|3 Months Ended|
May 02, 2020
10. Income Taxes
Our effective income tax rate from continuing operations for the first quarter of 2020 was 2.4% compared to 37.9% for the first quarter of 2019. The decrease in the effective income tax rate is primarily due to the valuation allowance established.
The significant impact of COVID-19 on our sales, profitability, and cash flows resulted in a reduction to our operating forecasts, reflecting the uncertainty of the current environment. As a result, management performed an assessment of the need for additional valuation allowances against deferred tax assets, weighing both positive and negative evidence. Through the three months ended May 2, 2020, the Company’s results reflect a three-year cumulative loss from U.S. operations. Historically, the Company reflected a three-year profit. The three-year cumulative loss arising this quarter limits the ability to consider other positive evidence, such as projections of future results, to assess the realizability of deferred tax assets. As a result, it is “more likely than not” that the net deferred tax asset will not be realized in the future; therefore, the provision for income tax for first quarter 2020 includes a non-cash charge for valuation allowance of $59.1 million on a significant portion of the Company’s deferred tax assets. The recognition of the valuation allowance does not result in or limit the Company’s ability to utilize these deferred tax assets in the future.
On March 27, 2020, the U.S. federal government officially signed The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law. ASC 740, “Accounting for Income Taxes”, requires companies to recognize the effect of tax law changes in the period of enactment. The CARES Act allows companies a five-year carryback for net operating losses (“NOLs”) arising in tax years 2018, 2019, and 2020. The Company is projecting to generate a taxable loss for the year ending January 30, 2021, which the Company will be able to carryback to the 2015-2019 tax years. As a result of the higher tax rates in some of these tax years, the Company has estimated a $5.6 million income tax benefit associated with carryback.
Additionally, we are currently undergoing several tax audits; however, we currently do not believe these audits will result in any material charge to tax expense in the future.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef