7. INCOME TAXES

The components of income tax expense from our wholly-owned operations and investments and our controlling interest in joint ventures with Carrier are as follows:


*Years Ended December 31,*	2012		2011		2010
U.S. Federal	$	50,919	$	50,197	$	44,845
State		6,245		6,338		5,515
Foreign		5,478		315		—

	$	62,642	$	56,850	$	50,360

Current	$	55,918	$	48,540	$	37,635
Deferred		6,724		8,310		12,725

	$	62,642	$	56,850	$	50,360

We calculate our income tax expense and our effective tax rate for 100% of income attributable to our wholly-owned operations and investments and for our controlling interest of income attributable to our joint ventures with Carrier, which are taxed as partnerships for income tax purposes.

Following is a reconciliation of the effective income tax rate:


*Years Ended December 31,*	2012			2011			2010
U.S. federal statutory rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal benefit and other		2.5			3.1			3.0
Tax effects on foreign income		(0.8	)		(0.1	)		—

Effective income tax rate attributable to Watsco, Inc.		36.7			38.0			38.0
Taxes attributable to noncontrolling interest		(8.3	)		(8.8	)		(6.9	)

Effective income tax rate		28.4	%		29.2	%		31.1	%

The following is a summary of the significant components of our current and long-term deferred tax assets and liabilities:


December 31,	2012			2011

Current deferred tax assets:
Capitalized inventory costs and inventory reserves	$	2,386		$	2,966
Allowance for doubtful accounts		1,084			1,634
Other current deferred tax assets		1,215			979
Self-insurance reserves		1,039			769

Total current deferred tax assets (1)		5,724			6,348


Long-term deferred tax assets:
Share-based compensation		13,911			11,688
Other long-term deferred tax assets		797			1,021
Net operating loss carryforwards		609			648

		15,317			13,357
Valuation allowance		(391	)		(423	)

Total long-term deferred tax assets (2)		14,926			12,934


Long-term deferred tax liabilities:
Deductible goodwill		(66,636	)		(46,057	)
Depreciation		(3,100	)		(2,500	)
Other long-term deferred tax liabilities		(1,358	)		(1,141	)

Total long-term deferred tax liabilities (2)		(71,094	)		(49,698	)

Net deferred tax liabilities	$	(50,444	)	$	(30,416	)

(1)	Current deferred tax assets have been included in the consolidated balance sheets in other current assets.

(2)	Long-term deferred tax assets and liabilities have been included in the consolidated balance sheets in deferred income taxes and other liabilities.

U.S. income taxes have not been provided on the undistributed earnings of international subsidiaries, as those earnings are considered to be permanently reinvested in the operations of those subsidiaries.

Management has determined that $391 and $423 of valuation allowance was necessary at December 31, 2012 and 2011, respectively, to reduce the deferred tax assets to the amount that will more likely than not be realized. At December 31, 2012, there were state and other net operating loss carryforwards of $8,288, which expire in varying amounts from 2013 through 2026. These amounts are available to offset future taxable income. There were no federal net operating loss carryforwards at December 31, 2012.

We are subject to U.S. federal income tax, income tax of multiple state jurisdictions and foreign income tax. We are subject to tax audits in the various jurisdictions until the respective statutes of limitations expire. We are no longer subject to U.S. federal tax examinations for tax years prior to 2009. For the majority of states, we are no longer subject to tax examinations for tax years prior to 2008.

As of December 31, 2012 and 2011, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $2,474 and $2,424, respectively. Of these totals, $1,609 and $1,773, respectively, (net of the federal benefit received from state positions) represent the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate. Our continuing practice is to recognize penalties within selling, general and administrative expenses and interest related to income tax matters in income tax expense in the consolidated statements of income. As of December 31, 2012 and 2011, the cumulative amount of estimated accrued interest and penalties resulting from such unrecognized tax benefits was $583 and $495, respectively, and is included in deferred income taxes and other liabilities in the accompanying consolidated balance sheets.

The change in gross unrecognized tax benefits during 2012 and 2011 is as follows:


Gross balance at January 1, 2011	$	1,889
Additions based on tax positions related to the current year		542
Reductions due to lapse of applicable statute of limitations		(7	)

Gross balance at December 31, 2011		2,424
Additions based on tax positions related to the current year		416
Reductions due to lapse of applicable statute of limitations		(366	)

Gross balance at December 31, 2012	$	2,474