Note 14. Income Taxes
Our operating results have been included in the consolidated U.S. federal and state income tax returns of Barnes & Noble for all periods ending on or before the consummation of the Spin-Off on August 2, 2015. Amounts presented in these consolidated financial statements related to income taxes have been determined on a separate tax return basis as it relates to those periods. Amounts presented in these consolidated financial statements related to income taxes for periods ending after the consummation of the Spin-Off are presented on a consolidated basis as we became a separate consolidated entity
For Fiscal 2017, Fiscal 2016 and Fiscal 2015, we had no material revenue or expense in jurisdictions outside the United States.
Income tax provisions (benefits) for Fiscal 2017, Fiscal 2016 and Fiscal 2015 are as follows:
|
| | | | | | | | | | | | |
| | Fiscal 2017 | | Fiscal 2016 | | Fiscal 2015 |
Current: | | | | | | |
Federal | | $ | 14,872 |
| | $ | 13,019 |
| | $ | 22,061 |
|
State | | 1,819 |
| | 1,783 |
| | 3,489 |
|
Total current | | 16,691 |
| | 14,802 |
| | 25,550 |
|
Deferred: | | | | | | |
Federal | | (9,238 | ) | | (9,922 | ) | | (10,247 | ) |
State | | (2,723 | ) | | (2,213 | ) | | (1,085 | ) |
Total deferred | | (11,961 | ) | | (12,135 | ) | | (11,332 | ) |
Total | | $ | 4,730 |
| | $ | 2,667 |
| | $ | 14,218 |
|
Reconciliation between the effective income tax rate and the federal statutory income tax rate is as follows:
|
| | | | | | | | | |
| | Fiscal 2017 | | Fiscal 2016 | | Fiscal 2015 |
Federal statutory income tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal income tax benefit | | (5.8 | ) | | (15.2 | ) | | 4.7 |
|
Valuation allowances | | — |
| | 50.6 |
| | — |
|
Permanent book / tax differences | | 25.5 |
| | 31.1 |
| | 3.1 |
|
Credits | | (5.5 | ) | | (5.4 | ) | | (0.2 | ) |
Other, net | | (2.3 | ) | | 0.8 |
| | — |
|
Effective income tax rate | | 46.9 | % | | 96.9 | % | | 42.6 | % |
One percentage point on our effective tax rate is approximately $100. The net benefit for state income taxes is principally driven by certain net operating losses that the Company is entitled to claim as a result of the Spin-Off. The permanent book / tax differences are principally comprised of non-deductible compensation, non-deductible meals and entertainment costs, and federal income tax credits.
In March 2016, the FASB issued ASU No. 2016-09 to provide guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires, among other things, the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. We are required to adopt this standard in the first quarter of Fiscal 2018, but have early adopted this standard during the fourth quarter of Fiscal 2016 as permitted. Prior to Fiscal 2016, we had no windfall benefits. There was no material impact upon adoption of this guidance since the recognition of income tax effects of awards was not materially different than amounts that had previously been recorded in our financial statements.
We account for income taxes using the asset and liability method. Deferred taxes are recorded based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards.
The significant components of our deferred taxes consisted of the following:
|
| | | | | | | | |
| | As of |
| | April 29, 2017 | | April 30, 2016 |
Deferred tax assets: | | | | |
Estimated accrued liabilities | | $ | 13,047 |
| | $ | 13,859 |
|
Inventory | | 16,969 |
| | 12,926 |
|
Stock-based compensation | | 1,780 |
| | 1,648 |
|
Insurance liability | | 881 |
| | 1,050 |
|
Lease transactions | | 1,826 |
| | 2,138 |
|
Property and equipment | | 8,728 |
| | 6,802 |
|
Tax credits | | 206 |
| | 112 |
|
Net operating losses | | 4,916 |
| | 3,477 |
|
Other | | 5,106 |
| | 1,499 |
|
Gross deferred tax assets | | 53,459 |
| | 43,511 |
|
Valuation allowance | | (1,392 | ) | | (1,394 | ) |
Net deferred tax assets | | 52,067 |
| | 42,117 |
|
Deferred tax liabilities: | | | | |
Intangible asset amortization | | (68,938 | ) | | (71,982 | ) |
Gross deferred tax liabilities | | (68,938 | ) | | (71,982 | ) |
Net deferred tax liabilities | | $ | (16,871 | ) | | $ | (29,865 | ) |
As of April 29, 2017, we had $86 of unrecognized tax benefits, all of which, if recognized, would affect our effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | |
Balance at May 3, 2014 | $ | 180 |
|
Additions for tax positions of the current period | 35 |
|
Additions for tax positions of prior periods | — |
|
Reductions due to settlements | — |
|
Other reductions for tax positions of prior periods | — |
|
Balance at May 2, 2015 | $ | 215 |
|
Additions for tax positions of the current period | 21 |
|
Additions for tax positions of prior periods | — |
|
Reductions due to settlements | — |
|
Other reductions for tax positions of prior periods | (215 | ) |
Balance at April 30, 2016 | $ | 21 |
|
Additions for tax positions of the current period | 40 |
|
Additions for tax positions of prior periods | 25 |
|
Reductions due to settlements | — |
|
Other reductions for tax positions of prior periods | — |
|
Balance at April 29, 2017 | $ | 86 |
|
We do not believe that it is reasonably possible that these unrecognized tax benefits will decrease in the next twelve months.
Our policy is to recognize interest and penalties related to income tax matters in income tax expense. As of April 29, 2017 and April 30, 2016, we had accrued $3 and $1, respectively, for net interest and penalties. The change in the amount accrued for net interest and penalties includes $2 in additions for net interest and penalties recognized in income tax expense in our Fiscal 2017 consolidated statement of operations.
In assessing the realizability of the deferred tax assets, management considered whether it is more likely than not that some or all of the deferred tax assets would be realized. In evaluating the Company’s ability to utilize its deferred tax assets, it considered all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis. The Company has recorded a valuation allowance of $1,392 and $1,394 for both April 29, 2017 and April 30, 2016. The valuation allowance remained unchanged during Fiscal 2017 principally due to costs incurred in connection with restructuring during Fiscal 2016 that are not more likely than not to be deductible for tax purposes.
At April 29, 2017, and based on its tax year ended January 2017, the Company had state net operating loss carryforwards (NOLs) of approximately $108,038 that are available to offset taxable income in its respective taxing jurisdiction beginning in the current period and that expire beginning in 2030. The Company had net state tax credit carryforwards totaling $317, which expire beginning in 2021.
As of April 29, 2017, the Company has not provided for deferred taxes on the excess of financial reporting over the tax basis of investments in certain foreign subsidiaries because, as of Fiscal 2017, any such amounts are immaterial. If these earnings were repatriated in the future, additional income and withholding tax expense would be incurred.
We are subject to U.S. federal income tax as well as income tax in jurisdictions of each state having an income tax. The tax years that remain subject to examination are primarily from Fiscal 2013 and forward. Some earlier years remain open for a small minority of states. Pursuant to the Tax Matters Agreements referenced in Note 10. Barnes & Noble, Inc. Transactions, we retain income tax liability for periods prior to the Spin-Off only for returns filed on a stand-alone basis.