Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.1
Income Taxes
 12 Months Ended
Feb. 01, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The provision for income taxes consists of the following: 
 
 
Year Ended
 
 
February 1,
 
February 2,
 
February 3,
(in millions)
 
2020
 
2019
 
2018
Current taxes:
 
 
 
 
 
 
Federal
 
$
210.1

 
$
245.6

 
$
439.3

State
 
52.5

 
47.8

 
23.8

Foreign
 
0.1

 
0.4

 
0.3

Total current taxes
 
262.7

 
293.8

 
463.4

Deferred taxes:
 
 
 
 
 
 
Federal
 
39.2

 
0.3

 
(456.0
)
State
 
(5.6
)
 
(12.3
)
 
(17.7
)
Foreign
 
(24.6
)
 
—

 
—

Total deferred taxes
 
9.0

 
(12.0
)
 
(473.7
)
Provision for income taxes
 
$
271.7

 
$
281.8

 
$
(10.3
)

A reconciliation of the statutory U.S. federal income tax (benefit) rate and the effective tax (benefit) rate follows: 
 
 
Year Ended
 
 
February 1, 2020
 
February 2, 2019
 
February 3, 2018
Statutory U.S. federal income tax (benefit) rate
 
21.0
 %
 
(21.0
)%
 
33.7
 %
Effect of:
 
 
 
 
 
 
Goodwill impairment
 
6.0

 
43.7

 
—

State and local income taxes, net of federal income tax benefit
 
3.7

 
3.0

 
2.5

Work Opportunity Tax Credit
 
(2.7
)
 
(2.0
)
 
(1.3
)
Deferred tax rate change
 
0.1

 
—

 
(0.6
)
Incremental tax expense (benefit) of exercises/vesting of
equity-based compensation
 
(0.4
)
 
0.1

 
(0.8
)
Change in valuation allowance
 
(2.2
)
 
0.3

 
(0.1
)
Tax Cuts and Jobs Act
 
—

 
(1.3
)
 
(33.0
)
Other, net
 
(0.8
)
 
(1.3
)
 
(1.0
)
Effective tax (benefit) rate
 
24.7
 %
 
21.5
 %
 
(0.6
)%
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 had completed its accounting for the tax effects of the TCJA.
Goodwill Impairment
In the fourth quarters of 2019 and 2018, the Company recorded goodwill impairment charges of $313.0 million and $2.73 billion, respectively, related to the Family Dollar goodwill, as further discussed in Note 3. As the purchase of Family Dollar was a stock acquisition, carryover basis applied for tax purposes. The impairment charges are not deductible for federal or state tax purposes and therefore there is no tax benefit related to the impairments.
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 1,
2020
 
February 2,
2019
Deferred tax assets:
 
 
 
 
Deferred rent
 
$
—

 
$
44.3

Operating lease liabilities
 
1,621.8

 
—

Accrued expenses
 
26.0

 
18.0

Net operating losses, interest expense and credit carryforwards
 
102.2

 
90.7

Accrued compensation expense
 
31.6

 
31.6

State tax election
 
19.3

 
20.9

Other
 
2.4

 
3.0

Total deferred tax assets
 
1,803.3

 
208.5

Valuation allowance
 
(18.5
)
 
(42.6
)
Deferred tax assets, net
 
1,784.8

 
165.9

Deferred tax liabilities:
 
 

 
 

Property and equipment
 
(304.3
)
 
(235.5
)
Operating lease right-of-use assets
 
(1,550.1
)
 
—

Other intangibles
 
(852.2
)
 
(864.0
)
Inventory
 
(14.4
)
 
(17.8
)
Prepaids
 
(24.1
)
 
(21.8
)
Total deferred tax liabilities
 
(2,745.1
)
 
(1,139.1
)
Deferred income taxes, net
 
$
(960.3
)
 
$
(973.2
)

At February 1, 2020, the Company had certain state tax credit carryforwards, net operating loss carryforwards and capital loss carryforwards totaling approximately $102.2 million. Some of these carryforwards will expire, if not utilized, beginning in 2020 through 2039.
A valuation allowance of $18.5 million, net of federal tax benefits, has been provided principally for certain state credit carryforwards, net operating loss and capital loss carryforwards. Since February 2, 2019, the valuation allowance has been decreased to reflect foreign net operating losses expected to be utilized over the carryforward period. 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 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 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 2018 tax year. Several states completed their examinations during fiscal 2019. In general, fiscal 2016 and forward are within the statute of limitations for state tax purposes. The statute of limitations is still open prior to fiscal 2016 for some states. The Company will participate in the CAP program for fiscal 2020 under the IRS’s new bridge year program. As a result, the IRS will not be providing a final audit determination on the 2020 tax return.
The balance for unrecognized tax benefits at February 1, 2020 was $28.9 million. The total amount of unrecognized tax benefits at February 1, 2020 that, if recognized, would affect the effective tax rate was $23.0 million (net of the federal tax benefit).  
The following is a reconciliation of the Company’s total gross unrecognized tax benefits:
(in millions)
 
February 1, 2020
 
February 2, 2019
Beginning Balance
 
$
35.4

 
$
43.8

Additions, based on tax positions related to current year
 
0.9

 
4.6

Additions for tax positions of prior years
 
4.8

 
4.5

Settlements
 
—

 
(2.2
)
Lapses in statutes of limitation
 
(12.2
)
 
(15.3
)
Ending balance
 
$
28.9

 
$
35.4


The Company believes it is reasonably possible that $9.0 million to $11.0 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 1, 2020, the Company has recorded a liability for potential interest and penalties of $3.3 million.