9.Income Taxes

Income Tax Provision


	Years Ended February 28 or 29
(In thousands)	2014		2013		2012
Current:
Federal	$	283,174	$	232,652	$	223,548
State		38,747		30,557		30,439
Total		321,921		263,209		253,987
Deferred:
Federal		(15,129)		4,705		54
State		(2,056)		(847)		(926)
Total		(17,185)		3,858		(872)
Income tax provision	$	304,736	$	267,067	$	253,115

Effective Income Tax Rate Reconciliation


	Years Ended February 28 or 29
	2014			2013			2012
Federal statutory income tax rate		35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal benefit		3.1			2.9			2.9
Nondeductible and other items		0.2			0.2			0.2
Credits		(0.1)			―			(0.2)
Valuation allowance		―			―			0.1
Effective income tax rate		38.2	%		38.1	%		38.0	%

Temporary Differences Resulting in Deferred Tax Assets and Liabilities


	As of February 28
(In thousands)	2014		2013
Deferred tax assets:
Accrued expenses	$	48,611	$	35,270
Partnership basis		71,503		70,737
Property and equipment		―		3,510
Stock compensation		60,158		53,297
Derivatives		4,896		3,904
Capital loss carry forward		1,296		1,110
Total gross deferred tax assets		186,464		167,828
Less: valuation allowance		(1,296)		(1,110)
Net gross deferred tax assets		185,168		166,718

Deferred tax liabilities:
Prepaid expenses		13,991		9,429
Property and equipment		3,737		―
Inventory		7,375		6,221
Total gross deferred tax liabilities		25,103		15,650
Net deferred tax asset	$	160,065	$	151,068

Except for amounts for which a valuation allowance has been provided, we believe it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. The valuation allowance as of February 28, 2014, relates to capital loss carryforwards that are not more likely than not to be utilized prior to their expiration.

Reconciliation of Unrecognized Tax Benefits


	Years Ended February 28 or 29
(In thousands)	2014		2013		2012
Balance at beginning of year	$	25,059	$	20,930	$	18,662
Increases for tax positions of prior years		1,523		1,685		5,403
Decreases for tax positions of prior years		(4,658)		(596)		(6,918)
Increases based on tax positions related to the current year		5,960		7,491		4,754
Settlements		(809)		(4,136)		(334)
Lapse of statute		(745)		(315)		(637)
Balance at end of year	$	26,330	$	25,059	$	20,930

As of February 28, 2014, we had $26.3 million of gross unrecognized tax benefits, $7.6 million of which, if recognized, would affect our effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of our uncertain tax positions will increase or decrease during the next 12 months; however, we do not expect the change to have a significant effect on our results of operations, financial condition or cash flows. As of February 28, 2013, we had $25.1 million of gross unrecognized tax benefits, $5.4 million of which, if recognized, would affect our effective tax rate. As of February 29, 2012, we had $20.9 million of gross unrecognized tax benefits, $3.9 million of which, if recognized, would affect our effective tax rate.

Our continuing practice is to recognize interest and penalties related to income tax matters in SG&A expenses. Our accrual for interest and penalties increased $0.3 million to $1.6 million as of February 28, 2014, from $1.3 million as of February 28, 2013. Our accrual for interest and penalties increased $0.2 million to $1.3 million as of February 28, 2013, from $1.1 million as of February 29, 2012.

CarMax is subject to U.S. federal income tax as well as income tax of multiple states and local jurisdictions. With a few insignificant exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to fiscal 2011.