5. TAXES BASED ON INCOME
The provision for taxes based on income consists of:
|
|
|
2013 |
|
2012 |
|
2011 |
| |||
|
Federal |
|
|
|
|
|
|
| |||
|
Current |
|
$ |
638 |
|
$ |
563 |
|
$ |
146 |
|
|
Deferred |
|
81 |
|
154 |
|
78 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Subtotal federal |
|
719 |
|
717 |
|
224 |
| |||
|
State and local |
|
|
|
|
|
|
| |||
|
Current |
|
42 |
|
46 |
|
42 |
| |||
|
Deferred |
|
(10 |
) |
31 |
|
(19 |
) | |||
|
|
|
|
|
|
|
|
| |||
|
Subtotal state and local |
|
32 |
|
77 |
|
23 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Total |
|
$ |
751 |
|
$ |
794 |
|
$ |
247 |
|
A reconciliation of the statutory federal rate and the effective rate follows:
|
|
|
2013 |
|
2012 |
|
2011 |
|
|
Statutory rate |
|
35.0 |
% |
35.0 |
% |
35.0 |
% |
|
State income taxes, net of federal tax benefit |
|
0.9 |
% |
2.2 |
% |
1.8 |
% |
|
Credits |
|
(1.3 |
)% |
(1.4 |
)% |
(3.6 |
)% |
|
Favorable resolution of issues |
|
¾ |
|
(0.5 |
)% |
(3.4 |
)% |
|
Domestic manufacturing deduction |
|
(1.1 |
)% |
(0.5 |
)% |
(1.3 |
)% |
|
Other changes, net |
|
(0.6 |
)% |
(0.3 |
)% |
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
32.9 |
% |
34.5 |
% |
29.3 |
% |
The 2013 tax rate differed from the federal statutory rate primarily as a result of the utilization of tax credits, the Domestic Manufacturing Deduction and other changes, partially offset by the effect of state income taxes. The 2013 rate for state income taxes is lower than 2012 and 2011 due to an increase in state credits, including the benefit from filing amended returns to claim additional credits. The 2013 benefit from the Domestic Manufacturing Deduction increased from 2012 due to additional deductions taken in 2013, as well as the amendment of prior years’ tax returns to claim the additional benefit available in years still under review by the Internal Revenue Service. The 2011 effective tax rate was significantly lower than 2013 and 2012 due to the effect on pre-tax income of the UFCW consolidated pension plan charge of $953 ($591 after-tax) in 2011. The effect of the UFCW consolidated pension plan charge reduced pre-tax income thereby increasing the effect of credits and of the favorable resolution of tax issues on our 2011 effective tax rate.
The tax effects of significant temporary differences that comprise tax balances were as follows:
|
|
|
2013 |
|
2012 |
| ||
|
Current deferred tax assets: |
|
|
|
|
| ||
|
Net operating loss and credit carryforwards |
|
$ |
4 |
|
$ |
4 |
|
|
Compensation related costs |
|
103 |
|
79 |
| ||
|
Other |
|
15 |
|
¾ |
| ||
|
|
|
|
|
|
| ||
|
Subtotal |
|
122 |
|
83 |
| ||
|
Valuation allowance |
|
(9 |
) |
(4 |
) | ||
|
|
|
|
|
|
| ||
|
Total current deferred tax assets |
|
113 |
|
79 |
| ||
|
|
|
|
|
|
| ||
|
Current deferred tax liabilities: |
|
|
|
|
| ||
|
Insurance related costs |
|
(96 |
) |
(116 |
) | ||
|
Inventory related costs |
|
(265 |
) |
(234 |
) | ||
|
Other |
|
¾ |
|
(17 |
) | ||
|
|
|
|
|
|
| ||
|
Total current deferred tax liabilities |
|
(361 |
) |
(367 |
) | ||
|
|
|
|
|
|
| ||
|
Current deferred taxes |
|
$ |
(248 |
) |
$ |
(288 |
) |
|
|
|
|
|
|
| ||
|
Long-term deferred tax assets: |
|
|
|
|
| ||
|
Compensation related costs |
|
$ |
464 |
|
$ |
564 |
|
|
Lease accounting |
|
115 |
|
87 |
| ||
|
Closed store reserves |
|
54 |
|
56 |
| ||
|
Insurance related costs |
|
66 |
|
77 |
| ||
|
Net operating loss and credit carryforwards |
|
103 |
|
82 |
| ||
|
Other |
|
¾ |
|
2 |
| ||
|
|
|
|
|
|
| ||
|
Subtotal |
|
802 |
|
868 |
| ||
|
Valuation allowance |
|
(38 |
) |
(28 |
) | ||
|
|
|
|
|
|
| ||
|
Total long-term deferred tax assets |
|
764 |
|
840 |
| ||
|
Long-term deferred tax liabilities: |
|
|
|
|
| ||
|
Depreciation |
|
(2,128 |
) |
(1,636 |
) | ||
|
Other |
|
(17 |
) |
¾ |
| ||
|
|
|
|
|
|
| ||
|
Total long-term deferred tax liabilities |
|
(2,145 |
) |
(1,636 |
) | ||
|
|
|
|
|
|
| ||
|
Long-term deferred taxes |
|
$ |
(1,381 |
) |
$ |
(796 |
) |
The long-term deferred tax liability for depreciation increased over the prior year due to the inclusion of Harris Teeter and an adjustment to the estimated tax depreciation used in the 2012 provision that resulted in a correction in the balance sheet between other current liabilities and long-term deferred income taxes in 2013. The amount of the correction was not material to any periods presented.
