Taxes on Earnings

The provision for income taxes consisted of the following:



($000)	2018			2017			2016
Current
Federal	$	357,170		$	660,017		$	632,872
State	74,472			52,853			44,333
	431,642			712,870			677,205
Deferred
Federal	33,913			(40,468		)	(8,350		)
State	(2,136		)	5,565			(353		)
	31,777			(34,903		)	(8,703		)
Total	$	463,419		$	677,967		$	668,502

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:



	2018		2017		2016
Federal income taxes at the statutory rate	21	%	34	%	35	%
State income taxes (net of federal benefit) and other, net	3		2		2
Tax audit settlements	(1	)	—		—
Impact of the Tax Act on deferred taxes	—		(3	)	—
Total	23	%	33	%	37	%

In November 2018, the Company resolved uncertain tax positions related to fiscal 2015 with the Internal Revenue Service. As a result, the Company recognized a tax benefit of approximately $26.0 million in the Consolidated Statement of Earnings.

In fiscal 2017, The Tax Cuts and Jobs Act (the “Tax Act” or "tax reform") was signed into law. 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, the last month of fiscal 2017. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. The Company applied a blended U.S. federal income tax rate of approximately 34% for fiscal 2017. This reduced tax rate resulted in a tax benefit of $24.9 million in fiscal 2017. The Company recorded an additional tax benefit of $55.2 million due to the remeasurement of its deferred tax assets and liabilities in fiscal 2017. As a result of the Tax Act, the SEC staff issued Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which provided guidance on accounting for the impact of the Tax Act. As permitted by SAB 118, the Company recorded provisional amounts for both current and deferred income taxes related to the reduced U.S. federal corporate income tax rate in fiscal 2017. The recorded provisional amounts totaling $80.1 million of tax benefit reflected assumptions made based upon the Company's interpretation of the Tax Act. The Company did not record any adjustments to the provisional amounts recorded in fiscal 2017. With the completion and filing of the 2017 federal return during the quarter ended November 3, 2018, the Company considered the deferred tax remeasurements and other adjustments related to the Tax Act to be complete.

Also, in fiscal 2017, the Company adopted ASU 2016-09. Prior to adoption of ASU 2016-09, the Company realized tax benefits of $23.3 million in 2016, related to employee equity programs that were recorded in additional paid-in capital. As a result of adopting ASU 2016-09, the Company realized tax benefits of $12.6 million and $16.3 million in 2018 and 2017, respectively, as a reduction to its provision for income taxes.

The components of deferred taxes at February 2, 2019 and February 3, 2018 are as follows:



($000)	2018			2017
Deferred Tax Assets
Accrued liabilities	$	38,367		$	46,489
Deferred compensation	30,886			28,094
Stock-based compensation	36,118			34,986
Deferred rent	19,824			18,013
State taxes and credits	20,310			20,206
Employee benefits	18,845			15,242
Other	1,412			5,224
Gross Deferred Tax Assets	165,762			168,254
Less: Valuation allowance	(4,639		)	(4,659		)
Deferred Tax Assets	161,123			163,595

Deferred Tax Liabilities
Depreciation	(238,631		)	(217,332		)
Merchandise inventory	(25,686		)	(19,055		)
Supplies	(10,308		)	(9,529		)
Other	(10,806		)	(3,485		)
Deferred Tax Liabilities	(285,431		)	(249,401		)
Net Deferred Tax Liabilities	$	(124,308	)	$	(85,806	)

At the end of fiscal 2018 and 2017, the Company’s state tax credit carryforwards for income tax purposes were approximately $13.6 million and $14.7 million, respectively. The state tax credit carryforwards will begin to expire in fiscal 2019. The Company has provided a valuation allowance of $4.6 million as of the end of fiscal 2018 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 2018, 2017, and 2016 are as follows:



($000)	2018			2017			2016
Unrecognized tax benefits - beginning of year	$	98,666		$	81,122		$	75,372
Gross increases:
Tax positions in current period	14,722			26,837			12,394
Tax positions in prior period	1,843			—			2,897
Gross decreases:
Tax positions in prior periods	(40,600		)	(2,755		)	(3,231		)
Lapse of statutes of limitations	(8,584		)	(6,068		)	(6,310		)
Settlements	(260		)	(470		)	—
Unrecognized tax benefits - end of year	$	65,787		$	98,666		$	81,122

At the end of fiscal 2018, 2017, and 2016, the reserves for unrecognized tax benefits were $78.8 million, $121.3 million, and $98.6 million inclusive of $13.0 million, $22.6 million, and $17.5 million of related reserves for interest and penalties, respectively. In November 2018, the Company resolved uncertain tax positions related to fiscal 2015 with the Internal Revenue Service. As a result, the Company recognized a decrease in reserves for tax positions in prior periods of $52.4 million, inclusive of $12.6 million of related reserves for interest and penalties. The Company accounts for interest and penalties related to unrecognized tax benefits as a part of its provision for taxes on earnings. If recognized, $62.7 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 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 $9.1 million.

The Company is open to audit by the Internal Revenue Service under the statute of limitations for fiscal years 2015 through 2018. The Company’s state income tax returns are generally open to audit under the various statutes of limitations for fiscal years 2014 through 2018. Certain 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.