Income Taxes

12 Months Ended

May 31, 2020

INCOME TAXES

The CARES Act was enacted on March 27, 2020. In an effort to enhance liquidity for businesses, the CARES Act provides for, among other items, refundable employee retention tax credits and the deferral of the employer-paid portion of social security taxes. Additionally, the CARES Act includes provisions addressing technical amendments for accelerated tax depreciation on qualified improvement property (QIP).

We expect to utilize the CARES Act provisions in the following ways:


•	We have elected to defer $24.8 million of our employer-paid portion of social security taxes.


•	We have estimated acceleration of $18.7 million in tax depreciation as a result of the technical amendments to QIP. We anticipate making an election to accelerate additional tax depreciation from QIP, which will be reflected in future periods when the election is made.


•	We intend to claim refundable employee retention tax credits of approximately $39.2 million.

Total income tax expense (benefit) was allocated as follows:



	Fiscal Year Ended
(in millions)	May 31, 2020			May 26, 2019			May 27, 2018
Earnings (loss) from continuing operations	$	(111.8	)	$	63.7		$	1.9
Loss from discontinued operations	(0.9		)	(1.8		)	(4.8		)
Total consolidated income tax expense (benefit)	$	(112.7	)	$	61.9		$	(2.9	)

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



	Fiscal Year Ended
(in millions)	May 31, 2020			May 26, 2019			May 27, 2018
Earnings (loss) from continuing operations before income taxes:
U.S.	$	(165.1	)	$	780.7		$	602.7
Foreign	4.1			1.6			3.0
Earnings (loss) from continuing operations before income taxes	$	(161.0	)	$	782.3		$	605.7
Income taxes:
Current:
Federal	$	5.8		$	(7.2	)	$	10.2
State and local	15.9			20.3			8.9
Foreign	1.0			1.4			1.8
Total current	$	22.7		$	14.5		$	20.9
Deferred (principally U.S.):
Federal	$	(109.0	)	$	44.9		$	(25.1	)
State and local	(25.5		)	4.3			6.1
Total deferred	$	(134.5	)	$	49.2		$	(19.0	)
Total income tax expense (benefit)	$	(111.8	)	$	63.7		$	1.9

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 Ended
	May 31, 2020		May 26, 2019		May 27, 2018
U.S. statutory rate	21.0	%	21.0	%	29.4	%
State and local income taxes, net of federal tax benefits	3.7		2.4		1.8
Enactment of the Tax Cuts and Jobs Act	—		—		(13.1	)
Benefit of federal income tax credits	47.3		(10.8	)	(12.8	)
Stock-based compensation tax benefit	5.0		(2.0	)	(1.8	)
Nondeductible goodwill impairment	(16.4	)	—		—
Deferred revaluation (1)	6.3		—		—
Other, net	2.5		(2.5	)	(3.2	)
Effective income tax rate (2)	69.4	%	8.1	%	0.3	%


(1)	In fiscal 2020, we amended tax returns that were subject to a 35.0 percent or 29.4 percent statutory rate. Corresponding deferred tax balances were revalued at 21.0 percent.


(2)	Our effective income tax rate of 69.4 percent for fiscal 2020 represents an income tax benefit as we generated a pre-tax loss from continuing operations in fiscal 2020, whereas our effective income tax rates of 8.1 percent and 0.3 percent for fiscal 2019 and 2018, respectively, represent income tax expense as we generated pre-tax income from continuing operations in fiscal 2019 and 2018.

As of May 31, 2020, we had estimated current prepaid state and federal income taxes of $7.4 million and $11.0 million, respectively, which is included on our accompanying consolidated balance sheets as prepaid income taxes and estimated current state income taxes payable of $6.2 million which is included on our accompanying consolidated balance sheets as accrued income taxes.

As of May 31, 2020, we had unrecognized tax benefits of $21.6 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 31, 2020, is $6.2 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 $6.2 million relates to items that would impact our effective income tax rate.

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



(in millions)
Balances at May 26, 2019	$	27.0
Additions related to current-year tax positions	4.1
Net reductions due to settlements with taxing authorities	(7.3		)
Reductions to tax positions due to statute expiration	(2.2		)
Balances at May 31, 2020	$	21.6

Interest recorded on reserves for uncertain tax positions was included in income tax expense in our consolidated statements of earnings as follows:



	Fiscal Year Ended
(in millions)	May 31, 2020		May 26, 2019		May 27, 2018
Interest recorded on unrecognized tax benefits	$	1.8	$	1.5	$	0.8

At May 31, 2020, we had $2.1 million accrued for the payment of interest associated with unrecognized 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 2020, and state and local, or non-U.S. income tax examinations by tax authorities for years before fiscal 2016.

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



(in millions)	May 31, 2020			May 26, 2019
Accrued liabilities	$	81.0		$	69.2
Compensation and employee benefits	127.5			119.9
Deferred rent and interest income	—			91.1
Lease liabilities	1,186.8			—
Net operating loss, credit and charitable contribution carryforwards	117.3			75.3
Other	11.4			5.9
Gross deferred tax assets	$	1,524.0		$	361.4
Valuation allowance	(19.3		)	(29.7		)
Deferred tax assets, net of valuation allowance	$	1,504.7		$	331.7
Trademarks and other acquisition related intangibles	(164.4		)	(211.5		)
Buildings and equipment	(263.7		)	(247.7		)
Capitalized software and other assets	(25.7		)	(24.6		)
Lease assets	(1,098.0		)	—
Other	(9.0		)	(4.8		)
Gross deferred tax liabilities	$	(1,560.8	)	$	(488.6	)
Net deferred tax liabilities	$	(56.1	)	$	(156.9	)

We have deferred tax assets of $15.4 million reflecting the benefit of state loss carryforwards, before federal benefit and valuation allowance, which expire at various dates between fiscal 2021 and fiscal 2039. We have deferred tax assets of $63.6 million of federal and $44.3 million state tax credits, before federal benefit and valuation allowance, which expire at various dates between fiscal 2020 and fiscal 2040.

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 31, 2020.