NOTE 16 – INCOME TAXES

Deferred income tax assets and 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, 2013 and 2012 (in thousands):



	December 31,
	2013			2012
Deferred tax assets:
Current:
Allowance for doubtful accounts	$	1,997		$	1,937
Tax credits	1,636			1,583
Other accruals	61,100			55,683
Total current deferred tax assets	64,733			59,203
Noncurrent:
Tax credits	5,333			5,333
Net operating losses	1,180			2,077
Other accruals	59,176			58,605
Total noncurrent deferred tax assets	65,689			66,015
Total deferred tax assets	130,422			125,218
Deferred tax liabilities:
Current:
Inventories	84,955			78,675
Total current deferred tax liabilities	84,955			78,675
Noncurrent:
Property and equipment	131,851			132,547
Other	14,551			13,012
Total noncurrent deferred tax liabilities	146,402			145,559
Total deferred tax liabilities	231,357			224,234
Net deferred tax liabilities	$	(100,935	)	$	(99,016	)

The following table reconciles the above net deferred tax assets (liabilities) as presented on the accompanying Consolidated Balance Sheets as of December 31, 2013 and 2012 (in thousands):



	December 31,
	2013			2012
Deferred tax assets - current	$	64,733		$	59,203
Deferred tax liabilities - current	(84,955		)	(78,675		)
Deferred tax liabilities - current	$	(20,222	)	$	(19,472	)

Deferred tax assets - noncurrent	65,689			66,015
Deferred tax liabilities - noncurrent	(146,402		)	(145,559		)
Deferred tax liabilities - noncurrent	$	(80,713	)	$	(79,544	)

Net deferred tax liabilities	$	(100,935	)	$	(99,016	)

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, 2013, 2012 and 2011 (in thousands):



	Current		Deferred			Total
2013
Federal	$	348,303	$	847		$	349,150
State	38,428		1,072			39,500
	$	386,731	$	1,919		$	388,650
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

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, 2013, 2012 and 2011 (in thousands):



	For the Year Ended December 31,
	2013			2012		2011
Federal income taxes at statutory rate	$	370,632		$	329,532	$	285,524
State income taxes, net of federal tax benefit	26,802			22,426		16,132
Other items, net	(8,784		)	3,817		6,444
Total provision for income taxes	$	388,650		$	355,775	$	308,100

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, 2013, the Company had tax credit carryforwards available for state tax purposes, net of federal impact, of $7.0 million. As of December 31, 2013, the Company had net operating loss carryforwards available for state purposes of $23.2 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 expire in 2024.

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, 2013, 2012 and 2011 (in thousands):



	For the Year Ended December 31,
	2013			2012			2011
Balance as of January 1,	$	51,004		$	45,800		$	36,710
Additions based on tax positions related to the current year	7,046			8,100			7,308
Additions based on tax positions related to prior years	—			1,301			4,060
Payments related to items settled with taxing authorities	(1,056		)	(451		)	—
Reductions due to the lapse of statute of limitations and settlements	(6,535		)	(3,746		)	(2,278		)
Balance as of December 31,	$	50,459		$	51,004		$	45,800

For the years ended December 31, 2013, 2012 and 2011, the Company recorded a reserve for unrecognized tax benefits (including interest and penalties) of $58.6 million, $59.3 million and $53.0 million, respectively. All of the unrecognized tax benefits recorded as of December 31, 2013, would affect the Company’s effective tax rate if recognized, generally net of the federal tax effect of approximately $16.6 million. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of the years ended December 31, 2013, 2012 and 2011, the Company had accrued approximately $8.1 million, $8.3 million and $7.2 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, 2013, 2012 and 2011, the Company recorded tax expense related to an increase in its liability for interest and penalties of $2.1 million, $2.6 million and $3.9 million, respectively. Although unrecognized tax benefits for individual tax positions may increase or decrease during 2014, the Company expects a reduction of $4.3 million of unrecognized tax benefits during the one-year period subsequent to December 31, 2013, 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 2009 and prior expired on September 15, 2013. The statute of limitations for the Company’s U.S. federal income tax return for 2010 will expire on September 15, 2014, 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 2012.