The provision (benefit) for income taxes on income from continuing operations was comprised of the following:



	Year ended
	December 30, 2012			January 1, 2012			January 2, 2011
Current:
Federal	$	(772	)	$	(6,606	)	$	(1,628	)
State	78			117			389
	(694		)	(6,489		)	(1,239		)

Deferred (prepaid):
Federal	(10,055		)	4,875			2,010
State	(1,407		)	(47		)	36
	(11,462		)	4,828			2,046
Valuation allowance	2,063			—			—
Provision (benefit) for income taxes	$	(10,093	)	$	(1,661	)	$	807

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income purposes. The components of deferred income tax assets and liabilities at December 30, 2012 and January 1, 2012 were as follows:



	December 30, 2012			January 1, 2012
Current deferred income tax assets (liabilities):
Inventory and other reserves	$	(486	)	$	(44	)
Accrued vacation benefits	1,733			2,788
Accrued settlement costs	981			—
Other accruals	422			740
Current deferred income tax assets	2,650			3,484
Less: Valuation allowance	(208		)	—
Total current deferred income tax assets	2,442			3,484
Long term deferred income tax assets (liabilities):
Deferred income on sale-leaseback of certain real estate	7,305			13,977
Lease financing obligations	198			1,095
Postretirement benefit obligations	1,452			1,533
Accumulated other comprehensive income-postretirement benefits	(414		)	(736		)
Stock-based compensation expense	329			1,566
Property and equipment depreciation	1,058			(4,562		)
Federal net operating loss carryforwards	7,042			—
State net operating loss carryforwards	2,063			921
Other intangibles, net	2,856			(87		)
Franchise rights	(24,771		)	(24,630		)
Occupancy costs	4,452			5,705
Tax credit carryforwards	984			1,693
Other	1,523			2,194
Long-term net deferred income tax assets (liabilities)	4,077			(1,331		)
Less: Valuation allowance	(1,855		)	(903		)
Total long-term deferred income tax assets (liabilities)	2,222			(2,234		)
Carrying value of net deferred income tax assets	$	4,664		$	1,250

The Company's federal net operating loss carryforwards expire in 2032 and its state net operating loss carryforwards expire in varying amounts through 2031.

The Company establishes a valuation allowance to reduce the carrying amount of deferred tax assets when it is more likely than not that it will not realize some portion or all of the tax benefit of its deferred tax assets. The Company has performed the required assessment of positive and negative evidence regarding the realization of deferred income tax assets associated with certain state net operating loss carryforwards in accordance with ASC 740. The Company considered all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income and recent financial operations, to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of these deferred income tax assets. Judgment is used in considering the relative impact of negative and positive evidence. In arriving at these judgments, the weight given to the potential effect of negative and positive evidence is commensurate with the extent to which such evidence can be objectively verified. In evaluating the objective evidence provided by historical results, the Company considered the past three years of cumulative losses.

Based on the assessment described above, the Company provided a valuation allowance of $2.1 million in 2012 on all of the deferred income tax assets as of December 30, 2012 for certain state net operating loss carryforwards, representing a charge to income tax expense during the year ended December 30, 2012. If the Company determines that it is more likely than not that it will realize these deferred tax assets in the future, the Company will make an adjustment to the valuation allowance at that time. At January 1, 2012, the Company had no valuation allowance pertaining to continuing operations.

The estimation of future taxable income for federal and state purposes and the Company's ability to realize deferred tax assets pertaining to state net operating loss carryforwards can significantly change based on future events and operating results. Thus, recorded valuation allowances may be subject to future changes that could be material.

As of December 30, 2012, the Company had federal NOL carryforwards of approximately $20.1 million. The Company has recorded a deferred income tax asset of $7.0 million reflecting the benefit of these loss carryforwards. The Company conducted an analysis of the impact that certain equity transactions of the Company's stockholders during the year had on the Company's ability to utilize its NOLs. The analysis concluded that Company incurred a change in ownership within the meaning of Section 382 of the Internal Revenue Code ("IRC Section 382"). In general, IRC Section 382 places annual limitations on the use of certain tax attributes such as NOL and tax credit carryforwards in existence at the ownership change date. Although realization is not assured, management believes it is more likely than not that the Company will be able to use the pre-ownership change deferred income tax assets related to the NOLs prior to their expiration.

The Company's effective tax rate was 34.9%, 76.0% and 30.8% for the years ended December 30, 2012, January 1, 2012 and January 2, 2011, respectively. A reconciliation of the statutory federal income tax provision (benefit) to the tax provision (benefit) applied to income from continuing operations for the years ended December 30, 2012, January 1, 2012, and January 2, 2011 was as follows:



	Year ended
	December 30, 2012			January 1, 2012			January 2, 2011
Statutory federal income tax provision (benefit)	$	(10,118	)	$	(765	)	$	916
State income taxes (benefit), net of federal provision (benefit)	(688		)	46			276
Stock-based compensation expense	(657		)	336			356
Change in valuation allowance	2,063			—			—
Non-deductible expenses	14			242			35
Employment tax credits	(353		)	(1,148		)	(1,060		)
Miscellaneous	(354		)	(372		)	284
Provision (benefit) for income taxes from continuing operations	$	(10,093	)	$	(1,661	)	$	807

The Company's policy is to recognize interest and/or penalties related to uncertain tax positions in income tax expense. At December 30, 2012 and January 1, 2012, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions. The tax years 2009 - 2012 remain open to examination by the major taxing jurisdictions to which the Company is subject. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to uncertainties regarding the timing of examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.