Income Taxes



(In thousands)	2016		2015		2014

Income before income taxes for continuing operations consists of the following components:
U.S. operations	$	697,974	$	635,270	$	519,386
Foreign operations	20,148		18,054		17,741
	$	718,122	$	653,324	$	537,127



(In thousands)	2016			2015		2014

Income tax expense for continuing operations consists of the following components:
Current:
Federal	$	284,046		$	203,202	$	139,102
State and local	25,926			25,346		18,286
	309,972			228,548		157,388
Deferred	(48,791		)	14,255		41,967
	$	261,181		$	242,803	$	199,355



(In thousands)	2016			2015			2014

Reconciliation of income tax expense for continuing operations using the statutory rate and actual income tax expense is as follows:
Income taxes at the U.S. federal statutory rate	$	251,352		$	228,727		$	187,375
State and local income taxes, net of federal benefit	16,672			16,705			17,934
Other	(6,843		)	(2,629		)	(5,954		)
	$	261,181		$	242,803		$	199,355

The components of deferred income taxes included on the consolidated balance sheets are as follows:



(In thousands)	2016			2015

Deferred tax assets:
Allowance for doubtful accounts	$	7,416		$	4,857
Inventory obsolescence	13,702			12,266
Insurance and contingencies	42,717			38,522
Stock-based compensation	45,720			29,910
Foreign related carry-forwards	17,883			16,862
Treasury locks	12,055			5,829
Other	8,100			9,461
	147,593			117,707
Valuation allowance	(17,047		)	(14,690		)
	130,546			103,017
Deferred tax liabilities:
In service inventory	172,704			169,629
Property	93,784			77,871
Intangibles	104,585			84,218
Investment in partnerships	2,563			86,098
State taxes and other	16,385			24,528
	390,021			442,344
Net deferred tax liability	$	259,475		$	339,327

Due to differences in accounting for the book and tax basis in Shred-it and other partnerships, a deferred tax liability was recorded. After the sale of Shred-it in fiscal 2016, the related deferred tax liability was reclassified to current taxes payable. See Note 16 entitled Discontinued Operations for additional information.

Although realization is not assured, management believes it is more likely than not that the recorded deferred tax assets, net of valuation allowances, will be realized.

The progression of the valuation allowance is as follows:



(In thousands)	2016			2015

Balance at beginning of year	$	(14,690	)	$	(13,358	)
Additions	(3,437		)	(2,433		)
Subtractions	1,080			1,101
Balance at end of year	$	(17,047	)	$	(14,690	)

Income taxes paid were $452.6 million, $236.7 million and $172.5 million for the fiscal years ended May 31, 2016, 2015 and 2014, respectively.

Undistributed earnings of foreign subsidiaries were approximately $117.2 million, $147.1 million and $172.7 million as of May 31, 2016, 2015 and 2014, respectively, for which deferred taxes have not been provided. Such earnings are considered to be permanently reinvested in Cintas' foreign subsidiaries. If such earnings were repatriated, additional tax expense may result. The current calculation of such additional taxes is not practicable.

As of May 31, 2016 and 2015, there was $12.9 million and $11.9 million, respectively, in total unrecognized tax benefits, which, if recognized, would favorably impact Cintas' effective tax rate. Cintas recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense in the consolidated statements of income, which is consistent with the recognition of these items in prior reporting periods. The total amount accrued for interest and penalties as of May 31, 2016 and 2015, was $1.1 million and $0.9 million, respectively. Cintas records this tax liability as current and long-term accrued liabilities on the consolidated balance sheets, as appropriate.

In the normal course of business, Cintas provides for uncertain tax positions and the related interest, and adjusts its unrecognized tax benefits and accrued interest accordingly. Unrecognized tax benefits increased in fiscal 2016 and 2015 by $0.8 million and $1.4 million, respectively, and decreased in fiscal 2014 by $0.2 million. Accrued interest increased by $0.2 million in both fiscal 2016 and 2015, and decreased by $0.4 million in fiscal 2014.

A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits (exclusive of interest and penalties) is as follows:



(In thousands)

Balance at June 1, 2013	$	13,709
Additions for tax positions of prior years	2,586
Settlements	(1,270		)
Statute expirations	(1,963		)
Balance at May 31, 2014	$	13,062
Additions for tax positions of prior years	4,001
Settlements	(48		)
Statute expirations	(1,603		)
Balance at May 31, 2015	$	15,412
Additions for tax positions of prior years	3,259
Settlements	(48		)
Statute expirations	(2,092		)
Balance at May 31, 2016	$	16,531

On September 13, 2013, the U.S. Department of the Treasury and the Internal Revenue Service released final tangible property regulations under Sections 162(a) and 263(a) of the Internal Revenue Code regarding amounts paid to improve tangible property and acquire or produce tangible property, as well as proposed regulations regarding the disposition of property. The effective date of the final regulations was for Cintas' fiscal year ending May 31, 2015, and there was not a material impact on the consolidated financial statements for any period presented.

The majority of Cintas' operations are in North America. Cintas is required to file federal income tax returns, as well as state income tax returns in a majority of the domestic states and also in certain Canadian provinces. At times, Cintas is subject to audits in these jurisdictions. The audits, by nature, are sometimes complex and can require several years to resolve. The final resolution of any such tax audit could result in either a reduction in Cintas' accruals or an increase in its income tax provision, either of which could have an impact on the consolidated results of operation in any given period.

All U.S. federal income tax returns are closed to audit through fiscal 2011. Cintas is currently in advanced stages of various audits in certain foreign jurisdictions and certain domestic states. The years under foreign and domestic state audits cover fiscal years back to 2009. Based on the resolution of the various audits and other potential regulatory developments, it is reasonably possible that the balance of unrecognized tax benefits will decrease by $3.1 million for the fiscal year ending May 31, 2017.