Note K. Income Taxes

For financial reporting purposes, components of income before income taxes are as follows:


	Fiscal Year Ended
In thousands	January 30, 2016		January 31, 2015		February 1, 2014
United States	$	3,102,304	$	2,943,745	$	2,746,925
Foreign		555,996		606,139		572,564
Income before provision for income taxes	$	3,658,300	$	3,549,884	$	3,319,489

The provision for income taxes includes the following:


	Fiscal Year Ended
In thousands	January 30, 2016			January 31, 2015		February 1, 2014
Current:
Federal	$	992,094		$	896,672	$	815,811
State		208,357			180,616		177,009
Foreign		149,408			155,398		136,626
Deferred:
Federal		34,620			87,057		73,206
State		(9,979	)		14,231		5,928
Foreign		6,142			782		(26,487	)
Provision for income taxes	$	1,380,642		$	1,334,756	$	1,182,093

TJX had net deferred tax (liabilities) assets as follows:


	Fiscal Year Ended
In thousands	January 30, 2016			January 31, 2015
Deferred tax assets:
Net operating loss carryforward	$	18,872		$	18,305
Reserves for lease obligations and computer intrusion		7,623			16,242
Pension, stock compensation, postretirement and employee benefits		380,523			351,171
Leases		51,823			47,464
Other		91,575			74,451
Total gross deferred tax assets	$	550,416		$	507,633
Valuation allowance		(11,998	)		(5,122	)
Net deferred tax asset	$	538,418		$	502,511
Deferred tax liabilities:
Property, plant and equipment	$	539,818		$	474,179
Capitalized inventory		47,374			50,536
Tradename/intangibles		49,111			47,443
Undistributed foreign earnings		167,968			181,822
Other		5,418			8,884
Total deferred tax liabilities	$	809,689		$	762,864
Net deferred tax (liability)	$	(271,271	)	$	(260,353	)
Non-current asset	$	13,831		$	22,532
Non-current liability		(285,102	)		(282,885	)
Total	$	(271,271	)	$	(260,353	)

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes.” This guidance requires deferred tax liabilities, deferred tax assets and valuation allowances be classified as non-current in a classified balance sheet. This ASU is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted and may be applied either prospectively or retrospectively to all periods presented. TJX has elected to early adopt the new reporting standard retrospectively on its fiscal 2016 consolidated financial statements. The classification for deferred tax assets (liabilities) for fiscal 2015 has been recast to reflect the new reporting standard. Current asset, non-current asset and non-current liability balances were $137.6 million, $24.6 million and $422.5 million, respectively on the original financial statements for fiscal 2015.

TJX has provided for deferred U.S. taxes on all undistributed earnings through January 30, 2016 from its subsidiaries in Canada, Puerto Rico, Italy, India and Hong Kong. For all other foreign subsidiaries, no income taxes have been provided on the approximately $727 million of undistributed earnings as of January 30, 2016 because such earnings are considered to be indefinitely reinvested in the business. A determination of the amount of unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with the hypothetical calculations.

As of January 30, 2016, TJX had available for state income tax purposes net operating loss carryforwards of $62.4 million which expire, if unused, in the years 2017 through 2035. As of January 31, 2015, TJX had available for state income tax purposes net operating loss carryforwards of $61.5 million. TJX has analyzed the realization of the state net operating loss carryforwards on an individual state basis. For those states where the Company has determined that it is more likely than not that the state net operating loss carryforwards will not be realized, a valuation allowance of $5.1 million has been provided for the deferred tax asset as of January 30, 2016, and $5.1 million as of January 31, 2015.

As of January 30, 2016, the Company had available for foreign income tax purposes (primarily related to Germany, Australia, Austria and the Netherlands) net operating loss carryforwards of $51.1 million, of which $3.9 million will expire, if unused, in fiscal 2025. The remaining loss carryforwards do not expire. For the deferred tax assets associated with the net operating loss carryforwards for which management has determined it is more likely than not that the deferred tax assets will not be realized, TJX had valuation allowances recorded of approximately $6.9 million. As of January 31, 2015, the Company had available for foreign income tax purposes (primarily related to Germany and Poland) net operating loss carryforwards of $48.3 million.

The difference between the U.S. federal statutory income tax rate and TJX’s worldwide effective income tax rate is reconciled below:


	Fiscal Year Ended
	January 30, 2016			January 31, 2015			February 1, 2014
U.S. federal statutory income tax rate		35.0	%		35.0	%		35.0	%
Effective state income tax rate		3.5			3.6			3.6
Impact of foreign operations		(0.7	)		(0.9	)		(0.8	)
All other		(0.1	)		(0.1	)		(2.2	)
Worldwide effective income tax rate		37.7	%		37.6	%		35.6	%

TJX’s effective income tax rate increased for fiscal 2016 as compared to fiscal 2015. The increase in the effective income tax rate was primarily due to the jurisdictional mix of income and the increase in valuation allowance on foreign net operating losses.

TJX had net unrecognized tax benefits (net of federal benefit on state issues) of $34.1 million as of January 30, 2016, $32.7 million as of January 31, 2015 and $26.2 million as of February 1, 2014.

A reconciliation of the beginning and ending gross amount of unrecognized tax benefits is as follows:


	Fiscal Year Ended
In thousands	January 30, 2016			January 31, 2015			February 1, 2014
Balance at beginning of year	$	55,619		$	48,680		$	148,777
Additions for uncertain tax positions taken in current year		2,248			4,771			4,212
Additions for uncertain tax positions taken in prior years		11,707			5,278			5,096
Reductions for uncertain tax positions taken in prior years		(23,874	)		(2,747	)		(69,292	)
Reductions resulting from lapse of statute of limitations		(389	)		—			(317	)
Settlements with tax authorities		(1,985	)		(363	)		(39,796	)
Balance at end of year	$	43,326		$	55,619		$	48,680

Included in the gross amount of unrecognized tax benefits are items that will impact future effective tax rates upon recognition. These items amounted to $39.0 million as of January 30, 2016, $34.8 million as of January 31, 2015 and $27.8 million as of February 1, 2014.

TJX is subject to U.S. federal income tax as well as income tax in multiple state, local and foreign jurisdictions. In the U.S., fiscal years through 2010 are no longer subject to examination. In Canada, fiscal years through 2007 are no longer subject to examination. In all other jurisdictions, fiscal years through 2009 are no longer subject to examination.

TJX follows the with and without approach for direct and indirect effects of windfall tax deductions. TJX’s accounting policy is to classify interest and penalties related to income tax matters as part of income tax expense. The amount of interest and penalties expensed was $1.6 million for the year ended January 30, 2016, $1.9 million for the year ended January 31, 2015 and $4.0 million for the year ended February 1, 2014. The accrued amounts for interest and penalties are $7.0 million as of January 30, 2016, $10.1 million as of January 31, 2015 and $8.1 million as of February 1, 2014.

Based on the final resolution of tax examinations, judicial or administrative proceedings, changes in facts or law, expirations of statute of limitations in specific jurisdictions or other resolutions of, or changes in, tax positions it is reasonably possible that unrecognized tax benefits for certain tax positions taken on previously filed tax returns may change materially from those represented on the financial statements as of January 30, 2016. During the next twelve months, it is reasonably possible that state tax audit resolutions may reduce unrecognized tax benefits by $0 to $11 million, which would reduce the provision for taxes on earnings.