LOWES COMPANIES INC

NOTE 12: Income Taxes

The following is a reconciliation of the federal statutory tax rate to the effective tax rate:



	2016		2015		2014
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	3.6		3.6		3.3
Valuation allowance - impairment	2.0		4.2		—
Other, net	(0.1	)	(0.4	)	(1.4	)
Effective tax rate	40.5	%	42.4	%	36.9	%

The components of the income tax provision are as follows:



(In millions)	2016		2015			2014
Current:
Federal	$	1,824	$	1,688		$	1,475
State	275		248			221
Total current ¹	2,099		1,936			1,696
Deferred:
Federal	6		(59		)	(112		)
State	3		(4		)	(6		)
Total deferred ¹	9		(63		)	(118		)
Total income tax provision	$	2,108	$	1,873		$	1,578


¹	Amounts applicable to foreign income taxes were insignificant for all periods presented.

The tax effects of cumulative temporary differences that gave rise to the deferred tax assets and liabilities were as follows:



(In millions)	February 3, 2017			January 29, 2016
Deferred tax assets:
Self-insurance	$	352		$	369
Share-based payment expense	69			83
Deferred rent	78			91
Impairment of investment	381			270
Foreign currency translation	—			107
Net operating losses	174			159
Other, net	175			156
Total deferred tax assets	1,229			1,235
Valuation allowance	(578		)	(447		)
Net deferred tax assets	651			788

Deferred tax liabilities:
Property	(417		)	(507		)
Other, net	(34		)	(40		)
Total deferred tax liabilities	(451		)	(547		)

Net deferred tax asset	$	200		$	241

As of February 3, 2017, the Company reported a deferred tax asset of $381 million related to its intention to exit from the Company’s joint venture investment in Australia. The Company established a full valuation allowance against the deferred tax asset related to these losses generated from impairments and equity method losses. These losses are collectively considered capital losses, having a five year carryforward period, once realized, and can only be used to offset capital gain income. No present or future capital gains have been identified through which this deferred tax asset can be realized.

In December 2016, the U.S. Treasury Department and the U.S. Internal Revenue Service issued final and temporary regulations under Internal Revenue Code Section 987 (the Regulations). The Regulations provide guidance on the taxation of foreign currency gains and losses arising from qualified business units that operate in a currency other than the currency of their owner. As a result of the newly enacted guidance, net deferred tax assets were reduced by $33 million as of February 3, 2017.

The Company operates as a branch in various foreign jurisdictions and cumulatively has incurred net operating losses of $640 million and $580 million as of February 3, 2017, and January 29, 2016, respectively. These net operating losses are subject to expiration in 2017 through 2036. Deferred tax assets have been established for these foreign net operating losses in the accompanying consolidated balance sheets. Given the uncertainty regarding the realization of the foreign net deferred tax assets, the Company recorded cumulative valuation allowances of $197 million and $177 million as of February 3, 2017, and January 29, 2016, respectively.

The Company has not provided for deferred income taxes on accumulated but undistributed earnings of the Company’s foreign operations of approximately $163 million and $153 million as of February 3, 2017, and January 29, 2016, respectively, due to its intention to permanently reinvest these earnings outside the U.S. It is not practicable to determine the income tax liability that would be payable on these earnings. The Company will provide for deferred or current income taxes on such earnings in the period it determines it is necessary to remit those earnings.

A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:



(In millions)	2016		2015			2014
Unrecognized tax benefits, beginning of year	$	3	$	7		$	62
Additions for tax positions of prior years	3		—			2
Reductions for tax positions of prior years	—		(2		)	(57		)
Settlements	—		(2		)	—
Unrecognized tax benefits, end of year	$	6	$	3		$	7

The amounts of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate were $5 million and $2 million as of February 3, 2017, and January 29, 2016, respectively.

The Company recognized $2 million of interest expense related to uncertain tax positions during 2016. The Company recognized $1 million of interest income related to uncertain tax positions during 2015 and 2014. As of February 3, 2017 and January 29, 2016, the Company had accrued interest related to uncertain tax positions of $3 million and $1 million, respectively. Penalties recognized related to uncertain tax positions were insignificant for 2016, 2015, and 2014. Accrued penalties were also insignificant as of February 3, 2017 and January 29, 2016.

The Company is subject to examination by various foreign and domestic taxing authorities. It is reasonably possible that the Company will resolve $3 million in state related audit items within the next 12 months. There are ongoing U.S. state audits covering tax years 2008 to 2015. An audit of the Company’s Canadian operations by the Canada Revenue Agency for fiscal years 2011 and 2012 was started during 2016. The Company remains subject to income tax examinations for international income taxes for fiscal years 2007 through 2015. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.