Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.4
Income Taxes
 12 Months Ended
Jan. 30, 2021
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The provision for income taxes consists of the following: 
  Year Ended
  January 30, February 1, February 2,
(in millions) 2021 2020 2019
Current taxes:
Federal $ 279.5  $ 210.1  $ 245.6 
State 87.4  52.5  47.8 
Foreign 0.2  0.1  0.4 
Total current taxes 367.1  262.7  293.8 
Deferred taxes:
Federal 32.6  39.2  0.3 
State (3.8) (5.6) (12.3)
Foreign 2.0  (24.6) — 
Total deferred taxes 30.8  9.0  (12.0)
Provision for income taxes $ 397.9  $ 271.7  $ 281.8 

A reconciliation of the statutory U.S. federal income tax (benefit) rate and the effective tax rate follows: 
  Year Ended
January 30, 2021 February 1, 2020 February 2, 2019
Statutory U.S. federal income tax (benefit) rate 21.0  % 21.0  % (21.0) %
Effect of:
State and local income taxes, net of federal income tax benefit 3.2  3.7  3.0 
Non-deductible executive compensation 0.4  —  — 
Incremental tax expense (benefit) of exercises/vesting of equity-based
compensation		 0.2  (0.4) 0.1 
State tax reserve release (0.5) —  — 
Work Opportunity Tax Credit (1.6) (2.7) (2.0)
Goodwill impairment —  6.0  43.7 
Deferred tax rate change —  0.1  — 
Change in valuation allowance —  (2.2) 0.3 
Tax Cuts and Jobs Act —  —  (1.3)
Other, net 0.2  (0.8) (1.3)
Effective tax rate 22.9  % 24.7  % 21.5  %
Goodwill Impairment
In the fourth quarters of 2019 and 2018, we 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 our foreign subsidiaries as we intend to permanently reinvest earnings. We do 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 our net deferred tax assets (liabilities) follow:
(in millions) January 30,
2021		 February 1,
2020
Deferred tax assets:    
Operating lease liabilities $ 1,658.4  $ 1,621.8 
Accrued expenses 72.9  26.0 
Net operating losses, interest expense and credit carryforwards 95.5  102.2 
Accrued compensation expense 47.2  31.6 
State tax election 17.4  19.3 
Other 3.2  2.4 
Total deferred tax assets 1,894.6  1,803.3 
Valuation allowance (16.8) (18.5)
Deferred tax assets, net 1,877.8  1,784.8 
Deferred tax liabilities:    
Property and equipment (410.5) (304.3)
Operating lease right-of-use assets (1,587.2) (1,550.1)
Other intangibles (840.4) (852.2)
Inventory (4.8) (14.4)
Prepaids (25.2) (24.1)
Total deferred tax liabilities (2,868.1) (2,745.1)
Deferred income taxes, net $ (990.3) $ (960.3)
At January 30, 2021, we had certain state tax credit carryforwards, net operating loss carryforwards and capital loss carryforwards totaling $95.5 million. Some of these carryforwards will expire, if not utilized, beginning in 2021 through 2040.
A valuation allowance of $16.8 million, net of federal tax benefits, has been provided principally for certain state credit carryforwards and net operating loss carryforwards. Since February 1, 2020, the valuation allowance has been decreased to reflect capital loss carryforwards, state credits and net operating losses expected to be utilized over the carryforward period. In assessing the realizability of deferred tax assets, we consider 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 our projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not the remaining existing deductible temporary differences will reverse during periods in which carrybacks are available or in which we generate net taxable income.
Uncertain Tax Positions
We are participating in the IRS Compliance Assurance Program (“CAP”) for fiscal 2020 and we have been accepted into the program for fiscal 2021. This program accelerates the examination of key transactions with the goal of resolving any issues before the tax return is filed. Our federal tax returns have been examined and all issues have been settled through the fiscal 2019 tax year. Several states completed their examinations during fiscal 2020. In general, fiscal 2017 and forward are within the statute of limitations for state tax purposes. The statute of limitations is still open prior to fiscal 2017 for some states. For fiscal 2020, we are participating in the CAP under the IRS’s bridge year program and as a result, the IRS will not be completing an audit on the 2020 tax return.
The balance for unrecognized tax benefits at January 30, 2021 was $22.6 million. The total amount of unrecognized tax benefits at January 30, 2021 that, if recognized, would affect the effective tax rate was $17.9 million (net of the federal tax benefit).
The following is a reconciliation of our total gross unrecognized tax benefits:
(in millions) January 30, 2021 February 1, 2020
Beginning Balance $ 28.9  $ 35.4 
Additions, based on tax positions related to current year 1.2  0.9 
Additions for tax positions of prior years 3.4  4.8 
Lapses in statutes of limitation (10.9) (12.2)
Ending balance $ 22.6  $ 28.9 
We believe it is reasonably possible that $6.0 million to $7.0 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. We do not expect any change to have a material impact to our consolidated financial statements.
As of January 30, 2021, we have recorded a liability for potential interest and penalties of $2.6 million.