11. Income Taxes

The Company's income before the provision for income taxes is classified by source as domestic income.

The components of the provision for income taxes consist of the following for the years ended August 31:


		2012			2011			2010
Current:
Federal	$	17,851		$	5,060		$	12,165
State		3,892			2,223			2,904
		21,743			7,283			15,069

Deferred:
Federal		180			1,876			(5,303	)
State		(46	)		(5	)		(797	)
		134			1,871			(6,100	)
Provision for income taxes	$	21,877		$	9,154		$	8,969

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate due to the following for the years ended August 31:


		2012			2011			2010
Amount computed by applying a tax rate of 35%	$	20,287		$	9,933		$	10,562
State income taxes (net of federal income tax benefit)		1,900			1,441			1,370
Employment related and other tax credits, net		(1,291	)		(1,730	)		(1,504	)
Adjustment of prior year deferred tax items		1,559			—			—
Benefit from stock option exchange program		—			—			(1,471	)
Other		(578	)		(490	)		12
Provision for income taxes	$	21,877		$	9,154		$	8,969

During fiscal year 2012, the Company conducted a reconciliation of its tax basis balance sheet and identified certain adjustments which were recorded in fiscal year 2012 to appropriately reflect the Company's current and deferred tax accounts. As a result of this reconciliation process, the Company recorded an additional income tax provision of $1,559 for fiscal year 2012. Management of the Company evaluated the impact of this adjustment and concluded the effect of this adjustment was immaterial to the current and prior year financial statements.

The adoption of ASC Topic 810 gives an appearance of a lower effective tax rate than the Company's actual effective tax rate. The following table reconciles the difference in the effective tax rate as a result of the adoption of ASC Topic 810:


	2012		2011		2010
Effective income tax rate reconciliation:
Effective tax rate per consolidated income statement	37.7	%	32.3	%	25.8	%
Book income attributable to noncontrolling interests	—		—		3.9
Effective tax rate for the fiscal year	37.7	%	32.3	%	29.7	%

Deferred tax assets and liabilities consist of the following at August 31:


		2012			2011
Current deferred tax assets (liabilities):
Allowance for doubtful accounts and notes receivable	$	840		$	1,032
Capital lease liabilities and other		1,636			1,551
Prepaid expenses		(1,265	)		(1,190	)
Deferred income from franchisees		461			848
Deferred income from affiliated technology fund		597			353
Deferred income		1,903			10
Accrued liabilities and other		649			166
Current deferred tax assets, net	$	4,821		$	2,770

Noncurrent deferred tax assets (liabilities):
Net investment in direct financing leases, including differences related to
capitalization and amortization	$	526		$	648
Investment in partnerships, including differences in capitalization,
depreciation and direct financing leases		(2,408	)		(2,554	)
State net operating losses		7,361			6,389
Property, equipment and capital leases		(22,538	)		(24,834	)
Deferred income from affiliated franchise fees		915			1,160
Intangibles and other assets		(16,694	)		(13,321	)
Deferred income from franchisees		773			1,481
Stock compensation		11,899			12,556
Debt extinguishment		(4,191	)		(4,146	)
Allowance for doubtful accounts and notes receivable		305			256
Deferred income		1,355			1,453
Accrued liabilities and other		281			73
		(22,416	)		(20,839	)
Valuation allowance		(7,361	)		(6,389	)
Noncurrent deferred tax liabilities, net	$	(29,777	)	$	(27,228	)
Deferred tax assets and (liabilities):
Deferred tax assets (net of valuation allowance)	$	22,140		$	21,587
Deferred tax liabilities		(47,096	)		(46,045	)
Net deferred tax liabilities	$	(24,956	)	$	(24,458	)

State net operating loss carryforwards expire generally beginning in 2012. Management does not believe the Company will be able to realize the state net operating loss carryforwards and therefore has provided a valuation allowance of $7.4 million and $6.4 million as of August 31, 2012 and August 31, 2011, respectively.

As of August 31, 2012, the Company had approximately $5,451 of unrecognized tax benefits, including approximately $746 of interest and penalty. The liability for unrecognized tax benefits increased by $676 in fiscal year 2012. The majority of the change was due to the expiration of statutes of limitations, additions for items under audit, and the settlement of a state tax audit in the first quarter of fiscal year 2012, which resulted in a decrease to state unrecognized tax positions from prior years. The Company recognizes estimated interest and penalties as a component of its income tax expense, net of federal benefit. If recognized, $1,862 of unrecognized tax benefits would favorably impact the effective tax rate. As of August 31, 2012 and 2011, an immaterial net benefit for interest and penalties was recognized in our Consolidated Statements of Income as a component of "provision for income taxes." A reconciliation of unrecognized tax benefits for fiscal years 2012 and 2011 is as follows:


		2012			2011
Balance at beginning of year	$	4,775		$	5,628
Additions based on tax positions related to the current year		834			—
Additions for tax positions of prior years		1,670			672
Reductions for tax positions of prior years		(469	)		—
Reductions for settlements		(68	)		(1,104	)
Reductions due to statute expiration		(1,291	)		(421	)
Balance at end of year	$	5,451		$	4,775

The Company or one of its subsidiaries is subject to U.S. federal income tax and income tax in multiple U.S. state jurisdictions. The Company is currently undergoing examinations or appeals by various state and federal authorities. The Company anticipates that the finalization of these examinations or appeals, combined with the expiration of applicable statutes of limitations and the additional accrual of interest related to unrecognized benefits on various return positions taken in years still open for examination could result in a change to the liability for unrecognized tax benefits during the next 12 months ranging from an increase of $123 to a decrease of $4,872, depending on the timing and terms of the examination resolutions. At August 31, 2012, the Company was subject to income tax examinations for its U.S. federal income taxes after fiscal year 2007 and for state and local income taxes generally after fiscal year 2007.

At August 31, 2012 and 2011, the Company had an income tax receivable of $10.3 million and $12.8 million, respectively, primarily relating to expected refunds from amended tax returns. Based on new information available at August 31, 2012, the Company does not anticipate receiving or being able to apply these refunds to other tax obligations during fiscal year 2013. As a result, this balance was reclassified from current assets to non-current assets during fiscal year 2012 and is included within "other assets, net" on the Consolidated Balance Sheets.