PIER 1 IMPORTS INC/DE

NOTE 7 – INCOME TAXES

The components of income before taxes for each of the last three fiscal years, by tax jurisdiction, were as follows (in thousands):


	2017			2016			2015
Domestic		$	39,818		$	54,887		$	111,338
Foreign			5,441			8,278			9,064

Income before income taxes		$	45,259		$	63,165		$	120,402

The provision for income taxes for each of the last three fiscal years consisted of (in thousands):


	2017				2016			2015
Federal:
Current		$	30,062			$	14,600		$	30,771
Deferred			(17,842	)			2,352			5,620
State:
Current			3,491				2,248			4,402
Deferred			(1,803	)			2,265			2,027
Foreign:
Current			1,222				2,066			2,420
Deferred			—				—			—

Total income tax provision		$	15,130			$	23,531		$	45,240

The differences between income taxes at the statutory federal income tax rate of 35% in fiscal 2017, 2016 and 2015, and income tax reported in the consolidated statements of operations were as follows (in thousands):


	2017			2016			2015
Tax provision at statutory federal income tax rate		$	15,841		$	22,108		$	42,141
State income taxes, net of federal provision			929			2,703			4,402
Change in valuation allowance			168			232			(224)
Foreign income taxes			1,222			2,066			2,420
Foreign and other tax credits			(2,161)			(4,561)			(3,436)
Other, net			(869)			983			(63)

Provision for income taxes		$	15,130		$	23,531		$	45,240

Effective tax rate			33.4%			37.3%			37.6%

Deferred tax assets and liabilities at February 25, 2017 and February 27, 2016, were comprised of the following (in thousands):


	2017				2016
Deferred tax assets:
Deferred compensation		$	23,692			$	21,750
Accrued average rent			14,130				12,998
Self insurance reserves			11,719				11,245
Cumulative foreign currency translation			3,316				4,205
Deferred revenue and revenue reserves			5,224				5,136
Foreign and other tax credits			2,655				2,403
Other			4,033				4,254

Total deferred tax assets		$	64,769			$	61,991

Deferred tax liabilities:
Properties and equipment, net		$	(24,084	)		$	(28,510)
Inventory			(18,613	)			(23,733)
Store supplies			(3,629	)			(3,679)
Deferred gain on debt repurchase			(7,342	)			(11,014)
Other			(1,082	)			(782)

Total deferred tax liabilities		$	(54,750	)		$	(67,718)

Valuation allowance		$	(822	)		$	(654)

Net deferred tax assets ⁽¹⁾		$	9,197			$	(6,381)

⁽¹⁾

The Company adopted retrospectively ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” in the fourth quarter of fiscal 2016. All deferred tax assets and liabilities are classified as noncurrent, accordingly. For fiscal 2017 and 2016, state deferred tax assets were $4,590 and $3,199, respectively, and federal deferred tax assets were $4,607 and $0, respectively. Deferred tax assets are included in noncurrent assets. Deferred tax liabilities were $0 and $9,580 for fiscal 2017 and 2016, respectively, and the balance in fiscal 2016 was related to federal deferred tax liabilities. Deferred tax liabilities are included in other noncurrent liabilities.

Deferred tax assets related to state net operating losses at February 25, 2017 and February 27, 2016, were $236,000 and $426,000, respectively. State loss carryforwards vary as to the carryforward period and will expire from fiscal 2020 through fiscal 2033. The Company believes that it is not more likely than not that the benefit from certain state tax credits, which will expire from fiscal 2024 through fiscal 2037, will be realized. Accordingly, the Company has provided a valuation allowance of $822,000 and $654,000 with respect to the deferred tax assets relating to these state tax credits as of February 25, 2017 and February 27, 2016, respectively.

The Company is subject to taxation in the United States and various state, provincial, local and foreign (primarily Canadian) jurisdictions. With few exceptions, as of fiscal 2017, the Company is no longer subject to U.S. federal or state examinations by tax authorities for years before fiscal 2014. Certain tax years prior to fiscal 2014 are subject to examination by certain state and foreign jurisdictions.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


	2017				2016				2015
Unrecognized tax benefits — beginning balance		$	2,551			$	765			$	6,673
Gross increases — tax positions in current period			4,643				231				—
Gross increases — tax positions in prior period			225				1,862				282
Gross decreases — tax positions in prior period			(320	)			(60	)			(1,458	)
Settlements			(83	)			(81	)			(4,732	)
Expiration of statute of limitations			(26	)			(166	)			—

Unrecognized tax benefits — ending balance		$	6,990			$	2,551			$	765

As of February 25, 2017, the Company had total unrecognized tax benefits of $6,990,000, the majority of which would, if recognized, affect the Company’s effective tax rate. As of February 27, 2016, the Company had unrecognized tax benefits of $2,551,000, the majority of which would, if recognized, affect the Company’s effective tax rate. It is reasonably possible a significant portion of the Company’s gross unrecognized tax benefits could decrease within the next twelve months primarily due to state settlements.

Interest associated with unrecognized tax benefits is recorded in nonoperating (income) and expenses. Penalties associated with unrecognized tax benefits are recorded in SG&A expenses. The Company recorded expenses for tax interest and penalties, net of refunds, of $142,000, $286,000 and $3,000 in fiscal 2017, 2016 and 2015, respectively. The Company had accrued penalties and interest of $379,000 and $508,000 at February 25, 2017 and February 27, 2016, respectively.