to the lower tax rate of 21% becoming effective in the last month of that fiscal year. This reduced tax rate resulted in a tax benefit of $24.9 million. The Company recorded an additional tax benefit of $55.2 million due to the remeasurement of its deferred tax assets and liabilities. Both of these tax benefits were recorded in the fourth quarter of fiscal 2017. Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which provides guidance on accounting for the impact of the Tax Act. As permitted by SAB 118, both of the tax benefits recorded by the Company in fiscal 2017, represent provisional amounts based on the Company’s current best estimates. Any adjustments made to those provisional amounts will be included in income from operations and recorded as an adjustment to tax expense through the fiscal year ending February 2, 2019. The recorded, provisional amounts reflect assumptions made based upon the Company’s current interpretation of the Tax Act, and may change as the Company receives additional clarification and guidance in the form of technical corrections to the Tax Act or regulations issued by the U.S. Treasury.

The components of deferred taxes at February 3, 2018 and January 28, 2017 are as follows:



($000)	2017			2016
Deferred Tax Assets
Accrued liabilities	$	46,489		$	71,796
Deferred compensation	28,094			36,101
Stock-based compensation	34,986			44,865
Deferred rent	18,013			25,221
State taxes and credits	20,206			28,484
Employee benefits	15,242			23,987
Other	5,224			8,223
Gross Deferred Tax Assets	168,254			238,677
Less: Valuation allowance	(4,659		)	(3,730		)
Deferred Tax Assets	163,595			234,947

Deferred Tax Liabilities
Depreciation	(217,332		)	(313,526		)
Merchandise inventory	(19,055		)	(28,853		)
Supplies	(9,529		)	(13,418		)
Other	(3,485		)	(535		)
Deferred Tax Liabilities	(249,401		)	(356,332		)
Net Deferred Tax Liabilities	$	(85,806	)	$	(121,385	)

At the end of fiscal 2017 and 2016, the Company’s state tax credit carryforwards for income tax purposes were approximately $14.7 million and $22.8 million, respectively. The state tax credit carryforwards will begin to expire in fiscal 2019. The Company has provided a valuation allowance of $4.7 million as of the end of fiscal 2017 for deferred tax assets related to state tax credits that are not expected to be realized.

The changes in amounts of unrecognized tax benefits (gross of federal tax benefits and excluding interest and penalties) at fiscal 2017, 2016, and 2015 are as follows:



($000)	2017			2016			2015
Unrecognized tax benefits - beginning of year	$	81,122		$	75,372		$	78,116
Gross increases:
Tax positions in current period	26,837			12,394			14,990
Tax positions in prior period	—			2,897			—
Gross decreases:
Tax positions in prior periods	(2,755		)	(3,231		)	(10,589		)
Lapse of statute limitations	(6,068		)	(6,310		)	(4,216		)
Settlements	(470		)	—			(2,929		)
Unrecognized tax benefits - end of year	$	98,666		$	81,122		$	75,372

At the end of fiscal 2017, 2016, and 2015, the reserves for unrecognized tax benefits were $121.3 million, $98.6 million, and $94.2 million inclusive of $22.6 million, $17.5 million, and $18.8 million of related interest and penalties, respectively. The Company accounts for interest and penalties related to unrecognized tax benefits as a part of its provision for taxes on earnings. If recognized, $81.3 million would impact the Company’s effective tax rate. The difference between the total amount of unrecognized tax benefits and the amounts that would impact the effective tax rate relates to amounts attributable to deferred tax assets and liabilities. These amounts are net of federal and state income taxes.

It is reasonably possible that certain federal and state tax matters may be concluded or statutes of limitations may lapse during the next twelve months. Accordingly, the total amount of unrecognized tax benefits may decrease by up to $8.8 million.

The Company is open to audit by the Internal Revenue Service under the statute of limitations for fiscal years 2013 through 2017. The Company’s state income tax returns are generally open to audit under the various statutes of limitations for fiscal years 2013 through 2017. Certain federal and state tax returns are currently under audit by various tax authorities. The Company does not expect the results of these audits to have a material impact on the consolidated financial statements.