NOTE 14 – INCOME TAXES

Deferred income tax assets (liabilities):

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and also include the tax effect of carryforwards.

The following table identifies significant components of the Company’s deferred tax assets and liabilities as of December 31, 2012 and 2011 (in thousands):



	December 31,
	2012		2011
Deferred tax assets:
Current:
Allowance for doubtful accounts	$	1,937	$	1,933
Tax credits		1,583		541
Other accruals		55,683		55,209
Total current deferred tax assets:		59,203		57,683
Noncurrent:
Tax credits		5,333		4,605
Net operating losses		2,077		3,008
Other accruals		58,605		50,855
Total noncurrent deferred tax assets:		66,015		58,468
Total deferred tax assets	$	125,218	$	116,151

Deferred tax liabilities:
Current:
Inventories	$	78,675	$	59,673
Total current deferred tax liabilities:		78,675		59,673
Noncurrent:
Property and equipment		132,547		138,132
Other		13,012		9,200
Total noncurrent deferred tax liabilities:		145,559		147,332
Total deferred tax liabilities		224,234		207,005
Net deferred tax liabilities	$	(99,016)	$	(90,854)

The following table reconciles the above net deferred tax assets (liabilities) as presented on the accompanying Consolidated Balance Sheets as of December 31, 2012 and 2011 (in thousands):



	December 31,
	2012		2011
Deferred tax assets - current	$	59,203	$	57,683
Deferred tax liabilities - current		(78,675)		(59,673)
Deferred tax liabilities - current		(19,472)	$	(1,990)

Deferred tax assets - noncurrent		66,015		58,468
Deferred tax liabilities - noncurrent		(145,559)		(147,332)
Deferred tax liabilities - noncurrent		(79,544)	$	(88,864)

Net deferred tax liabilities	$	(99,016)	$	(90,854)

Provision for income taxes:

The following table reconciles the “Provision for income taxes” included in the accompanying Consolidated Statements of Income for the years ended December 31, 2012, 2011 and 2010 (in thousands):



	Current		Deferred		Total
2012
Federal	$	311,631	$	10,030	$	321,661
State		35,982		(1,868)		34,114
	$	347,613	$	8,162	$	355,775

2011
Federal	$	228,443	$	55,175	$	283,618
State		25,537		(1,055)		24,482
	$	253,980	$	54,120	$	308,100

2010
Federal	$	146,259	$	88,395	$	234,654
State		24,484		10,862		35,346
	$	170,743	$	99,257	$	270,000

The following table outlines the reconciliation of the “Provision for income taxes” amounts included in the accompanying Consolidated Statements of Income to the amounts computed at the federal statutory rate for the years ended December 31, 2012, 2011 and 2010 (in thousands):



	Year ended December 31,
	2012		2011		2010
Federal income taxes at statutory rate	$	329,532	$	285,524	$	241,281
State income taxes, net of federal tax benefit		22,426		16,132		22,267
Other items, net		3,817		6,444		6,452
Total provision for income taxes	$	355,775	$	308,100	$	270,000

The excess tax benefit associated with the exercise of non-qualified stock options has been included within “Additional paid-in capital” on the accompanying consolidated financial statements.

As of December 31, 2012, the Company had tax credit carryforwards available for state tax purposes of $6.9 million. As of December 31, 2012, the Company had net operating loss carryforwards available for state purposes of $42.9 million. The Company’s state net operating loss carryforwards generally expire in years ranging from 2021 to 2027, and the Company’s tax credits generally do not expire.

CSK had net operating losses in various years dating back to the tax year 1993. For CSK, the statute of limitation for a particular tax year for examination by the IRS is three years subsequent to the last year in which the loss carryover is finally used. The IRS completed an examination of the CSK consolidated federal tax return for the fiscal years ended January 30, 2005, January 29, 2006, February 4, 2007, and February 2, 2008. The statute of limitation for a particular tax year for examination by various states is generally three to four years subsequent to the last year in which the loss carryover is finally used.

Unrecognized tax benefits:

The following table summarizes the changes in the gross amount of unrecognized tax benefits, excluding interest and penalties, for the years ended December 31, 2012, 2011 and 2010 (in thousands):



	Year ended December 31,
		2012		2011		2010
Balance as of January 1,	$	45,800	$	36,710	$	33,570
Additions based on tax positions related to the current year		8,100		7,308		5,138
Additions based on tax positions related to prior years		1,301		4,060		-
Payments related to settled items		(451)		-		-
Reductions due to lapse of statute of limitations		(3,746)		(2,278)		(1,998)
Balance as of December 31,	$	51,004	$	45,800	$	36,710

For the years ended December 31, 2012, 2011 and 2010, the Company recorded a reserve for unrecognized tax benefits (including interest and penalties) of $59.3 million, $53.0 million and $41.3 million, respectively, of which $59.3 million, $53.0 million and $41.3 million would affect the Company’s effective tax rate if recognized, generally net of federal tax affect. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of the years ended December 31, 2012, 2011 and 2010, the Company had accrued approximately $8.3 million, $7.2 million and $4.6 million, respectively, of interest and penalties related to uncertain tax positions before the benefit of the deduction for interest on state and federal returns. During the years ended December 31, 2012, 2011 and 2010, the Company recorded tax expense related to an increase in its liability for interest and penalties of $2.6 million, $3.9 million and $1.5 million, respectively. Although unrecognized tax benefits for individual tax positions may increase or decrease during 2013, the Company expects a reduction of $6.9 million of unrecognized tax benefits during the one-year period subsequent to December 31, 2012, resulting from settlement or expiration of the statute of limitations.

The Company’s United States federal income tax returns for tax years 2011 and beyond remain subject to examination by the Internal Revenue Service (“IRS”). The IRS concluded an examination of the O’Reilly consolidated 2008, 2009 and 2010 federal income tax returns in the first quarter of 2013. The statute of limitations for the Company’s federal income tax returns for tax years 2008 and prior expired on September 15, 2012. The statute of limitations for the Company’s U.S. federal income tax return for 2009 will expire on September 15, 2013, unless otherwise extended. The IRS is currently conducting an examination of the Company’s consolidated returns for the tax year 2011. The Company’s state income tax returns remain subject to examination by various state authorities for tax years ranging from 2002 through 2011.