Note 6. Income Taxes

Earnings before income taxes were derived from the following sources:



	2015		2014	2013
Domestic	$	785,916	757,896	697,062
Foreign	40,104		29,538	16,406
	$	826,020	787,434	713,468

Components of income tax expense (benefit) were as follows:



2015 :	Current		Deferred	Total
Federal	$	256,748	7,362	264,110
State	31,297		227	31,524
Foreign	13,677		348	14,025
	$	301,722	7,937	309,659



2014 :	Current		Deferred		Total
Federal	$	250,527	1,919		252,446
State	30,768		256		31,024
Foreign	10,518		(704	)	9,814
	$	291,813	1,471		293,284



2013 :	Current		Deferred		Total
Federal	$	220,588	8,547		229,135
State	29,073		527		29,600
Foreign	7,487		(1,390	)	6,097
	$	257,148	7,684		264,832

Income tax expense in the accompanying consolidated financial statements differed from the expected expense as follows:



	2015			2014		2013
Federal income tax expense at the ‘expected’ rate of 35%	$	289,107		275,602		249,714
Increase (decrease) attributed to:
State income taxes, net of federal benefit	21,613			20,549		16,683
Other, net	(1,061		)	(2,867	)	(1,565	)
Total income tax expense	$	309,659		293,284		264,832
Effective income tax rate	37.5		%	37.2	%	37.1	%

The tax effects of temporary differences that give rise to deferred income tax assets and liabilities at year end were as follows:



	2015			2014
Deferred income tax assets (liabilities):
Inventory costing and valuation methods	$	4,556		4,311
Allowance for doubtful accounts receivable	4,529			4,873
Insurance claims payable	10,930			10,404
Promotions payable	1,738			1,586
Stock-based compensation	8,270			7,837
Federal and state benefit of uncertain tax positions	1,911			1,327
Foreign net operating loss and credit carryforwards	5,155			5,768
Foreign valuation allowances	(3,406		)	(3,007	)
Other, net	1,541			592
Total deferred income tax assets	35,224			33,691
Property and equipment	(90,281		)	(80,458	)
Total deferred income tax liabilities	(90,281		)	(80,458	)
Net deferred income tax liabilities	$	(55,057	)	(46,767	)

In November 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-17, Income Taxes (Topic 740), to simplify the presentation of deferred income taxes. Under the new standard, both deferred tax liabilities and assets are required to be classified as noncurrent in a classified balance sheet. This standard will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016, with early adoption allowed. As of December 31, 2014, we had deferred taxes that were classified as current assets and noncurrent liabilities. During the fourth quarter of 2015, we elected to prospectively adopt this standard, thus reclassifying $23,300 of current deferred tax assets to noncurrent (netted within noncurrent liabilities) on the accompanying consolidated balance sheet. The prior reporting period was not retrospectively adjusted. The adoption of this guidance had no impact on our Consolidated Statements of Earnings and Comprehensive Income.

A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits was as follows:



	2015			2014
Balance at beginning of year:	$	3,772		3,282
Increase related to prior year tax positions	704			185
Decrease related to prior year tax positions	(43		)	(113	)
Increase related to current year tax positions	984			924
Decrease related to statute of limitation lapses	—			(506	)
Balance at end of year:	$	5,417		3,772

Included in the liability for gross unrecognized tax benefits is an immaterial amount for interest and penalties, both of which we classify as a component of income tax expense. The amount of gross unrecognized tax benefits that would favorably impact the effective tax rate, if recognized, is not material.

Fastenal files income tax returns in the United States federal jurisdiction, all states, and various local and foreign jurisdictions. With limited exceptions, we are no longer subject to income tax examinations by taxing authorities for taxable years before 2012 in the case of United States federal and foreign examinations and 2011 in the case of state and local examinations.

In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when the tax impact is zero or very minimal. As of December 31, 2015, we have not made a provision for United States income taxes or for additional foreign withholding taxes on $140,000 of unremitted earnings. Generally, such amounts become subject to United States taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred income tax liabilities related to investments in these foreign subsidiaries.