Ulta Beauty, 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. 01, 2020

Income Taxes

Income Taxes

11. Income taxes

The provision for income taxes consists of the following:


	Fiscal		Fiscal		Fiscal
(In thousands)	2019		2018		2017
Current:
Federal	$	163,596	$	137,255	$	230,006
State		31,106		29,247		28,714
Total current		194,702		166,502		258,720
Deferred:
Federal		1,182		29,374		(26,256)
State		4,321		4,706		(839)
Total deferred		5,503		34,080		(27,095)
Provision for income taxes	$	200,205	$	200,582	$	231,625

A reconciliation of the federal statutory rate to the Company’s effective tax rate is as follows:


	Fiscal		Fiscal		Fiscal
	2019		2018		2017
Federal statutory rate	21.0	%	21.0	%	33.7	%
State effective rate, net of federal tax benefit	3.1	%	3.1	%	2.4	%
Re-measurement of deferred tax liabilities	0.0	%	0.0	%	(4.9)	%
Excess deduction of stock compensation	(1.1)	%	(0.6)	%	(1.2)	%
Other	(0.9)	%	(0.2)	%	(0.6)	%
Effective tax rate	22.1	%	23.3	%	29.4	%

At February 3, 2018, the Company recorded a provisional tax expense related to the impacts of the Tax Cuts and Jobs Act (Tax Reform). The SEC issued guidance on December 22, 2017 under Staff Accounting Bulletin No. 118 (“SAB 118”) which allowed recording a provisional tax expense using a measurement period, not to exceed more than one year from the enactment date. The Company’s accounting for the impacts of the Tax Reform is complete and the Company has not recorded any material adjustments to the provisional amounts under SAB 118.

Significant components of the Company’s deferred tax assets and liabilities are as follows:


	February 1,		February 2,
(In thousands)	2020		2019
Deferred tax assets:
Operating lease liability	$	496,977	$	—
Reserves not currently deductible		35,626		30,669
Accrued liabilities		27,363		34,391
Employee benefits		22,907		18,491
Inventory valuation		4,021		4,107
NOL carryforwards		288		413
Credit carryforwards		224		237
Other		1,019		—
Total deferred tax assets		588,425		88,308
Deferred tax liabilities:
Operating lease asset		567,198		—
Property and equipment		61,570		69,265
Prepaid expenses		45,354		39,915
Receivables not currently includable		2,863		1,449
Intangibles		807		1,018
Deferred rent obligation		—		60,525
Total deferred tax liabilities		677,792		172,172
Net deferred tax liability	$	(89,367)	$	(83,864)

At February 1, 2020, the Company had $224 of credit carryforwards for state income tax purposes that expire between 2024 and 2029. The Company also had $523 of state net operating loss (NOL) carryforwards that expire by 2036 and $1,145 of federal and $26 of state NOL carryforwards that do not expire.

The Company accounts for uncertainty in income taxes in accordance with the ASC 740-10 rules for income taxes. The reserve for uncertain tax positions was $3,536 and $3,844 at February 1, 2020 and February 2, 2019, respectively. The balance is the Company’s best estimate of the potential liability for uncertain tax positions. A reconciliation of the Company’s unrecognized tax benefits, excluding interest and penalties, is as follows:


	February 1,		February 2,
(In thousands)	2020		2019
Balance at beginning of the year	$	3,844	$	3,565
Increase due to a prior year tax position		602		1,008
Decrease due to a prior year tax position		(910)		(729)
Balance at end of the year	$	3,536	$	3,844

The Company acknowledges that the amount of unrecognized tax benefits may change in the next twelve months. However, it does not expect the change to have a significant impact on its consolidated financial statements. Income tax-related interest and penalties were insignificant for fiscal 2019 and 2018.

The Company files tax returns in the U.S. federal and state jurisdictions. The Company is no longer subject to U.S. federal examinations by the Internal Revenue Service for years before 2018 and is no longer subject to examinations by state authorities before 2015.