Income Taxes



(In thousands)	2015		2014		2013

Income before income taxes for continuing operations consists of the following components:
U.S. operations	$	630,740	$	594,840	$	482,679
Foreign operations	18,733		12,202		17,996
	$	649,473	$	607,042	$	500,675



(In thousands)	2015		2014		2013

Income tax expense for continuing operations consists of the following components:
Current:
Federal	$	201,992	$	162,679	$	109,739
State and local	25,230		21,268		12,453
	227,222		183,947		122,192
Deferred	14,174		48,810		61,897
	$	241,396	$	232,757	$	184,089



(In thousands)	2015			2014		2013

Reconciliation of income tax expense for continuing operations using the statutory rate and actual income tax expense is as follows:
Income taxes at the U.S. federal statutory rate	$	227,316		$	212,464	$	175,237
State and local income taxes, net of federal benefit	16,623			20,252		12,211
Other	(2,543		)	41		(3,359		)
	$	241,396		$	232,757	$	184,089

The components of deferred income taxes included on the consolidated balance sheets are as follows:



(In thousands)	2015			2014

Deferred tax assets:
Allowance for doubtful accounts	$	4,857		$	4,835
Inventory obsolescence	12,266			11,682
Insurance and contingencies	38,522			36,032
Stock-based compensation	29,910			23,890
Foreign related carry-forwards	16,862			19,129
Treasury locks	5,829			6,924
Other	9,461			15,663
	117,707			118,155
Valuation allowance	(14,690		)	(13,358		)
	103,017			104,797
Deferred tax liabilities:
In service inventory	169,629			150,439
Property	77,871			90,155
Intangibles	84,218			81,215
Investment in partnerships	86,098			93,227
State taxes and other	24,528			24,650
	442,344			439,686
Net deferred tax liability	$	339,327		$	334,889

On April 30, 2014, Cintas completed the Shredding Transaction. Due to differences in accounting for the book and tax basis in the Shred-it Partnership and other partnerships, a deferred tax liability was recorded. Additionally, Cintas re-characterized the existing deferred tax liabilities associated with Shredding assets contributed to the partnership from "Property" and "Intangibles" to "Investment in Partnerships."

Although realization is not assured, management believes it is more likely than not that the recorded deferred tax assets, net of valuation allowances, will be realized.

The progression of the valuation allowance is as follows:



(In thousands)	2015			2014

Balance at beginning of year	$	(13,358	)	$	(12,789	)
Additions	(2,433		)	(1,701		)
Subtractions	1,101			1,132
Balance at end of year	$	(14,690	)	$	(13,358	)

Income taxes paid were $236.7 million, $172.5 million and $122.2 million for the fiscal years ended May 31, 2015, 2014 and 2013, respectively.

Undistributed earnings of foreign subsidiaries were approximately $147.1 million, $172.7 million and $194.0 million as of May 31, 2015, 2014 and 2013, respectively, for which deferred taxes have not been provided. Such earnings are considered to be permanently reinvested in Cintas' foreign subsidiaries. If such earnings were repatriated, additional tax expense may result. The current calculation of such additional taxes is not practicable.

As of May 31, 2015 and 2014, there was $11.9 million and $9.7 million, respectively, in total unrecognized tax benefits, which, if recognized, would favorably impact Cintas' effective tax rate. Cintas recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense in the consolidated statements of income, which is consistent with the recognition of these items in prior reporting periods. The total amount accrued for interest and penalties as of May 31, 2015 and 2014, was $0.9 million and $0.7 million, respectively. Cintas records this tax liability as current and long-term accrued liabilities on the consolidated balance sheets, as appropriate.

In the normal course of business, Cintas provides for uncertain tax positions and the related interest, and adjusts its unrecognized tax benefits and accrued interest accordingly. Unrecognized tax benefits increased by $1.4 million in fiscal 2015 and decreased by $0.2 million and $29.2 million in fiscal 2014 and 2013, respectively. Accrued interest increased by $0.2 million in fiscal 2015 and decreased by $0.4 million and $0.9 million in fiscal 2014 and 2013, respectively.

A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits (exclusive of interest and penalties) is as follows:



(In thousands)

Balance at June 1, 2012	$	44,531
Additions based on tax positions related to the current year	1,843
Additions for tax positions of prior years	2,960
Change in tax regulations	(33,600		)
Statute expirations	(2,025		)
Balance at May 31, 2013	$	13,709
Additions for tax positions of prior years	2,586
Statute expirations	(1,963		)
Settlements	(1,270		)
Balance at May 31, 2014	$	13,062
Additions for tax positions of prior years	4,001
Statute expirations	(1,603		)
Settlements	(48		)
Balance at May 31, 2015	$	15,412

On September 13, 2013, the U.S. Department of the Treasury and the Internal Revenue Service released final tangible property regulations under Sections 162(a) and 263(a) of the Internal Revenue Code regarding amounts paid to improve tangible property and acquire or produce tangible property, as well as proposed regulations regarding the disposition of property. The effective date of the final regulations was for Cintas' fiscal year ending May 31, 2015, and there was not a material impact on the consolidated financial statements.

The majority of Cintas' operations are in North America. Cintas is required to file federal income tax returns, as well as state income tax returns in a majority of the domestic states and also in certain Canadian provinces. At times, Cintas is subject to audits in these jurisdictions. The audits, by nature, are sometimes complex and can require several years to resolve. The final resolution of any such tax audit could result in either a reduction in Cintas' accruals or an increase in its income tax provision, either of which could have an impact on the consolidated results of operation in any given period.

All U.S. federal income tax returns are closed to audit through fiscal 2011. Cintas is currently in advanced stages of various audits in certain foreign jurisdictions and certain domestic states. The years under foreign and domestic state audits cover fiscal years back to 2009. Based on the resolution of the various audits and other potential regulatory developments, it is reasonably possible that the balance of unrecognized tax benefits will not change for the fiscal year ending May 31, 2016.