Income Taxes
The provision for income taxes consists of the following:
|
| | | | | | | | | | | |
| 2016 |
| 2015 |
| 2014 |
Current: | (in thousands) |
U.S. federal | $ | 7,600 |
| | $ | 72,222 |
| | $ | 29,884 |
|
U.S. state and local | 4,721 |
| | 12,425 |
| | 6,491 |
|
Foreign | 814 |
| | 224 |
| | 565 |
|
Total | 13,135 |
| | 84,871 |
| | 36,940 |
|
Deferred: | | | | | |
U.S. federal | 19,333 |
| | (8,715 | ) | | 6,884 |
|
U.S. state and local | 866 |
| | (1,983 | ) | | (558 | ) |
Foreign | (134 | ) | | (2 | ) | | (35 | ) |
Total | 20,065 |
| | (10,700 | ) | | 6,291 |
|
Provision for income taxes | $ | 33,200 |
| | $ | 74,171 |
| | $ | 43,231 |
|
The following table provides a reconciliation between the statutory federal income tax rate and the effective tax rate:
|
| | | | | | | | |
| 2016 | | 2015 | | 2014 |
Federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal income tax effect | 4.4 | % | | 3.6 | % | | 4.1 | % |
Share-based compensation | 4.0 | % | | 0.2 | % | | 0.8 | % |
(Benefit)/Expense for uncertain tax positions | (7.0 | )% | | 0.5 | % | | (1.4 | )% |
Other items, net | 0.2 | % | | (0.4 | )% | | 0.3 | % |
Effective tax rate | 36.6 | % | | 38.9 | % | | 38.8 | % |
The decrease in the tax rate in 2016 compared to 2015 is primarily attributable to the release of uncertain tax positions discussed further below, partially offset by the impact on the tax rate of share-based compensation due to the expiration of certain unexercised stock options previously held by the former Chairman of the Company's Board of Directors (the "Board").
The following table provides the effect of temporary differences that created deferred income taxes as of January 28, 2017 and January 30, 2016. Deferred tax assets and liabilities represent the future effects on income taxes resulting from temporary differences and carry-forwards at the end of the respective periods.
|
| | | | | | | |
| January 28, 2017 | | January 30, 2016 |
| (in thousands) |
Deferred tax assets: | | | |
Accrued expenses and deferred compensation | $ | 28,340 |
| | $ | 40,540 |
|
Rent | 31,170 |
| | 28,551 |
|
Lease financing obligations | 31,522 |
| | 28,492 |
|
Inventory | 3,005 |
| | 1,778 |
|
Other | 3,535 |
| | 2,573 |
|
Tax credits/carryforwards | 562 |
| | 214 |
|
Valuation allowance | (3,243 | ) | | (2,081 | ) |
Total deferred tax assets | 94,891 |
| | 100,067 |
|
| | | |
Deferred tax liabilities: | | | |
Prepaid expenses | 5,189 |
| | 4,976 |
|
Intangible assets | 22,417 |
| | 17,996 |
|
Property and equipment | 66,124 |
| | 55,868 |
|
Total deferred tax liabilities | 93,730 |
| | 78,840 |
|
Net deferred tax asset | $ | 1,161 |
| | $ | 21,227 |
|
The net increase in the total valuation allowance attributable to foreign operations for the years ended January 28, 2017, and January 30, 2016 was $1.0 million and $0.4 million, respectively. The foreign capital loss carryforward as of January 28, 2017 and January 30, 2016 was $0.3 million and $0.3 million, respectively. The Company has established a full valuation allowance related to the foreign capital loss carryforward. The foreign capital loss carryforward period is indefinite. A valuation allowance of $0.2 million was established related to state and local tax credits generated in the current year which have a one year carryforward period.
No other valuation allowances have been provided for deferred tax assets because management believes that it is more likely than not that the full amount of the net deferred tax assets will be realized in the future.
The following table summarizes the presentation of the Company’s net deferred tax assets in the Consolidated Balance Sheets:
|
| | | | | | | |
| January 28, 2017 | | January 30, 2016 |
| (in thousands) |
Deferred tax assets | $ | 7,926 |
| | $ | 21,227 |
|
Other long-term liabilities | (6,765 | ) | | — |
|
Net deferred tax assets | $ | 1,161 |
| | $ | 21,227 |
|
Uncertain Tax Positions
The Company evaluates tax positions using a more likely than not recognition criterion.
A reconciliation of the beginning to ending unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
| January 28, 2017 | | January 30, 2016 | | January 31, 2015 |
| (in thousands) |
Unrecognized tax benefits, beginning of year | $ | 9,506 |
| | $ | 1,651 |
| | $ | 4,091 |
|
Gross addition for tax positions of the current year | 296 |
| | 767 |
| | 346 |
|
Gross addition for tax positions of the prior year | 527 |
| | 7,174 |
| | 129 |
|
Settlements | — |
| | (57 | ) | | (2,137 | ) |
Reduction for tax positions of prior years | (23 | ) | | (29 | ) | | (628 | ) |
Lapse of statute of limitations | (7,202 | ) | | — |
| | (150 | ) |
Unrecognized tax benefits, end of year | $ | 3,104 |
| | $ | 9,506 |
| | $ | 1,651 |
|
The amount of the above unrecognized tax benefits as of January 28, 2017, January 30, 2016, and January 31, 2015 that would impact the Company's effective tax rate, if recognized, is $3.1 million, $9.5 million, and $1.7 million, respectively.
During 2016, the Company released gross uncertain tax positions of $7.2 million and the related accrued interest of $0.9 million as a result of the expiration of associated statutes of limitation. During 2014, the Internal Revenue Service (IRS) completed its examination of the Company’s 2012, 2011, and 2010 income tax returns and the Company released gross uncertain tax positions of $2.1 million and the related accrued interest of $0.1 million as a result of the conclusion of this examination.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. The total amount of net interest in tax expense related to interest and penalties included in the Consolidated Statements of Income and Comprehensive Income was $(0.3) million for 2016, $0.7 million for 2015, and immaterial for 2014. As of January 28, 2017 and January 30, 2016, the Company had accrued interest of $0.5 million and $0.8 million, respectively.
The Company is subject to examination by the IRS for years subsequent to 2012. The Company is also generally subject to examination by various U.S. state and local and non-U.S. tax jurisdictions for the years subsequent to 2012. There are ongoing U.S. state and local audits covering tax years 2012 through 2015. The Company does not expect the results from any income tax audit to have a material impact on the Company’s financial statements.
The Company believes that over the next twelve months, it is reasonably possible that up to $0.8 million of unrecognized tax benefits could be resolved as the result of the expiration of statutes of limitation. Final settlement of these issues may result in payments that are more or less than this amount, but the Company does not anticipate that the resolution of these matters will result in a material change to its consolidated financial position or results of operations.
The Company’s Canadian subsidiary has an accumulated deficit; accordingly, we have not provided for income taxes in the United States on undistributed earnings.