9.    Income Taxes

 

Our income tax provision (benefit) is as follows (in thousands):

 

 

On December 22, 2017, the Tax Act was adopted into law. The Tax Act makes broad and complex changes to the Internal Revenue Code of 1986, including, but not limited to, (i) reducing the U.S. federal corporate tax rate from 35% to 21%; (ii) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits are realized; (iii) creating a new limitation on deductible interest expense; and (iv) changing rules related to uses and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017. As a result of the adoption of the Tax Act, for the fiscal year ended January 27, 2018, the statutory federal corporate tax rate was prorated to 34.0%, with the statutory rate for fiscal year 2019 and beyond at 21.0%.

 

In December of 2017, the Securities and Exchange Commission staff issued State Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows us to record provisional amounts during a measurement period not to extend beyond one year from the enactment date.  Since the Tax Act was enacted in the fourth quarter of our fiscal year ended January 27, 2018 (and ongoing guidance and accounting interpretations are expected over the next 12 months), we consider the accounting of deferred tax re-measurements and other items, such as cost recovery and state tax considerations, to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118.

Deferred tax assets and liabilities are determined based on the estimated future tax effects of the difference between the financial statement and tax basis of asset and liability balances using statutory tax rates. Tax effects of temporary differences that give rise to significant components of the deferred tax assets and liabilities are as follows (in thousands):

 

 

We are required to assess the available positive and negative evidence to estimate if sufficient future income will be generated to utilize deferred tax assets. We believe the cumulative pre-tax income is a significant piece of positive evidence that allows us to consider other subjective evidence such as future forecasted pre-tax income. For the fiscal year ended January 30, 2016, we determined that we had three years of cumulative pre-tax income, after excluding items that we considered to be unusual in nature. In addition, taxable income (loss) exceeded pre-tax income (loss) for the fiscal year ended January 30, 2016 and for each of the two preceding fiscal years. As of January 30, 2016, we had completed approximately 18 months of operations following our rebranding initiative as well as demonstrated our ability to more accurately forecast the results of our operations. We concluded that because of this positive evidence, as well as cumulative pre-tax income in recent fiscal years, it was more likely than not that our deferred tax assets would be realized in future years. Accordingly, during fiscal year 2016 we reversed $6.0 million of the valuation allowance on deferred tax assets, with an offsetting credit to the provision for income taxes.

 

For the fiscal years ended January 27, 2018 and January 28, 2017, we continued to have three years of cumulative pre-tax income. In addition, taxable income exceeded pre-tax income for the fiscal years ended January 27, 2018 and January 28, 2017 and for each of the two preceding fiscal years. We concluded that because of this positive evidence, as well as cumulative pre-tax income in recent fiscal years, it was more likely than not that our deferred tax assets would be realized in future years. Accordingly, during fiscal year 2018, we determined no valuation allowance was required.

 

Our valuation allowances totaled $0.3 million as of January 28, 2017. During fiscal year 2018, while analyzing our ability to utilize state net operating losses, it was determined that the positive evidence outweighed the negative evidence and the remaining valuation allowance was released.

 

We had approximately $7.4 million and $8.2 million of state net operating loss carryforwards at January 27, 2018 and January 28, 2017, respectively. The state net operating losses begin to expire in fiscal year 2023. During fiscal year 2018, we determined that the valuation allowance for state net operating losses was no longer appropriate and released the remaining valuation allowance.

 

The reconciliation between the actual income tax provision (benefit) and the income tax provision (benefit) calculated at the federal statutory tax rate is as follows (dollars in thousands):

 

 

Uncertain Tax Positions

 

We operate in a number of tax jurisdictions and are subject to examination of its income tax returns by tax authorities in those jurisdictions who may challenge any item on these returns. Because the tax matters challenged by tax authorities are typically complex, the ultimate outcome of these challenges is uncertain. In accordance with ASC 740 (Topic 740, “Income Taxes”), we recognize the benefits of uncertain tax positions in our consolidated financial statements only after determining that it is more likely than not that the uncertain tax positions will be sustained.

 

The total amount of unrecognized tax benefits as of January 27, 2018 was $1.7 million, $0.5 million of which would favorably impact the effective tax rate if resolved in our favor.

 

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

 

 

We recognize accrued interest and penalties related to unrecognized tax benefits in our provision for income taxes. As of January 27, 2018 and January 28, 2017, there was approximately $0.1 million in accrued penalties. As of January 27, 2018 and January 28, 2017, there was approximately $0.2 million in accrued interest. In addition, we recognized an immaterial amount of interest expense and penalties during the fiscal years ended January 27, 2018 and January 28, 2017.

 

In the normal course of business, we are subject to examination by taxing authorities in U.S. Federal and U.S. state jurisdictions. The period subject to examination for our federal return is fiscal year 2015 and later and fiscal year 2014 and later for all major state tax returns. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with management's expectations, we could be required to adjust the provision for income tax in the period such resolution occurs.