15. INCOME TAXES

The components of income before income taxes and the provision for income taxes consisted of the following for the years ended October 31, 2013, 2012, and 2011.


(in thousands)	2013		2012		2011
*Current:*
Federal	$	15,331	$	9,700	$	5,539
State		10,960		10,459		7,147
Foreign		785		—		67
*Deferred:*
Federal		10,007		11,047		21,642
State		2,469		(1,275)		2,585

	$	39,552	$	29,931	$	36,980

The difference between the U.S. statutory tax rate and our effective income tax rate consisted of the following for the years ended October 31, 2013, 2012, and 2011.



	2013		2012		2011
Tax rate reconciliation:
Statutory rate		35.0%		35.0%		35.0%
State and local income taxes, net of federal tax benefit		6.5%		6.5%		6.3%
Federal and state tax credits		(8.6)%		(5.5)%		(5.1)%
Impact of change in state tax rate		0.5%		1.2%		(0.4)%
Tax liabilities no longer required		(1.4)%		(7.2)%		(4.0)%
Nondeductible expenses and other, net		3.2%		2.3%		3.2%

Annual tax rate		35.2%		32.3%		35.0%

As presented in the preceding table, the effective tax rate increased for the year ended October 31, 2013 over the year ended October 31, 2012 due to a tax benefit included in 2012 of $6.9 million related to a re-measurement of certain unrecognized tax benefits and discrete adjustments of $1.9 million for employment-based tax credits. The impact of these benefits was partially offset by discrete tax benefits during 2013 of $4.1 million related to a retroactive reinstatement of federal employment-based tax credits.

As presented in the preceding table, the effective tax rate for the year ended October 31, 2012 is lower than the effective tax rate for the year ended October 31, 2011, primarily due to net nonrecurring favorable federal and state tax benefits recorded during the year ended October 31, 2012. These tax benefits included a $6.9 million re-measurement of certain unrecognized tax benefits and $1.9 million of additional employment-based tax credits. Additionally, the effective tax rate decrease for 2012 was offset by the expiration of employment-based tax credits as of December 31, 2011 and an increase in certain state tax rates in jurisdictions where we operate.

As of October 31, 2013 and 2012, the components of our deferred tax assets and liabilities were as follows:


(in thousands)	2013		2012

Deferred tax assets:
Self-insurance claims (net of recoverables)	$	114,919	$	109,516
Deferred and other compensation		33,590		30,221
Accounts receivable allowances		3,857		3,967
Settlement liabilities		638		3,288
Other accruals		2,337		2,877
Other comprehensive income		1,394		1,862
State taxes		696		727
State net operating loss carryforwards		8,083		8,596
Tax credits		6,048		7,802
Other		1,019		3,019

		172,581		171,875
Valuation allowance		(6,215)		(6,026)

Total deferred tax assets		166,366		165,849

Deferred tax liabilities:
Property, plant and equipment		(5,512)		(2,767)
Goodwill and other acquired intangibles		(126,877)		(101,801)

Total deferred tax liabilities		(132,389)		(104,568)

Net deferred tax assets	$	33,977	$	61,281

Operating loss carryforwards totaling $12.4 million at October 31, 2013 are being carried forward in a number of state jurisdictions where we are permitted to use tax operating losses from prior periods to reduce future taxable income. These operating losses will expire between 2014 and 2033. We review our deferred tax assets for recoverability quarterly. The valuation allowance represents the amount of tax benefits related to state net operating loss carryforwards that management believes are not likely to be realized. We believe the remaining net deferred tax assets are more likely than not to be realizable based on estimates of future taxable income. Changes to the deferred tax asset valuation allowance for the years ended October 31, 2013, 2012, and 2011 were as follows:


(in thousands)	2013		2012		2011
Valuation allowance at the beginning of the year	$	6,026	$	5,784	$	6,290
Acquisition of Linc		—		—		290
Other, net		189		242		(796)

Valuation allowance at the end of the year	$	6,215	$	6,026	$	5,784

During the year ended October 31, 2013, the valuation allowance increased through an increase of the tax provision by $0.8 million for state net operating losses that were not expected to be ultimately realized and decreased by $0.6 million on the utilization of state net operating losses on which a valuation allowance was previously recorded and on the write-off of acquired state net operating loss carryforwards of a liquidated subsidiary. During the year ended October 31, 2012, the valuation allowance increased through an increase of the tax provision by $0.5 million for state net operating losses that were not expected to be ultimately realized and decreased by $0.3 million on the write-off of acquired federal net operating loss carryforwards of a liquidated subsidiary.

At October 31, 2013, we had unrecognized tax benefits of $87.6 million, $80.9 million of which, if recognized in the future, would impact our effective tax rate. We include interest and penalties related to unrecognized tax benefits in income tax expense. As of October 31, 2013, we had accrued interest and penalties related to uncertain tax positions of $1.3 million, of which $0.2 million was recognized and expensed in 2013. As of October 31, 2012, we had accrued interest and penalties related to uncertain tax positions of $1.1 million, of which $0.2 million was recognized and expensed in 2012. The following is a reconciliation of our total unrecognized tax benefits as of October 31, 2013 and 2012:


(in thousands)	2013		2012
Balance at beginning of year	$	88,448	$	95,956
Additions for tax positions related to the current year		1,635		590
Reductions for tax positions related to the current year		(589)		—
Additions for tax positions related to prior years		631		865
Reductions for tax positions related to prior years		(107)		(7,328)
Reductions for expiration of statute of limitations		(1,479)		(66)
Settlements		(929)		(1,569)

Balance as of October 31	$	87,610	$	88,448

Our most significant income tax jurisdiction is the United States. The U.S. federal income tax returns for ABM, Linc entities that are taxable as corporations, Air Serv, and HHA remain open for examination for the periods ending October 31, 2010 through October 31, 2012; December 31, 2010; June 30, 2010 through October 31, 2012; and December 31, 2010 through October 31, 2012, respectively. Air Serv is currently being examined by the Internal Revenue Service for its tax year ended June 30, 2011. We do business in all 50 states, significantly in California, Texas, and New York, as well as in various foreign jurisdictions. In major state jurisdictions, the tax years 2009-2013 remain open and subject to examination by the appropriate tax authorities. We estimate that a decrease in unrecognized tax benefits of up to approximately $2.9 million is reasonably possible over the next 12 months.