INCOME TAXES

The Tax Act was enacted on December 22, 2017, and includes, among other items, a reduction in the federal corporate income tax rate from 35.0 percent to 21.0 percent effective January 1, 2018. Our federal corporate income tax rate for fiscal 2018 is 29.4 percent and represents a blended income tax rate for the current fiscal year. For fiscal 2019, our federal corporate income tax rate will be 21.0 percent. Additionally, for the fiscal year ended May 27, 2018, in accordance with FASB ASC 740, we remeasured our deferred tax balances to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. The remeasurement resulted in a $79.3 million one-time adjustment of our net deferred tax liabilities reflected in our consolidated balance sheet as of May 27, 2018 and a corresponding income tax benefit reflected in our consolidated statements of earnings for the fiscal year ended May 27, 2018. The SEC staff issued Staff Accounting Bulletin 118 which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. While we are able to make a reasonable estimate of the impacts of the Tax Act, adjustments may occur and may be affected by other factors, including, but not limited to further refinement of our calculations, changes in interpretations and assumptions and regulatory changes from the Internal Revenue Service (IRS), the SEC, the FASB and various tax jurisdictions. The fiscal 2018 impact of the enactment of the Tax Act is reflected in the tables below.

Total income tax expense was allocated as follows:



	Fiscal Year
(in millions)	2018			2017			2016
Earnings from continuing operations	$	1.9		$	154.8		$	90.0
Earnings from discontinued operations	(4.8		)	(4.2		)	3.4
Total consolidated income tax expense (benefit)	$	(2.9	)	$	150.6		$	93.4

The components of earnings from continuing operations before income taxes and the provision for income taxes thereon are as follows:



	Fiscal Year
(in millions)	2018			2017			2016
Earnings from continuing operations before income taxes:
U.S.	$	602.7		$	632.3		$	450.6
Foreign	3.0			5.0			(0.9		)
Earnings from continuing operations before income taxes	$	605.7		$	637.3		$	449.7
Income taxes:
Current:
Federal	$	10.2		$	160.5		$	89.1
State and local	8.9			22.2			2.7
Foreign	1.8			1.3			1.9
Total current	$	20.9		$	184.0		$	93.7
Deferred (principally U.S.):
Federal	$	(25.1	)	$	(24.1	)	$	(2.4	)
State and local	6.1			(5.1		)	(1.3		)
Total deferred	$	(19.0	)	$	(29.2	)	$	(3.7	)
Total income taxes	$	1.9		$	154.8		$	90.0

The following table is a reconciliation of the U.S. statutory income tax rate to the effective income tax rate from continuing operations included in the accompanying consolidated statements of earnings:



	Fiscal Year
	2018		2017		2016
U.S. statutory rate	29.4	%	35.0	%	35.0	%
State and local income taxes, net of federal tax benefits	1.8		1.7		1.2
Enactment of the Tax Act	(13.1	)	—		—
Benefit of federal income tax credits	(12.8	)	(9.2	)	(12.5	)
Other, net	(5.0	)	(3.2	)	(3.7	)
Effective income tax rate	0.3	%	24.3	%	20.0	%

As of May 27, 2018, we had estimated current prepaid state and federal income taxes of $2.6 million and $13.3 million, respectively, which is included on our accompanying consolidated balance sheets as prepaid income taxes.

As of May 27, 2018, we had unrecognized state tax benefits of $17.4 million, which represents the aggregate tax effect of the differences between tax return positions and benefits recognized in our consolidated financial statements, all of which would favorably affect the effective tax rate if resolved in our favor. Included in the balance of unrecognized tax benefits at May 27, 2018, is $2.0 million related to tax positions for which it is reasonably possible that the total amounts could change during the next 12 months based on the outcome of examinations. The $2.0 million relates to items that would impact our effective income tax rate.

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



(in millions)
Balances at May 28, 2017	$	16.4
Additions related to current-year tax positions	4.5
Reductions due to settlements with taxing authorities	(0.5		)
Reductions to tax positions due to statute expiration	(3.0		)
Balances at May 27, 2018	$	17.4

Interest expense associated with unrecognized tax benefits, excluding the release of accrued interest related to prior year matters due to settlement or the lapse of the statute of limitations was as follows:



	Fiscal Year
(in millions)	2018		2017		2016
Interest expense on unrecognized tax benefits	$	0.8	$	0.6	$	0.5

At May 27, 2018, we had $1.1 million accrued for the payment of interest associated with unrecognized state tax benefits.

For U.S. federal income tax purposes, we participate in the IRS’s Compliance Assurance Process (CAP), whereby our U.S. federal income tax returns are reviewed by the IRS both prior to and after their filing. Income tax returns are subject to audit by state and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws. The major jurisdictions in which the Company files income tax returns include the U.S. federal jurisdiction, Canada, and all states in the U.S. that have an income tax. With a few exceptions, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before fiscal 2018, and state and local, or non-U.S. income tax examinations by tax authorities for years before fiscal 2013.

The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:



(in millions)	May 27, 2018			May 28, 2017
Accrued liabilities	$	66.6		$	137.1
Compensation and employee benefits	99.8			174.6
Deferred rent and interest income	81.1			110.3
Net operating loss, credit and charitable contribution carryforwards	71.9			78.0
Other	5.3			6.9
Gross deferred tax assets	$	324.7		$	506.9
Valuation allowance	(26.6		)	(17.0		)
Deferred tax assets, net of valuation allowance	$	298.1		$	489.9
Trademarks and other acquisition related intangibles	(201.8		)	(310.7		)
Buildings and equipment	(176.9		)	(275.4		)
Capitalized software and other assets	(24.4		)	(38.1		)
Other	(9.0		)	(11.3		)
Gross deferred tax liabilities	$	(412.1	)	$	(635.5	)
Net deferred tax liabilities	$	(114.0	)	$	(145.6	)

We have deferred tax assets of $12.6 million reflecting the benefit of state loss carryforwards, before federal benefit and valuation allowance, which expire at various dates between fiscal 2019 and fiscal 2037. We have deferred tax assets of $17.1 million of federal and $42.6 million state tax credits, before federal benefit and valuation allowance, which expire at various dates between fiscal 2019 and fiscal 2039. Additionally, we have deferred tax assets of $11.1 million reflecting the benefit of foreign loss carryforwards, before valuation allowance, which have an indefinite life.

We have taken current and potential future expirations into consideration when evaluating the need for valuation allowances against these deferred tax assets. A valuation allowance for deferred tax assets is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which our deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of the existing valuation allowances at May 27, 2018.