KOHLS CORP

5. Income Taxes

Deferred income taxes consist of the following:

(Dollars in Millions)	Feb 3, 2018		Jan 28, 2017
Deferred tax liabilities:
Property and equipment	$	788		$	1,226
Merchandise inventories		63			95
Total deferred tax liabilities		851			1,321
Deferred tax assets:
Capital lease and financing obligations		445			711
Accrued and other liabilities, including stock-based compensation		106			194
Accrued step rent liability		76			111
Federal benefit on state tax reserves		30			47
Unrealized loss on interest rate swap		5			9
Merchandise inventories		—			—
Total deferred tax assets		662			1,072
Net deferred tax liability	$	189		$	249

Deferred tax assets included in other long-term assets totaled $24 million as of February 3, 2018 and $23 million as of January 28, 2017.

The components of the provision for income taxes were as follows:

(Dollars in Millions)	2017			2016		2015
Current federal	$	299		$	272	$	397
Current state		26			25		34
Deferred federal		(86	)		16		(35	)
Deferred state		19			6		(12	)
Provision for income taxes	$	258		$	319	$	384

On December 22, 2017, H.R. 1, originally the Tax Cuts & Jobs Act (“the Act”), was signed into law making significant changes to the Internal Revenue Code. Changes include a corporate rate decrease from 35% to 21%, effective January 1, 2018, as well as a variety of other changes including the acceleration of expensing of certain business assets and reductions in the amount of executive pay that could qualify as a tax deduction.

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act. For matters that have not been completed, provisional amounts are recorded to the extent they can be reasonably estimated.

We have calculated our best estimate of the impact of the Act in our year end income tax provision in accordance with our understanding of the Act and guidance available as of the date of this filing. For 2017, the reduction in the tax rate is prorated, resulting in a current year statutory federal tax rate of 33.7%. The provisional amount related to the current year federal tax rate reduction and the re-measurement of our deferred tax assets and liabilities is recorded as a total tax benefit of $136 million. This estimate may be impacted as we further analyze available tax accounting methods and elections, state tax conformity to the federal tax changes and guidance issued by regulatory bodies that provide interpretive guidance of the Act.

The effective tax rate differs from the amount that would be provided by applying the statutory U.S. corporate tax rate due to the following items:

	2017			2016			2015
Federal statutory rate		33.7	%		35.0	%		35.0	%
State income taxes, net of federal tax benefit		1.0			2.4			2.1
Re-measurement of deferred tax assets and liabilities		(10.9	)		—			—
Other federal tax credits		(0.7	)		(0.9	)		(0.8	)
Effective tax rate		23.1	%		36.5	%		36.3	%

The re-measurement of deferred tax assets and liabilities above includes the following impacts:

•

Revaluation of deferred taxes that existed on December 22, 2017, the enactment date of the Act

•

Deferred taxes that were created after December 22, 2017. These items were deducted at the federal statutory rate of 33.7%, but will reverse at the newly enacted 21% rate.

We have analyzed filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. The federal returns subject to examination are for the 2008 through 2017 tax years. State returns subject to examination vary depending upon the state. Generally, the 2014 through 2017 tax years are subject to state examination. The earliest state open period is 2006. Certain states have proposed adjustments which we are currently appealing. If we do not prevail on our appeals, we do not anticipate that the adjustments would result in a material change in our financial position.

During 2017, we resolved a significant state tax dispute. The resolution relates to fiscal years 2003 through 2012. As a result of the settlement, we recorded a $30 million pre-tax benefit in 2017.

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

(Dollars in Millions)	2017			2016
Balance at beginning of year	$	149		$	139
Increases due to:
Tax positions taken in prior years		—			3
Tax positions taken in current year		18			15
Decreases due to:
Tax positions taken in prior years		(13	)		—
Settlements with taxing authorities		(16	)		(6	)
Lapse of applicable statute of limitations		(3	)		(2	)
Balance at end of year	$	135		$	149

Not included in the unrecognized tax benefits reconciliation above are gross unrecognized accrued interest and penalties of $33 million at February 3, 2018 and $29 million at January 28, 2017. We had interest and penalty expense of $4 million for 2017, $6 million for 2016, and none for 2015.

Our total unrecognized tax benefits that, if recognized, would affect our effective tax rate were $112 million as of February 3, 2018 and $110 million as of January 28, 2017. It is reasonably possible that our unrecognized tax positions may change within the next 12 months, primarily as a result of ongoing audits. While it is possible that one or more of these examinations may be resolved in the next year, it is not anticipated that a significant impact to the unrecognized tax benefit balance will occur.

We have both payables and receivables for current income taxes recorded on our balance sheet. Receivables included in other current assets totaled $62 million as of February 3, 2018 and $27 million as of January 28, 2017.