Income Taxes

12 Months Ended

May 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Income before income taxes consists of the following components for the fiscal years ended May 31:

(In thousands)	2023		2022		2021
U.S. operations	$	1,632,391	$	1,445,719	$	1,221,690
Foreign operations	60,757		53,049		66,059
	$	1,693,148	$	1,498,768	$	1,287,749

Income tax expense (benefit) consists of the following components for the fiscal years ended May 31:

(In thousands)	2023		2022		2021
Current:
Federal	$	248,413	$	162,269	$	164,104
State and local	56,589		32,431		42,340
Foreign	13,205		16,676		12,417
	318,207		211,376		218,861
Deferred	26,931		51,635		(42,080)
	$	345,138	$	263,011	$	176,781

Reconciliation of income tax expense using the statutory rate and actual income tax expense is as follows for the fiscal years ended May 31:

(In thousands)	2023		2022		2021
Income taxes at the U.S. federal statutory rate	$	355,561	$	314,741	$	270,427
Permanent differences (1)	(59,502)		(85,413)		(101,870)
State and local income taxes, net of federal benefit	46,245		33,547		27,304
Capital loss carryback	—		—		(14,072)
Other	2,834		136		(5,008)
	$	345,138	$	263,011	$	176,781

(1)    Primarily consists of the excess tax benefits related to stock-based compensation.

The components of deferred income taxes included on the consolidated balance sheets are as follows at May 31:

(In thousands)	2023		2022
Deferred tax assets:
Reserves related to accounts receivable	$	12,562	$	10,928
Inventory reserves	22,822		28,020
Insurance reserves	45,153		45,237
Stock-based compensation	63,186		62,522
Operating lease liabilities	46,258		43,745
Deferred compensation and other	92,538		92,250
	282,519		282,702
Deferred tax liabilities:
Uniform and other rental items in service	248,883		226,510
Property and equipment	171,971		171,819
Intangibles and other amortizable assets	190,299		199,256
Treasury locks	32,830		31,566
Capitalized contract costs	88,056		81,314
Operating lease right-of-use assets	46,258		43,745
State taxes and other	2,578		2,269
	780,875		756,479
Net deferred tax liability	$	498,356	$	473,777

Although realization is not assured, management has evaluated its deferred tax assets to determine whether a valuation allowance is required or should be adjusted. This evaluation considers, among other items, the nature, frequency and amount of recent losses, reversal periods of taxable temporary differences, duration of statutory periods and tax planning strategies. As a result of this analysis, management believes it is more likely than not that the recorded deferred tax assets will be realized.

Income taxes paid were $291.9 million, $208.5 million and $245.5 million for the fiscal years ended May 31, 2023, 2022 and 2021, respectively.

As of May 31, 2023 and 2022, there was $29.3 million and $30.8 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, 2023 and 2022, was $3.2 million and $4.0 million, respectively. Cintas records this tax liability in long-term accrued liabilities on the consolidated balance sheets.

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, 2021	$	42,457
Additions for tax positions of the current year	5,558
Additions for tax positions of prior years	3,093
Settlements	(7,352)
Statute expirations	(6,182)
Balance at May 31, 2022	37,574
Additions for tax positions of the current year	6,904
Additions for tax positions of prior years	6,821
Settlements	(12,937)
Statute expirations	(1,608)
Balance at May 31, 2023	$	36,754

The majority of Cintas' operations are in North America. Cintas is required to file U.S. 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 expense, 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 2019. Cintas is currently in various audits in certain foreign jurisdictions and certain domestic states. The years under foreign and domestic state audits cover fiscal years back to 2014. Based on the status and resolution of the various audits and other potential regulatory developments, it is expected that the balance of unrecognized tax benefits will not materially change for the fiscal year ending May 31, 2024.

Foreign Withholding Tax

The Company asserts that all foreign earnings will be indefinitely reinvested, with the exception of certain foreign investments in which earnings and cash generation are in excess of local needs. With the passage of the Tax Cuts and Jobs Act in the U.S., dividends of earnings from non-U.S. operations are generally no longer subject to U.S. income tax. Cintas continues to analyze the estimated impact of the non-U.S. income and withholding tax liabilities based on the source of these earnings, as well as the expected means through which those earnings may be taxed; however, the unrecorded tax is not material to the consolidated financial statements.