(7) Income Taxes

The components of income tax expense for the years ended December 31, 2012, 2011 and 2010, included in the accompanying consolidated statements of income were as follows:

	Federal			State			Total
	(in thousands)
December 31, 2012
Current	$	175		$	37		$	212
Deferred	707			242			949
Total 2012	$	882		$	279		$	1,161

December 31, 2011
Current	$	1,373		$	(331	)	$	1,042
Deferred	9,783			(1,448		)	8,335
Total 2011	$	11,156		$	(1,779	)	$	9,377

December 31, 2010
Current	$	(458	)	$	321		$	(137	)
Deferred	7,609			158			7,767
Total 2010	$	7,151		$	479		$	7,630

The following is a reconciliation of the federal income tax expense at the statutory rate of 34% to the effective income tax expense:

	Years Ended December 31,
	2012				2011				2010
	(in thousands and % of pre-tax income)
	$		%		$		%		$		%
Statutory federal income tax expense	916		34.0		8,147		34.0		6,690		34.0
State taxes, net of federal benefit	185		6.9		(38	)	(0.2	)	713		3.7
State income tax apportionment adjustment	—		—		(1,137	)	(4.7	)	(396	)	(2.0	)
Extraterritorial income exclusion	—		—		(7	)	—		(101	)	(0.5	)
Tax consequesnces of the sale of engines to WMES	(46	)	(1.7	)	1,214		5.1		—		—
Uncertain tax positions	97		3.6		195		0.8		113		0.6
Permanent differences-162(m)	385		14.3		737		3.1		406		2.1
Permanent differences and other	(376	)	(14.1	)	266		1.0		205		0.9
Effective income tax expense	1,161		43.0		9,377		39.1		7,630		38.8

In 2011 and 2010, we determined that a number of assets and their associated leases qualify for exclusion from federal taxable income under the Extraterritorial Income Exclusion rules, resulting in a reduction in the federal effective tax rate in those years. In 2012, these assets and their associated leases no longer qualify for exclusion from federal taxable income under the Extraterritorial Income Exclusion rules.

For the years ended December 31, 2011 and 2010, the Company’s effective tax rate was reduced by $1.1 million and $0.4 million, respectively, related to a change in California state tax law enacted during 2009 regarding state apportionment of income which became effective in 2011.

The following table summarizes the activity related to the Company’s unrecognized tax benefits:

	(in thousands)
Balance as of December 31, 2010	$	113
Increases related to current year tax positions	195
Balance as of December 31, 2011	308
Increases related to current year tax positions	98
Balance as of December 31, 2012	$	406

As of December 31, 2012 and 2011, we reserved $0.1 million and $0.2 million, respectively, for tax exposure in Europe. If the Company is able to eventually recognize these uncertain tax positions, all of the unrecognized benefit would reduce the Company’s effective tax rate. We carried $0.1 million in specified tax reserves as of December 31, 2010.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:

	As of December 31,
	2012			2011
	(in thousands)
Deferred tax assets:
Unearned lease revenue	$	1,550		$	1,274
State taxes	706			603
Reserves and allowances	1,596			1,595
Other accruals	962			1,795
Alternative minimum tax credit	542			527
Net operating loss carry forward	32,470			21,805
Charitable contributions	18			16
Total deferred tax assets	37,844			27,615

Deferred tax liabilities:
Depreciation and impairment on aircraft engines and equipment	(124,292		)	(113,956		)
Other deferred tax liabilities	(4,451		)	(3,612		)
Net deferred tax liabilities	(128,743		)	(117,568		)

Other comprehensive income, deferred tax asset	651			5,247

Net deferred tax liabilities	$	(90,248	)	$	(84,706	)

As of December 31, 2012, we had net operating loss carry forwards of approximately $91.1 million for federal tax purposes and $18.3 million for state tax purposes. The federal net operating loss carry forwards will expire at various times from 2022 to 2032 and the state net operating loss carry forwards will expire at various times from 2016 to 2022. The Company’s ability to utilize the net operating loss and tax credit carry forwards in the future may be subject to restriction in the event of past or future ownership changes as defined in Section 382 of the Internal Revenue Code and similar state tax law. As of December 31, 2012, we also had alternative minimum tax credit of approximately $0.5 million for federal income tax purposes which has no expiration date and which should be available to offset future regular tax liabilities. Management believes that no valuation allowance is required on deferred tax assets, as it is more likely than not that all amounts are recoverable through future taxable income.

Deferred tax assets relating to tax benefits of employee stock option grants have been reduced to reflect exercises in 2012. Some exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant (“windfall”). Although these additional tax benefits are reflected in net operating tax loss carryforwards, pursuant to SFAS 123R, in the amount of $2.2 million as of December 31, 2012, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable. The tax effect of windfalls included in net operating loss carryforwards but not reflected in deferred tax assets for 2012 are $0.8 million and will be recorded to paid in capital when recognized.