INCOME TAXES

The income tax provision (benefit) is comprised of the following amounts (in thousands):



	Fiscal Year Ended January 31, 2015			Fiscal Year Ended February 1, 2014
Current:
Federal	$	251		$	323
State and local	296			578
Foreign	—			—
	547			901
Deferred:
Federal	1,066			(4,433		)
State and local	188			(587		)
Foreign	(144		)	(766		)
	1,110			(5,786		)
Income tax provision (benefit)	1,657			(4,885		)
Valuation allowance adjustment	(1,110		)	5,786
Income tax provision	$	547		$	901

The income tax provision (benefit) differs from the amount obtained by applying the statutory Federal income tax rate to pretax income as follows (in thousands):



	Fiscal Year Ended January 31, 2015			Fiscal Year Ended February 1, 2014
Provision (benefit) at Federal statutory rates	$	1,118		$	(4,047	)
Permanent adjustments	47			24
State tax, net of Federal	415			(97		)
Net tax benefit adjustment	—			(765		)
Change in valuation allowance	(1,111		)	5,786
Prior year adjustments	134			—
Foreign rate differential	(59		)	—
Other	3			—
Income tax provision	$	547		$	901

Net deferred tax liabilities, which are included in other long-term liabilities on the accompanying consolidated balance sheets as of January 31, 2015 and February 1, 2014, reflect the tax effect of the following differences between financial statement carrying amounts and tax bases of assets and liabilities as follows (in thousands):



	January 31, 2015			February 1, 2014
Assets:
Net operating loss and tax credit carryforwards	$	7,142		$	11,991
Puerto Rico and U.S. Virgin Islands net operating loss carryforwards	3,129			2,986
Inventories	7,862			7,280
Property and equipment	8,810			10,803
Accounts receivable allowances	295			371
Goodwill and intangibles	194			415
Accrued interest	8,744			6,950
Deferred rent	3,481			3,287
Accrued expenses	3,382			2,897
Share-based compensation	2,933			2,726
Other	2,566			1,442
Total deferred tax assets	48,538			51,148
Valuation allowance	(45,749		)	(46,860		)
Net deferred tax assets	2,789			4,288
Liabilities:
Tradename	(3,400		)	(3,400		)
Intangibles	(2,789		)	(4,288		)
Total deferred tax liabilities, net	$	(3,400	)	$	(3,400	)

Management evaluates the Company’s deferred income tax assets and liabilities to determine whether or not a valuation allowance is necessary. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Realization of future tax benefits related to the deferred tax assets is dependent on many factors, including the Company’s ability to generate future taxable income during those periods in which temporary differences become deductible and/or credits can be utilized. Based on the difficult retail and wholesale environment resulting from the decline in general economic conditions and consumer confidence at the time, and the uncertainty as to when conditions will improve enough to enable the Company to utilize its deferred tax assets, the Company recorded a full valuation allowance against its deferred tax assets. The lack of practical tax-planning strategies available in the short-term and the lack of other objectively verifiable positive evidence supported the conclusion that a full valuation allowance against the Company’s Federal and state net deferred tax assets was necessary. In fiscal 2014, the valuation allowance decreased by $1.1 million and in fiscal 2013, the valuation allowance increased by approximately $5.8 million, respectively. For U.S. Federal and State income tax purposes, the Company generated taxable income and utilized net operating losses, but also increased other deferred tax assets due to the reversal of certain temporary differences. Overall, the Company’s deferred tax assets net with deferred tax liabilities, and before being reduced by the valuation allowance, decreased.

As of January 31, 2015 and February 1, 2014, the Company had a deferred tax liability of approximately $3.4 million related to a tradename. Due to the uncertainty of when this deferred tax liability will be recognized, the Company was not able to offset its total deferred tax assets with this deferred tax liability. The deferred tax liability is included in other long-term liabilities on the accompanying consolidated balance sheets as of January 31, 2015 and February 1, 2014.

Based on available evidence, management concluded that a valuation allowance should be maintained against the Company’s deferred tax assets as of January 31, 2015 and February 1, 2014. If, in the future, the Company realizes taxable income on a sustained basis of the appropriate character and within the net operating loss carryforward period, the Company would reverse some or all of this valuation allowance, resulting in an income tax benefit. Further, changes in existing tax laws could also affect valuation allowance needs in the future.

As of January 31, 2015 and February 1, 2014, the Company’s United States and Puerto Rico net operating loss carryforwards, which approximate $20.1 million and $32.5 million, respectively, begin to expire in fiscal years 2030 and 2018, respectively. Federal net operating losses of $8.9 million were obtained through the acquisition of Parlux Inc. in 2012, which are subject to limitations under Section 382 of the Internal Revenue Code. Additionally, the Company and Parlux have approximately $35.1 million of net operating loss carryforwards in various states expiring from 2015 through 2034 and may be subject to certain annual limitations.

On April 15, 2014, the Company filed a request with the Internal Revenue Service (“IRS”) to change its tax year from June 30 to a fifty-two/fifty-three week year ending on the Saturday closest to January 31, which will correspond with its accounting year-end. On June 2, 2014, the IRS notified the Company that the Company’s request to change its tax year has been accepted. The Company filed a short-period return for the period July 1, 2013 through February 1, 2014 in October 2014.

GAAP prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in an income tax return. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. GAAP also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of January 31, 2015 and February 1, 2014, there was a liability of $1.1 million and $1.0 million, respectively, recorded for income tax associated with unrecognized tax benefits.

The Company accrues interest related to unrecognized tax benefits as well as any related penalties in income tax expense, which is consistent with the recognition of these items in prior reporting periods. Accrued interest and penalties were $0.9 million and $0.6 million as of January 31, 2015 and February 1, 2014, respectively.

The balance of unrecognized tax benefits, the amount of related interest and penalties we have provided and what we believe to be the range of reasonably possible changes in the next twelve months, were (in thousands):



	Fiscal Year Ended January 31, 2015		Fiscal Year Ended February 1, 2014
Unrecognized tax benefits	$	1,079	$	1,007
Portion if recognized would reduce tax expense and effective rate	1,079		1,007
Accrued interest on unrecognized tax benefits	647		406
Accrued penalties on unrecognized tax benefits	244		218

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):



	Fiscal Year Ended January 31, 2015			Fiscal Year Ended February 1, 2014
Balance at beginning of year	$	1,007		$	714
Additions for tax positions of the current year	71			130
Additions for tax positions of prior years	30			163
Reductions for tax positions of prior years	(29		)	—
Balance at end of year	$	1,079		$	1,007

The Company does not expect material adjustments to the total amount of unrecognized tax benefits within the next 12 months, but the outcome of tax matters is uncertain and unforeseen results can occur.

The Company conducts business throughout the United States, Puerto Rico and the U.S. Virgin Islands and, as a result, files income tax returns in the United States Federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities. With few exceptions, the Company is no longer subject to U.S. Federal, state, local or Puerto Rico income tax examinations for fiscal years prior to 2005. State and foreign income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any Federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. The Company is currently under examination by two jurisdictions; however, management does not expect any significant liability to result.