Income Taxes

The following table sets forth the components of income tax expense for each of the following years (in thousands):



	2014		2013		2012
Currently payable:
Federal	$	32,610	$	33,703	$	36,211
State	4,413		4,570		2,962
	37,023		38,273		39,173
Deferred:
Federal	9,266		4,359		9,357
State	877		682		1,448
	10,143		5,041		10,805
Total income tax expense	$	47,166	$	43,314	$	49,978

Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):



	March 1, 2014			March 2, 2013
Deferred tax assets:
Deferred credits from landlords	$	10,323		$	10,591
Share-based compensation	4,361			4,681
Compensation accrual	5,456			3,297
Deferred compensation	2,281			1,920
Other	5,721			4,501
Total deferred tax assets	28,142			24,990
Deferred tax liabilities:
Property and equipment	(24,625		)	(10,137		)
Inventories	(7,500		)	(9,729		)
Other	(1,381		)	(345		)
Total deferred tax liabilities	(33,506		)	(20,211		)
Net deferred tax (liability) asset	$	(5,364	)	$	4,779

The effective income tax rate varies from the statutory federal income tax rate for 2014, 2013 and 2012 due to the following:



	2014		2013		2012
Tax at statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	2.9		2.9		3.0
Tax contingencies	—		(0.2	)	(0.9	)
Tax effect related to Running Specialty partnership interest	0.5		0.7		—
Other	0.2		0.1		—
	38.6	%	38.5	%	37.1	%

As of March 1, 2014, the Company had approximately $1.0 million of net operating loss carryforwards for state tax purposes of which $0.5 million of net operating loss carryforwards related to excess share-based compensation deductions and when realized, will be credited to shareholders’ equity. If not used, these carryforwards will expire between 2028 and 2029.

Payments of income taxes for 2014, 2013 and 2012 equaled $31.0 million, $45.0 million and $28.7 million, respectively.

The Company is subject to U.S. federal income tax as well as income tax by multiple state jurisdictions. The Company has substantially concluded all U.S. federal income tax matters through fiscal 2009 and all state and local income tax matters through fiscal 2005. The Company may resolve some or all of the issues related to tax matters and make payments to settle agreed upon liabilities.

Uncertain Tax Positions

As of March 1, 2014 and March 2, 2013, the Company had $9.6 million and $8.1 million of unrecognized tax benefits respectively, $2.7 million and $3.0 million respectively, of which, if recognized, would affect the effective income tax rate. Of the total unrecognized tax benefits as of March 1, 2014, it is reasonably possible that the total unrecognized tax benefits could decrease by up to $0.2 million during the next twelve months due to audit settlements, expiration of statute of limitations or other resolution of uncertainties. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in liabilities that could be different from this estimate. In such case, the Company will record additional tax expense or tax benefit in the tax provision or reclassify amounts on the consolidated balance sheets in the period in which such matter is effectively settled with the tax authority.

The Company recognizes interest and penalty expense, as well as reversal of expense, related to unrecognized tax benefits as components of income tax expense. In 2014, 2013 and 2012, $0.2 million, $(0.5) million and $(0.6) million, respectively, of interest and penalties were included in income tax expense on the consolidated statements of income. The Company has accrued $2.0 million and $1.8 million for the payment of interest and penalties as of March 1, 2014 and March 2, 2013, respectively.

The following table summarizes the activity related to the Company’s unrecognized tax benefits for U.S. federal and state tax jurisdictions and excludes accrued interest and penalties (in thousands):



	2014			2013			2012
Unrecognized tax benefits at beginning of year	$	6,268		$	6,548		$	7,530
Increases in tax positions for prior years	1,695			275			193
Decreases in tax positions for prior years	(195		)	(29		)	(1,057		)
Increases in unrecognized tax benefits as a result of current year activity	2,385			13			50
Decreases to unrecognized tax benefits relating to settlements with taxing authorities	(209		)	—			(5		)
Decreases to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations	(2,306		)	(539		)	(163		)
Unrecognized tax benefits at end of year	$	7,638		$	6,268		$	6,548