NOTE 14 - INCOME TAXES

All of our operations are domestic. Income tax expense consisted of the following (in thousands):



	Fiscal Year
	2014		2013			2012
Federal income tax expense:
Current	$	12,948	$	9,462		$	17,467
Deferred	3,048		(761		)	1,170
	15,996		8,701			18,637
State income tax expense:
Current	2,323		1,509			3,626
Deferred	300		(47		)	(62		)
	2,623		1,462			3,564
Total income tax expense	$	18,619	$	10,163		$	22,201

Income tax is included in the consolidated financial statements as follows (in thousands):



	Fiscal Year
	2014			2013			2012
Continuing operations	22,847			15,400			24,373
Discontinued operations	(4,228		)	(5,237		)	(2,172		)
Total income tax expense	$	18,619		$	10,163		$	22,201

Reconciliation between the federal income tax expense charged to income before income tax computed at statutory tax rates and the actual income tax expense recorded follows (in thousands):



	Fiscal Year
	2014			2013			2012
Federal income tax expense at the statutory rate	$	17,314		$	9,382		$	21,133
State income taxes, net	1,811			974			2,199
Uncertain tax position	92			531			—
Other	590			399			(99		)
Job credits	(1,188		)	(1,123		)	(1,032		)
Total income tax expense	$	18,619		$	10,163		$	22,201

Deferred tax assets (liabilities) consist of the following (in thousands):



	January 31, 2015			February 1, 2014
Gross deferred tax assets:
Net operating loss carryforwards	$	521		$	599
Accrued expenses	2,392			3,031
Lease obligations	18,690			20,658
Deferred compensation	9,967			13,371
Deferred income	4,707			5,319
Other	2,905			1,366
	39,182			44,344
Gross deferred tax liabilities:
Inventory	(5,756		)	(9,675		)
Depreciation and amortization	(55,320		)	(54,570		)
	(61,076		)	(64,245		)

Valuation allowance	(402		)	(464		)
Net deferred tax liabilities	$	(22,296	)	$	(20,365	)

ASC No. 740, Income Taxes, requires recognition of future tax benefits of deferred tax assets to the extent such realization is more likely than not. Net non-current deferred tax liabilities were $20.5 million and $15.6 million and net current deferred tax liabilities were $1.8 million and $4.7 million at January 31, 2015 and February 1, 2014, respectively. Consistent with the requirements of ASC No. 740, the tax benefits recognized related to pre-reorganization deferred tax assets have been recorded as a direct addition to additional paid-in capital. The remaining valuation allowance of $0.4 million and $0.5 million at January 31, 2015 and February 1, 2014, respectively, was established for pre-reorganization state net operating losses, which may expire prior to utilization. Adjustments are made to reduce the recorded valuation allowance when positive evidence exists that is sufficient to overcome the negative evidence associated with those losses.

We have net operating loss carryforwards for state income tax purposes of approximately $12.5 million which, if not utilized, will expire in varying amounts between 2015 and 2021. We do not have any net operating loss carryforwards for federal income tax purposes.

As of January 31, 2015, the total unrecognized tax benefit was $0.6 million, which if recognized, would favorably affect the effective income tax rate in a future period. A reconciliation of the beginning and ending amount of total unrecognized tax benefits, including associated interest, is as follows (in thousands):



	2014
Balance, beginning of period	$	531
Additions based on tax positions related to 2014	79
Additions for tax positions for prior years	13
Balance, end of period	$	623

We file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The Internal Revenue Service ("IRS") has initiated an examination of the federal tax return for 2012 and has completed its field examination of the federal income tax returns for 2009, 2010 and 2011. We have received a Revenue Agent Report from the IRS that seeks adjustments to income before taxes of approximately $2.3 million in connection with an unresolved issue related to Section 199, Domestic Production Deduction. In July 2014, we filed a protest with the IRS Appeals Office regarding the proposed adjustment. Meetings with the Appeals Office have not been set. We believe that adequate provision has been made for any adjustments that may result from tax audits. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with our expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs.

We recognize penalty and interest accrued related to unrecognized tax benefits as an income tax expense. During the years ended January 31, 2015, February 1, 2014, and February 2, 2013, the amount of penalties and interest accrued was almost nil. We are subject to U.S. federal income tax examinations by tax authorities for 2013 forward. We are also subject to audit by the taxing authorities of 38 states for years generally after 2009.