At February 1, 2014, the Company had net operating loss carryforwards for state income tax purposes of $1,280. These net operating loss carryforwards expire from 2014 through 2032. The utilization of certain of the Company’s net operating loss carryforwards may be limited in a given year. Further, based on the analysis described below, the Company has recorded a valuation allowance against some of the deferred tax assets resulting from its net operating losses.
At February 1, 2014, the Company had state credit carryforwards of $34, most of which expire from 2014 through 2027. The utilization of certain of the Company’s credits may be limited in a given year. Further, based on the analysis described below, the Company has recorded a valuation allowance against some of the deferred tax assets resulting from its state credits.
The Company regularly reviews all deferred tax assets on a tax filer and jurisdictional basis to estimate whether these assets are more likely than not to be realized based on all available evidence. This evidence includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies. Projected future taxable income is based on expected results and assumptions as to the jurisdiction in which the income will be earned. The expected timing of the reversals of existing temporary differences is based on current tax law and the Company’s tax methods of accounting. Unless deferred tax assets are more likely than not to be realized, a valuation allowance is established to reduce the carrying value of the deferred tax asset until such time that realization becomes more likely than not. Increases and decreases in these valuation allowances are included in “Income tax expense” in the Consolidated Statements of Operations.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, including positions impacting only the timing of tax benefits, is as follows:
|
|
|
2013 |
|
2012 |
|
2011 |
| |||
|
Beginning balance |
|
$ |
299 |
|
$ |
310 |
|
$ |
285 |
|
|
Additions based on tax positions related to the current year |
|
23 |
|
45 |
|
24 |
| |||
|
Reductions based on tax positions related to the current year |
|
(10 |
) |
(9 |
) |
¾ |
| |||
|
Additions for tax positions of prior years |
|
17 |
|
1 |
|
24 |
| |||
|
Reductions for tax positions of prior years |
|
(4 |
) |
(27 |
) |
(11 |
) | |||
|
Settlements |
|
¾ |
|
(21 |
) |
(12 |
) | |||
|
Ending balance |
|
$ |
325 |
|
$ |
299 |
|
$ |
310 |
|
The Company does not anticipate that changes in the amount of unrecognized tax benefits over the next twelve months will have a significant impact on its results of operations or financial position.
As of February 1, 2014, February 2, 2013 and January 28, 2012, the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $98, $70 and $81 respectively.
To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense. During the years ended February 1, 2014, February 2, 2013 and January 28, 2012, the Company recognized approximately $10, $(8) and $(24), respectively, in interest and penalties (recoveries). The Company had accrued approximately $41 and $33 for the payment of interest and penalties as of February 1, 2014 and February 2, 2013, respectively.
As of February 1, 2014, the Internal Revenue Service had concluded its field examination of the Company’s 2008 and 2009 federal tax returns and is currently auditing years 2010 and 2011. The 2010 and 2011 audits are expected to be completed in 2014. The Company has filed an administrative appeal with the Internal Revenue Service protesting certain adjustments proposed by the Internal Revenue Service as a result of their field work.
On September 13, 2013, the U.S. Department of the Treasury and Internal Revenue Service released final tangible property regulations that provide guidance on the tax treatment regarding the deduction and capitalization of expenditures related to tangible property. These regulations are effective for tax years beginning on or after January 1, 2014. The Company is currently assessing these rules and their effect on its financial statements, and believes adoption of these regulations will not have an effect on net income and will not have a material effect on the reclassification between long-term deferred tax liabilities and current income tax liabilities.