Dollar Tree, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

INCOME TAXES

12 Months Ended

Feb. 03, 2018

The provision for income taxes consists of the following:



	Year Ended
	February 2,			February 3,			January 28,
(in millions)	2019			2018			2017
Current taxes:
Federal	$	245.6		$	439.3		$	480.5
State	47.8			23.8			79.5
Foreign	0.4			0.3			0.8
Total current taxes	293.8			463.4			560.8
Deferred taxes:
Federal	0.3			(456.0		)	(37.7		)
State	(12.3		)	(17.7		)	(89.9		)
Total deferred taxes	(12.0		)	(473.7		)	(127.6		)
Provision for income taxes	$	281.8		$	(10.3	)	$	433.2

Included in current tax expense for the years ended February 2, 2019, February 3, 2018 and January 28, 2017, are amounts related to uncertain tax positions associated with temporary differences, in accordance with ASC 740, Income Taxes.

A reconciliation of the statutory U.S. federal income tax (benefit) rate and the effective tax (benefit) rate follows:



	Year Ended
	February 2, 2019		February 3, 2018		January 28, 2017
Statutory U.S. federal income tax (benefit) rate	(21.0	)%	33.7	%	35.0	%
Effect of:
Goodwill impairment	43.7		—		—
State and local income taxes, net of federal income tax benefit	3.0		2.5		3.0
Work Opportunity Tax Credit	(2.0	)	(1.3	)	(1.6	)
State tax election	—		—		(1.4	)
Deferred tax rate change	—		(0.6	)	(1.6	)
Incremental tax expense (benefit) of exercises/vesting of equity-based compensation	0.1		(0.8	)	(0.6	)
Change in valuation allowance	0.3		(0.1	)	0.1
Tax Cuts and Jobs Act	(1.3	)	(33.0	)	—
Other, net	(1.3	)	(1.0	)	(0.3	)
Effective tax (benefit) rate	21.5	%	(0.6	)%	32.6	%

Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The TCJA lowered the federal corporate tax rate from 35% to 21% and made numerous other law changes, including a provision that allows the full expensing of certain qualified property and adds limitations on the deductibility of certain executive compensation. In 2017, the Company recorded a $562.0 million benefit resulting from the re-measurement of the Company’s net deferred tax liabilities, primarily related to the Family Dollar trade name, to reflect the lower statutory U.S. federal income tax rate of 21%. An additional benefit of $16.2 million was recorded in 2018, related to the continued analysis of the TCJA impacts to the net deferred tax liability valuation and acceleration of depreciation. As of February 2, 2019, the Company has completed its accounting for the tax effects of the TCJA.

Goodwill Impairment

In the fourth quarter of 2018, the Company recorded a goodwill impairment charge of $2.73 billion related to the Family Dollar goodwill, as further discussed in “Note 3 - Goodwill and Nonamortizing Intangible Assets.” As the purchase of Family Dollar was a stock acquisition, carryover basis applied for tax purposes. The expense related to the impairment is not deductible for federal or state tax purposes and therefore there is no tax benefit related to the impairment.

Foreign Taxes

United States income taxes have not been provided on accumulated but undistributed earnings of the Company’s foreign subsidiaries as the Company intends to permanently reinvest earnings. The Company does not consider the tax on the mandatory deemed repatriation of undistributed foreign earnings and profits to be material.

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company’s net deferred tax assets (liabilities) follow:



(in millions)	February 2, 2019			February 3, 2018
Deferred tax assets:
Deferred rent	$	44.3		$	42.7
Accrued expenses	18.0			17.8
Net operating losses, interest expense and credit carryforwards	90.7			75.6
Accrued compensation expense	31.6			23.2
State tax election	20.9			22.8
Other	3.0			—
Total deferred tax assets	208.5			182.1
Valuation allowance	(42.6		)	(38.6		)
Deferred tax assets, net	165.9			143.5
Deferred tax liabilities:
Property and equipment	(235.5		)	(218.5		)
Other intangibles	(864.0		)	(880.5		)
Inventory	(17.8		)	(27.1		)
Prepaids	(21.8		)	—
Other	—			(2.6		)
Total deferred tax liabilities	(1,139.1		)	(1,128.7		)
Deferred income taxes, net	$	(973.2	)	$	(985.2	)

At February 2, 2019, the Company had certain state tax credit carryforwards, net operating loss carryforwards and capital loss carryforwards totaling approximately $90.7 million. Some of these carryforwards will expire, if not utilized, beginning in 2019 through 2038.

A valuation allowance of $42.6 million, net of federal tax benefits, has been provided principally for certain state credit carryforwards, net operating loss and capital loss carryforwards. Since February 3, 2018, the valuation allowance has been increased primarily as a result of state net operating losses that may not be utilized. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred taxes will not be realized. Based upon the availability of carrybacks of future deductible amounts to the past two years’ taxable income and the Company’s projections for future taxable income over the periods in which the deferred tax assets are deductible, the Company believes it is more likely than not the remaining existing deductible temporary differences will reverse during periods in which carrybacks are available or in which the Company generates net taxable income.

Uncertain Tax Positions

The Company is participating in the IRS Compliance Assurance Program (“CAP”) for fiscal 2018 and will participate in the program for fiscal 2019. This program accelerates the examination of key transactions with the goal of resolving any issues before the tax return is filed. The Company’s federal tax returns have been examined and all issues have been settled through the fiscal 2017 tax year; however, the federal statute of limitations is still open for Family Dollar’s tax returns for the tax year ended July 6, 2015. Several states completed their examinations during fiscal 2018. In general, fiscal 2015 and forward are within the statute of limitations for state tax purposes. The statute of limitations is still open prior to fiscal 2015 for some states.

The balance for unrecognized tax benefits at February 2, 2019 was $35.4 million. The total amount of unrecognized tax benefits at February 2, 2019 that, if recognized, would affect the effective tax rate was $29.6 million (net of the federal tax benefit).

The following is a reconciliation of the Company’s total gross unrecognized tax benefits:



(in millions)	February 2, 2019			February 3, 2018
Beginning Balance	$	43.8		$	71.2
Additions, based on tax positions related to current year	4.6			2.5
Additions for tax positions of prior years	4.5			9.8
Reductions for tax positions of prior years	—			(31.7		)
Settlements	(2.2		)	(2.9		)
Lapses in statutes of limitation	(15.3		)	(5.1		)
Ending balance	$	35.4		$	43.8

The Company believes it is reasonably possible that $10.0 million to $12.0 million of the reserve for uncertain tax positions may be reduced during the next 12 months principally as a result of the effective settlement of outstanding issues. It is also possible that state tax reserves will be reduced for audit settlements and statute expirations within the next 12 months. At this point it is not possible to estimate a range associated with the resolution of these audits. The Company does not expect any change to have a material impact to its consolidated financial statements.

As of February 2, 2019, the Company has recorded a liability for potential interest and penalties of $3.9 million.