(8) Income Taxes

Income tax (benefit) expense for fiscal 2012, 2011, and 2010 consists of the following (in thousands):

	2012			2011			2010
Current:
Federal	$	70		$	(6,809	)	$	9,304
State	313			(863		)	1,340
Total current	383			(7,672		)	10,644
Deferred:
Federal	(2,281		)	(499		)	429
State	(618		)	355			(331		)
Total deferred	(2,899		)	(144		)	98
Total income tax (benefit) expense	$	(2,516	)	$	(7,816	)	$	10,742

Income tax (benefit) expense computed using the federal statutory rate is reconciled to the reported income tax (benefit) expense as follows for fiscal 2012, 2011, and 2010 (in thousands):

	2012			2011			2010
Statutory rate applied to (loss) income before income taxes	$	(1,659	)	$	(6,241	)	$	11,058
State income taxes, net of federal benefit	(182		)	(684		)	1,191
State tax credits	(106		)	(342		)	(443		)
State tax credits - valuation allowance (net of federal benefit)	—			810			—
Tax exempt interest	(7		)	(9		)	(37		)
General business credits	(691		)	(1,477		)	(987		)
Other	129			127			(40		)
Income tax (benefit) expense	$	(2,516	)	$	(7,816	)	$	10,742

The components of deferred tax assets and deferred tax liabilities as of February 2, 2013 and January 28, 2012 are as follows (in thousands):

	February 2,			January 28,
	2013			2012
Deferred tax assets:
Deferred rent amortization	$	1,773		$	1,980
Inventory capitalization	2,628			1,898
Federal jobs credits	1,438			—
Vacation liability	850			736
State tax credits	1,528			1,421
Stock compensation	1,204			1,197
Legal expense reserve	604			—
Insurance liabilities	803			681
Other	486			455
Subtotal deferred tax assets	11,314			8,368
Less: State tax credits valuation allowance - net	(810		)	(810		)
Total deferred tax assets	10,504			7,558

Deferred tax liabilities:
Book and tax depreciation differences	(232		)	(214		)
Prepaid expenses	(321		)	(292		)
Total deferred tax liabilities	(553		)	(506		)
Net deferred tax asset	$	9,951		$	7,052

The Company reviews and assesses uncertain tax positions, with recognition and measurement of tax benefit, if any, based on a “more-likely-than-not” standard with respect to the ultimate outcome, regardless of whether this assessment is favorable or unfavorable. The Company files income tax returns in U.S. federal and state jurisdictions where it does business and is subject to examinations by the IRS and other taxing authorities. As of February 2, 2013, there were no benefits taken on the Company’s income tax returns that do not qualify for financial statement recognition. If a tax position does not meet the minimum statutory threshold to avoid payment of penalties and interest, a company is required to recognize an expense for the amount of the interest and penalty in the period in which the company claims or expects to claim the position on its tax return. For financial statement purposes, companies are allowed to elect whether to classify such charges as either income tax expense or another expense classification. Should such expense be incurred in the future, the Company will classify such interest as a component of interest expense and penalties as a component of income tax expense.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible and income tax credits may be utilized, management believes it is more likely than not that the Company will realize the benefits of these deductible differences with the exception of certain tax credits available in one state. Losses incurred in 2011 caused the Company to conclude that its ability to utilize such state’s tax credits was no longer more likely than not, necessitating a charge to income tax expense and a reduction in deferred tax assets of $0.8 million in connection with the establishment of a valuation allowance. Deferred tax assets as of February 2, 2013 still include the portion of state tax credits that are available through 2026 and are expected to be utilized in the future. However, if operating results deteriorate in the future, these tax credits may also require a valuation allowance, which would result in a charge to income tax expense and a reduction in deferred tax assets of $0.5 million.

The effective income tax rate for fiscal 2012 included the recognition of benefits arising from various federal and state tax credits. Under current IRS and state income tax regulations, these credits may be carried back for two years or carried forward for periods up to 20 years. The effective income tax rate for fiscal 2011 included the recognition of benefits arising from a tax net operating loss generated in 2011 and the benefit of various tax credits, partially offset by the aforementioned valuation allowance for state tax credits. IRS and state income tax regulations allowed for carry back of such net operating loss and tax credits benefits to prior years. Accordingly, in fiscal 2012 the Company amended its income tax returns for the prior two years and has fully recovered such benefits. With a few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to fiscal 2009.