NOTE 7 – INCOME TAXES

The components of the provision for income taxes are as follows:



	Year Ended Fiscal March
	2018			2017		2016
	(Dollars in thousands)
Current -
Federal	$	20,854		$	22,040	$	29,202
State		3,180			2,422		2,825
		24,034			24,462		32,027
Deferred -
Federal		15,153			10,120		6,216
State		332			1,136		373
		15,485	(a)		11,256		6,589
Total	$	39,519		$	35,718	$	38,616

_________________

(a)

For fiscal 2018, includes $4.7 million related to the Tax Act.

On December 22, 2017, U.S. President Trump signed the Tax Act into legislation. The new U.S. tax legislation is subject to a number of provisions, including a reduction of the U.S. federal corporate income tax rate from 35% to 21% (effective January 1, 2018). Other enacted provisions which may impact Monro include limitations on the deductibility of executive compensation beginning January 1, 2018 and the immediate deduction of the cost of certain capital expenditures from taxable income instead of deducting the costs over time.

Certain aspects of the new legislation would generally require the accounting to be completed in the period of enactment. However, in response to the complexities of the new legislation, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The ultimate impact may differ from provisional amounts recorded, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, and additional regulatory guidance that may be issued.

For fiscal 2018, we recorded a net discrete adjustment to income tax expense of approximately $4.7 million primarily from revaluing our net deferred tax assets to reflect the new U.S. federal corporate income tax rate. We believe this calculation is complete except for deferred taxes related to certain equity compensation arrangements and changes in estimates that can result from finalizing the filing of our 2017 U.S. income tax return, which are not anticipated to be material. We will complete the accounting for the impacts of the Tax Act during the measurement period, which will not exceed beyond one year from the enactment date.

Deferred tax (liabilities) assets consist of the following:



	March 31,		March 25,
	2018		2017
	(Dollars in thousands)
Goodwill	$	(32,290)	$	(39,715)
Other		(645)		(968)
Total deferred tax liabilities		(32,935)		(40,683)
Property and equipment		25,056		36,980
Insurance reserves		6,769		11,075
Warranty and other reserves		2,978		4,810
Other		9,607		11,863
Total deferred tax assets		44,410		64,728
Net deferred tax assets	$	11,475	$	24,045

We have $5.4 million of state net operating loss carryforwards available as of March 31, 2018. The carryforwards expire in varying amounts through 2038. Based on all available evidence, we have determined that it is more likely than not that sufficient taxable income of the appropriate character within the carryforward period will exist for the realization of the tax benefits on existing state net operating loss carryforwards.

We believe it is more likely than not that all other future tax benefits will be realized as a result of current and future income.

A reconciliation between the U.S. federal statutory tax rate and the effective tax rate reflected in the accompanying financial statements is as follows:



	Year Ended Fiscal March
	2018			2017			2016
	Amount		Percent	Amount		Percent	Amount		Percent
	(Dollars in thousands)
Federal income tax based on statutory tax rate applied to income before taxes (a)	$	32,692	31.6	$	34,035	35.0	$	36,897	35.0
State income tax, net of federal income tax benefit		2,218	2.1		2,700	2.8		2,306	2.2
Tax Act (b)		4,707	4.5		—	—		—	—
Other		(98)	—		(1,017)	(1.1)		(587)	(0.6)
	$	39,519	38.2	$	35,718	36.7	$	38,616	36.6

_________________

(a)

For fiscal 2018, represents the blended rate of 35% for 9/12 of the year and 21% for 3/12 of the year.

(b)

Represents the net discrete adjustment to income tax expense from the remeasurement of our net deferred tax assets at the lower U.S. corporate income tax rate.

The following is a rollforward of Monro’s liability for income taxes associated with unrecognized tax benefits:



	Dollars in thousands
Balance at March 28, 2015	$	7,495
Tax positions related to current year:
Additions		1,116
Reductions		—
Tax positions related to prior years:
Additions		—
Reductions		(922)
Settlements		—
Lapses in statutes of limitations		(760)
Balance at March 26, 2016		6,929
Tax positions related to current year:
Additions		981
Reductions		—
Tax positions related to prior years:
Additions		66
Reductions		(352)
Settlements		—
Lapses in statutes of limitations		(732)
Balance at March 25, 2017		6,892
Tax positions related to current year:
Additions		447
Reductions		—
Tax positions related to prior years:
Additions		—
Reductions		(342)
Settlements		—
Lapses in statutes of limitations		(788)
Balance at March 31, 2018	$	6,209

The total amount of unrecognized tax benefits was $6.2 million and $6.9 million at March 31, 2018 and March 25, 2017, respectively, the majority of which, if recognized, would affect the effective tax rate.

In the normal course of business, Monro provides for uncertain tax positions and the related interest and penalties, and adjusts its unrecognized tax benefits and accrued interest and penalties and, accordingly, we had approximately $.4 million of interest and penalties associated with uncertain tax benefits accrued as of March 31, 2018 and March 25, 2017.

The Company is currently under audit by the Internal Revenue Service for the fiscal 2016 tax year. It is reasonably possible that the examination phase of the audit may conclude in the next 12 months, and that the related unrecognized tax benefits for tax positions taken regarding previously filed tax returns may change from those recorded as liabilities for uncertain tax positions in the Company’s Consolidated Financial Statements as of March 31, 2018. However, based on the status of the examination, it is not possible to estimate the effect of any such change to previously recorded uncertain tax positions.

We file U.S. federal income tax returns and income tax returns in various state jurisdictions. Monro’s fiscal 2015 and fiscal 2017 U.S. federal tax years and various state tax years remain subject to income tax examinations by tax authorities.