12. Income Taxes:
Unrecognized tax benefits for uncertain tax positions, primarily recorded in Other noncurrent liabilities, are established in accordance with ASC 740 when, despite the fact that the tax return positions are supportable, the Company believes these positions may be challenged and the results are uncertain. The Company adjusts these liabilities in light of changing facts and circumstances. As of February 3, 2018, the Company had gross unrecognized tax benefits totaling approximately $9.5 million, of which approximately $10.2 million (inclusive of interest) would affect the effective tax rate if recognized. The Company had approximately $2.8 million, $4.1 million and $4.3 million of interest and penalties accrued related to uncertain tax positions as of February 3, 2018, January 28, 2017 and January 30, 2016, respectively. The Company recognizes interest and penalties related to the resolution of uncertain tax positions as a component of income tax expense. The Company recognized $986,000, $716,000 and $891,000 of interest and penalties in the Consolidated Statements of Income and Comprehensive Income for the years ended February 3, 2018, January 28, 2017 and January 30, 2016, respectively. The Company is no longer subject to U.S. federal income tax examinations for years before 2014. In state and local tax jurisdictions, the Company has limited exposure before 2006. During the next 12 months, various state and local taxing authorities’ statutes of limitations will expire and certain state examinations may close, which could result in a potential reduction of unrecognized tax benefits for which a range cannot be determined.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
| February 3, 2018 | January 28, 2017 | January 30, 2016 | |||||||
| Fiscal Year Ended | |||||||||
| Balances, beginning | $ | 10,668 | $ | 9,560 | $ | 9,431 | |||
| Additions for tax positions of the current year | 2,537 | 2,618 | 1,452 | ||||||
| Reduction for tax positions of prior years for: | |||||||||
| Changes in judgment | (1,209) | - | - | ||||||
| Settlements during the period | (390) | (328) | (611) | ||||||
| Lapses of applicable statute of limitations | (2,075) | (1,182) | (712) | ||||||
| Balances, ending | $ | 9,531 | $ | 10,668 | $ | 9,560 | |||
The provision for income taxes consists of the following (in thousands):
| February 3, 2018 | January 28, 2017 | January 30, 2016 | |||||||
| Fiscal Year Ended | |||||||||
| Current income taxes: | |||||||||
| Federal | $ | 1,726 | $ | (411) | $ | 29,076 | |||
| State | 1,401 | 873 | 4,981 | ||||||
| Foreign | 1,952 | 2,053 | 197 | ||||||
| Total | 5,079 | 2,515 | 34,254 | ||||||
| Deferred income taxes: | |||||||||
| Federal | 3,816 | 45 | (1,953) | ||||||
| State | (1,462) | (644) | (104) | ||||||
| Foreign | - | (14) | 88 | ||||||
| Total | 2,354 | (613) | (1,969) | ||||||
| Total income tax expense | $ | 7,433 | $ | 1,902 | $ | 32,285 | |||
| February 3, 2018 | January 28, 2017 | |||||||||
| Deferred tax assets: | ||||||||||
| Allowance for doubtful accounts | $ | 198 | $ | 435 | ||||||
| Inventory valuation | 1,758 | 2,841 | ||||||||
| Non-deductible accrued liabilities | 3,248 | 5,298 | ||||||||
| Other taxes | 1,152 | 1,653 | ||||||||
| Federal benefit of uncertain tax positions | 1,268 | 3,812 | ||||||||
| Equity compensation expense | 4,321 | 6,077 | ||||||||
| Net Operating Losses | 851 | 257 | ||||||||
| Charitable contribution carryover | 2,041 | 3,425 | ||||||||
| Other | 1,977 | 2,268 | ||||||||
| Total deferred tax assets | 16,814 | 26,066 | ||||||||
| Deferred tax liabilities | ||||||||||
| Property and equipment | 1,859 | 9,564 | ||||||||
| Deferred lease liability | 1,191 | 267 | ||||||||
| Healthcare expense | - | 406 | ||||||||
| Incurred but not reported ("IBNR") | 1,043 | 1,500 | ||||||||
| Other | 151 | 556 | ||||||||
| Total deferred tax liabilities | 4,244 | 12,293 | ||||||||
| Net deferred tax assets | $ | 12,570 | $ | 13,773 | ||||||
The Company continues to evaluate its permanent reinvestment assertion in light of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The accounting is expected to be completed within the one-year measurement period as allowed by Staff Accounting Bulletin No.118 (“SAB 118”).
The reconciliation of the Company’s effective income tax rate with the statutory rate is as follows:
| February 3, 2018 | January 28, 2017 | January 30, 2016 | |||||||||||
| Fiscal Year Ended | |||||||||||||
| Federal income tax rate | 33.7 | % | 35.0 | % | 35.0 | % | |||||||
| State income taxes | (4.7) | (0.2) | 3.0 | ||||||||||
| Tax credits | (7.5) | (4.1) | (1.8) | ||||||||||
| Tax exempt interest | (4.4) | (1.6) | (0.5) | ||||||||||
| Foreign rate differential | (44.4) | (13.4) | - | ||||||||||
| Uncertain tax positions | (4.4) | 2.4 | (0.3) | ||||||||||
| Charitable contribution of inventory | (1.0) | (13.1) | (1.5) | ||||||||||
| Deemed Repatriation | 38.6 | - | - | ||||||||||
| Deferred Rate Change | 39.2 | - | - | ||||||||||
| Addback on Wage Related Credits | 2.0 | 1.2 | 0.6 | ||||||||||
| Effects of permanent differences | - | 0.1 | (0.1) | ||||||||||
| Other | (0.6) | (2.4) | (1.8) | ||||||||||
| Effective income tax rate | 46.5 | % | 3.9 | % | 32.6 | % | |||||||
The recently enacted Tax Act significantly revised U.S. corporate income tax law by, among other things, reducing the corporate income tax rate to 21% and implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. In response to the Tax Act, the SEC issued SAB 118 which allows issuers to recognize provisional estimates of the impact of the Tax Act in their financial statements and adjust in the period in which the estimate becomes finalized, or in circumstances where estimates cannot be made, to disclose and recognize within a one year measurement period.
Implementation of the Tax Act resulted in an approximate $6.2 million charge for the revaluation of the Company’s net domestic deferred tax assets and a one-time provisional transition tax charge of approximately $6.1 million, of which $5.7 million is recorded in non-current liabilities. In reaching these estimates, the Company utilized all available guidance and notices issued by the U.S. Department of the Treasury. These amounts are to be considered provisional and are not currently able to be finalized given the complexity of the underlying calculations. The Company relied upon prior year legal entity financials and return filings in the estimates of the one-time transition tax. The Company will update and conclude its accounting as additional information is obtained, which in many cases is contingent on the timing of issuance of regulatory guidance.