Note 7. Income Taxes

Earnings before income taxes were derived from the following sources:



	2012		2011	2010
Domestic	$	649,098	545,527	409,068
Foreign	25,057		29,554	21,572
	$	674,155	575,081	430,640

Components of income tax expense (benefit) are as follows:



2012 :	Current		Deferred		Total
Federal	$	202,095	14,742		216,837
State	27,586		981		28,567
Foreign	8,476		(261	)	8,215
	$	238,157	15,462		253,619



2011 :	Current		Deferred		Total
Federal	$	164,125	17,343		181,468
State	28,669		(244	)	28,425
Foreign	8,683		(1,424	)	7,259
	$	201,477	15,675		217,152



2010 :	Current		Deferred		Total
Federal	$	136,247	(936	)	135,311
State	22,914		(492	)	22,422
Foreign	4,448		3,103		7,551
	$	163,609	1,675		165,284

Income tax expense in the accompanying consolidated financial statements differs from the expected expense as follows:



	2012			2011		2010
Federal income tax expense at the ‘expected’ rate of 35%	$	235,954		201,278		150,724
Increase (decrease) attributed to:
State income taxes, net of federal benefit	19,565			18,210		14,259
State tax matters	884			737		1,238
Other, net	(2,784		)	(3,073	)	(937	)
Total income tax expense	$	253,619		217,152		165,284

The tax effects of temporary differences that give rise to deferred income tax assets and liabilities at year end are as follows:



	2012			2011
Deferred income tax asset (liability):
Inventory costing and valuation methods	$	4,045		4,643
Allowance for doubtful accounts receivable	2,618			2,202
Insurance claims payable	7,825			10,807
Promotions payable	945			797
Accrued legal reserves	207			39
Stock based compensation	4,715			5,853
Federal and state benefit of uncertain tax positions	1,871			1,632
Other, net	267			920
Total deferred income tax assets	22,493			26,893
Property and equipment	(59,371		)	(48,329	)
Total deferred income tax liabilities	(59,371		)	(48,329	)
Net deferred income tax asset (liability)	$	(36,878	)	(21,436	)

No significant valuation allowance for deferred tax assets was necessary as of December 31, 2012 and 2011. The character of the deferred tax assets is such that they can typically be realized through carryback to prior tax periods or offset against future taxable income.

A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows:



	2012			2011
Balance at start of year:	$	4,653		3,617
Increase related to prior year tax positions	172			578
Decrease related to prior year tax positions	(1,025		)	(65	)
Increase related to current year tax positions	2,170			523
Decrease related to statute of limitation lapses	—			—
Settlements	(639		)	—
Balance at end of year:	$	5,331		4,653

Included in the liability for unrecognized tax benefits is an immaterial amount for interest and penalties, both of which we classify as a component of income tax expense. The amount of unrecognized tax benefits that would favorably impact the effective tax rate, if recognized, is not material.

Fastenal Company or one of its subsidiaries files income tax returns in the United States federal jurisdiction, all states, and various foreign jurisdictions. With limited exceptions, we are no longer subject to income tax examinations by taxing authorities for taxable years before 2009 in the case of United States federal and non-United States examinations and 2008 in the case of state and local examinations.