10. Income Taxes:

A reconciliation of the expected federal income tax expense based on the federal statutory tax rate to the actual income tax expense is provided below:

	Year Ended
	December 29, 2012			December 31, 2011
Federal income tax expense at statutory rate (35%)	$	8,104,400		$	8,183,600
Valuation allowance	1,413,600			577,700
State and local income taxes, net of federal benefit	677,700			827,700
Permanent differences, including stock option expenses	60,200			(223,600		)
Other, net	(38,300		)	(78,800		)
Actual income tax expense	$	10,217,600		$	9,286,600

Components of the provision for income taxes are as follows:

	Year Ended
	December 29, 2012			December 31, 2011
Current:
Federal	$	8,332,400		$	4,718,000
State	1,186,000			860,000
Foreign	374,900			377,000
Current provision	9,893,300			5,955,000
Deferred:
Federal	435,300			2,890,500
State	(111,000		)	441,100
Deferred provision	324,300			3,331,600
Total provision for income taxes	$	10,217,600		$	9,286,600

The tax effects of temporary differences that give rise to the net deferred income tax assets and liabilities are presented below:

	December 29, 2012			December 31, 2011
Deferred tax assets:
Accounts receivable and lease reserves	$	368,600		$	315,600
Accrued restructuring charge	64,500			65,500
Non-qualified stock option expense	901,800			1,026,000
Deferred franchise and software license fees	519,800			464,700
Trademarks	96,400			98,300
Lease deposits	1,093,200			943,800
Loss from and impairment of equity and note investments	4,074,300			2,660,700
Valuation allowance	(4,074,300		)	(2,660,700		)
Other	301,800			305,900
Total deferred tax assets	3,346,100			3,219,800
Deferred tax liabilities:
Lease revenue and initial direct costs	(9,267,900		)	(8,776,600		)
Depreciation and amortization	(222,400		)	(263,100		)
Total deferred tax liabilities	(9,490,300		)	(9,039,700		)
Total net deferred tax liabilities	$	(6,144,200	)	$	(5,819,900	)

During the years ended December 29, 2012 and December 31, 2011, $884,300 and $249,500 respectively, was directly credited to stockholders’ equity to account for excess tax benefits related to stock option exercises.

The Company has assessed its taxable earnings history and prospective future taxable income. Based upon this assessment, the Company has determined that it is more likely than not that its deferred tax assets will be realized in future periods and no valuation allowance is necessary, except for the deferred tax assets related to the loss from and impairment of equity and note investments (which are capital losses for tax purposes). As a result, valuation allowances of $4.1 million and $2.7 million as of December 29, 2012 and December 31, 2011, respectively, have been recorded.

The amount of unrecognized tax benefits, including interest and penalties, as of December 29, 2012 and December 31, 2011, was $323,400 and $334,800, respectively, primarily for potential foreign and state taxes.

The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense for all periods presented. The Company had accrued approximately $11,100 and $25,300 for the payment of interest and penalties at December 29, 2012 and December 31, 2011, respectively.

The following table summarizes the activity related to the Company’s unrecognized tax benefits:

	Total
Balance at December 25, 2010	$	155,900
Increases related to current year tax positions	88,600
Additions for tax positions of prior years	103,700
Expiration of the statute of limitations for the assessment of taxes	(38,700		)
Balance at December 31, 2011	309,500
Increases related to current year tax positions	95,900
Subtractions for tax positions of prior years	(2,800		)
Expiration of the statute of limitations for the assessment of taxes	(90,300		)
Balance at December 29, 2012	$	312,300

The Company and its subsidiaries file income tax returns in the U.S. federal, numerous state and certain foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2008. The Internal Revenue Service concluded its examination of our U.S. federal tax returns for the fiscal years ended 2008 and 2010 in 2010 and 2012, respectively. We expect various statutes of limitation to expire during the next 12 months. Due to the uncertain response of taxing authorities, a range of outcomes cannot be reasonably estimated at this time.