Note 8—Income Taxes

Income before income taxes is comprised of the following:



	2014		2013		2012
Domestic (including Puerto Rico)	$	2,145	$	2,070	$	1,809
Foreign	1,052		981		958
Total	$	3,197	$	3,051	$	2,767

The provisions for income taxes for 2014, 2013, and 2012 are as follows:



	2014			2013			2012
Federal:
Current	$	696		$	572		$	591
Deferred	(105		)	16			12
Total federal	591			588			603
State:
Current	107			109			100
Deferred	(3		)	4			2
Total state	104			113			102
Foreign:
Current	369			302			312
Deferred	45			(13		)	(17		)
Total foreign	414			289			295
Total provision for income taxes	$	1,109		$	990		$	1,000

Tax benefits associated with the exercise of employee stock options and other employee stock programs were allocated to equity attributable to Costco in the amount of $84, $59, and $65, in 2014, 2013, and 2012, respectively.

The reconciliation between the statutory tax rate and the effective rate for 2014, 2013, and 2012 is as follows:



	2014					2013					2012
Federal taxes at statutory rate	$	1,119		35.0	%	$	1,068		35.0	%	$	969		35.0	%
State taxes, net	66			2.1		66			2.1		59			2.1
Foreign taxes, net	(85		)	(2.7	)	(87		)	(2.8	)	(61		)	(2.2	)
Employee stock ownership plan (ESOP)	(11		)	(0.3	)	(65		)	(2.1	)	(7		)	(0.3	)
Other	20			0.6		8			0.2		40			1.5
Total	$	1,109		34.7	%	$	990		32.4	%	$	1,000		36.1	%

The Company’s provision for income taxes for 2013 was favorably impacted by a $62 nonrecurring tax benefit in connection with the special cash dividend of $7.00 per share paid by the Company to employees, who through the Company's 401(k) Retirement Plan owned 22,600,000 shares of Company stock through an ESOP. Dividends paid on these shares are deductible for U.S. income tax purposes.

The components of the deferred tax assets (liabilities) are as follows:



	2014			2013
Equity compensation	$	85		$	80
Deferred income/membership fees	98			130
Accrued liabilities and reserves	607			530
Other	19			42
Property and equipment	(529		)	(558		)
Merchandise inventories	(193		)	(190		)
Net deferred tax assets	$	87		$	34

The deferred tax accounts at the end of 2014 and 2013 include current deferred income tax assets of $448 and $422 respectively, included in deferred income taxes and other current assets; non-current deferred income tax assets of $68 and $62, respectively, included in other assets; and non-current deferred income tax liabilities of $429 and $450, respectively, included in deferred income taxes and other liabilities.

In the fourth quarter of 2014, the Company changed its position regarding the undistributed earnings of the Canadian operations, and a portion of the earnings are no longer considered permanently reinvested. Current exchange rates compared to historical rates when these earnings were generated resulted in an immaterial U.S. tax liability, which was recorded at the end of 2014. Canadian withholding taxes, which are creditable against federal income taxes, have also been accrued on the amount expected to be repatriated.

The Company has not provided for U.S. deferred taxes on cumulative undistributed earnings of $3,619 at the end of 2014, of certain non-U.S. consolidated subsidiaries as such earnings are deemed by the Company to be indefinitely reinvested. This includes the remaining undistributed earnings of the Canadian operations that the Company continues to assert are indefinitely reinvested. Because of the availability of U.S. foreign tax credits and complexity of the computation, it is not practicable to determine the U.S. federal income tax liability that would be associated with such earnings if such earnings were not deemed to be indefinitely reinvested. The Company believes that its U.S. current and projected asset position is sufficient to meet its U.S. liquidity requirements and has no current plans to repatriate for use in the U.S. cash and cash equivalents and short-term investments held by these non-U.S. consolidated subsidiaries.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2014 and 2013 is as follows:



	2014			2013
Gross unrecognized tax benefit at beginning of year	$	80		$	116
Gross increases—current year tax positions	9			10
Gross increases—tax positions in prior years	10			5
Gross decreases—tax positions in prior years	(11		)	(13		)
Settlements	(11		)	(38		)
Lapse of statute of limitations	(2		)	0
Gross unrecognized tax benefit at end of year	$	75		$	80

Included in the balance at the end of 2014, are $38 of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

The total amount of such unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is $47 and $46 at the end of 2014 and 2013, respectively.

Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Interest and penalties recognized by the Company were not material in 2014 and 2013. Accrued interest and penalties were not material at the end of 2014 and 2013.

The Company is currently under audit by several taxing jurisdictions in the United States and in several foreign countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits we have recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next 12 months.

The Company files income tax returns in the United States, various state and local jurisdictions, in Canada and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2007. The Company is currently subject to examination in Canada for fiscal years 2010 to present and in California for fiscal years 2007 to present. No other examinations are believed to be material.