Income Taxes

12 Months Ended

Aug. 31, 2019

We account for income taxes using the asset and liability approach as prescribed by ASC Topic 740, Income Taxes (“ASC 740”). This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Using the enacted tax rates in effect for the year in which the differences are expected to reverse, deferred tax liabilities and assets are determined based on the differences between the financial reporting and the tax basis of an asset or liability.

The provision for income taxes consists of the following components (in millions):



	Year Ended August 31,
	2019		2018			2017
Provision for current federal taxes	$	60.3	$	88.9		$	151.2
Provision for current state taxes	14.7		16.4			20.4
Provision for current foreign taxes	10.2		9.2			7.0
Provision (benefit) for deferred taxes	9.3		(38.2		)	(7.7		)
Total provision for income taxes	$	94.5	$	76.3		$	170.9

The following table reconciles the provision at the federal statutory rate to the total provision for income taxes (in millions):



	Year Ended August 31,
	2019			2018			2017
Federal income tax computed at statutory rate	$	89.2		$	109.4		$	172.4
State income tax, net of federal income tax benefit	12.2			11.5			12.2
Foreign permanent differences and rate differential	2.1			(2.0		)	(1.6		)
Discrete income tax benefits of the TCJA	(2.2		)	(34.6		)	—
Research and development tax credits	(18.1		)	(3.3		)	(3.0		)
Unrecognized tax benefits	12.2			0.4			0.8
Other, net	(0.9		)	(5.1		)	(9.9		)
Total provision for income taxes	$	94.5		$	76.3		$	170.9

Components of the net deferred income tax liabilities at August 31, 2019 and 2018 include (in millions):



	August 31,
	2019			2018
Deferred income tax liabilities:
Depreciation	$	(22.0	)	$	(15.0	)
Goodwill and intangibles	(149.6		)	(151.2		)
Other liabilities	(2.8		)	(2.3		)
Total deferred income tax liabilities	(174.4		)	(168.5		)
Deferred income tax assets:
Self-insurance	2.6			2.6
Pension	22.7			18.1
Deferred compensation	20.5			23.7
Net operating losses	6.2			6.2
Other accruals not yet deductible	26.9			24.9
Other assets	9.7			7.0
Total deferred income tax assets	88.6			82.5
Valuation allowance	(4.6		)	(3.6		)
Net deferred income tax liabilities	$	(90.4	)	$	(89.6	)

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”). The TCJA included changes that took effect during fiscal 2019 including, but not limited to, additional limitations on certain executive compensation, limitations on interest deductions, a new U.S. tax on certain offshore earnings referred to as Global Intangible Low-Taxed Income (“GILTI”), a new alternative U.S. tax on certain Base Erosion Anti-Avoidance (“BEAT”) payments from a U.S. company to any foreign related party, a new deduction for Foreign Derived Intangible Income (“FDII”), and the repeal of the Section 199 domestic production activities deduction. Our U.S. federal corporate tax rate was 21.0% for the current fiscal year. During fiscal 2018, we recorded a provisional discrete tax benefit of $34.6 million within Income tax expense on the Consolidated Statements of Comprehensive Income following the enactment of the TCJA. During fiscal 2019, we recorded an additional tax benefit of $2.2 million related to TCJA impacts including, but not limited to, our one-time transition tax, deferred income taxes, and executive compensation. The total tax benefit related to the enactment of the TCJA was $36.8 million, which included a benefit of $32.5 million to decrease our deferred income taxes to the revised statutory federal rate as well as a current estimated benefit of approximately $4.3 million for the transition tax on unremitted foreign earnings.

Previously, we asserted that all undistributed earnings and original investments in foreign subsidiaries were indefinitely reinvested and, therefore, had not recorded any deferred taxes related to any outside basis differences associated with our foreign subsidiaries. As of August 31, 2019, the estimated undistributed earnings from foreign subsidiaries was $107.7 million. A significant portion of these earnings was subject to U.S. federal taxation in fiscal 2018 as part of the one-time transition tax. We are no longer asserting indefinite reinvestment on the portion of our unremitted earnings that were previously subject to U.S. federal taxation with the one-time transition tax. Accordingly, we recognized a deferred income tax liability of $0.6 million for certain foreign withholding taxes and U.S. state taxes. With respect to unremitted earnings and original investments in foreign subsidiaries where we are continuing to assert indefinite reinvestment, any future remittances could be subject to additional foreign withholding taxes, U.S. state taxes, and certain tax impacts relating to foreign currency exchange effects. It is not practicable to estimate the amount of any unrecognized tax effects on these reinvested earnings and original investments in foreign subsidiaries.

We have elected to account for the tax on Global Intangible Low-Taxed Income (“GILTI”) as a period cost and, therefore, do not record deferred taxes related to GILTI on our foreign subsidiaries.

At August 31, 2019, we had state tax credit carryforwards of approximately $2.2 million, which will expire beginning in 2021. At August 31, 2019, we had federal net operating loss carryforwards of $32.9 million that expire beginning in 2030, state net operating loss carryforwards of $20.3 million that begin expiring in 2020, and foreign net operating loss carryforwards of $1.8 million that expire beginning in 2026.

The gross amount of unrecognized tax benefits as of August 31, 2019 and 2018 totaled $16.6 million and $4.4 million, respectively, which includes $15.9 million and $3.8 million, respectively, of net unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. We recognize potential interest and penalties related to unrecognized tax benefits as a component of income tax expense; such accrued interest and penalties are not material. With few exceptions, we are no longer subject to United States federal, state, and local income tax examinations for years ended before 2013 or for foreign income tax examinations before 2013. We do not anticipate unrecognized tax benefits will significantly increase or decrease within the next twelve months.

The following table reconciles the change in the unrecognized income tax benefit (reported in Other long-term liabilities on the Consolidated Balance Sheets) for the years ended August 31, 2019 and 2018 (in millions):



	Year Ended August 31,
	2019			2018
Unrecognized tax benefits balance at beginning of year	$	4.4		$	6.0
Additions based on tax positions related to the current year	2.0			0.6
Additions for tax positions of prior years	10.9			1.0
Reductions due to settlements	—			(2.2		)
Reductions due to lapse of statute of limitations	(0.7		)	(1.0		)
Unrecognized tax benefits balance at end of year	$	16.6		$	4.4

Total accrued interest was $1.0 million and $0.5 million as of August 31, 2019 and 2018, respectively. There were no accruals related to income tax penalties during fiscal 2019. Interest, net of tax benefits, and penalties are included in Income tax expense within the Consolidated Statements of Comprehensive Income. The classification of interest and penalties did not change during the current fiscal year.