12. Income Taxes

The Company’s income before the provision for income taxes is classified by source as domestic income.

The components of the provision for income taxes consist of the following for the years ended August 31:



	2014		2013		2012
Current:
Federal	$	16,580	$	16,741	$	17,851
State		3,490		2,688		3,892
		20,070		19,429		21,743

Deferred:
Federal		5,328		439		180
State		450		(270)		(46)
		5,778		169		134
Provision for income taxes	$	25,848	$	19,598	$	21,877

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate due to the following for the fiscal years ended August 31:


	2014		2013		2012
Amount computed by applying a tax rate of 35%	$	25,818	$	19,705	$	20,287
State income taxes (net of federal income tax benefit)		2,562		1,572		1,900
Employment related and other tax credits, net		(1,537)		(1,572)		(1,291)
Adjustment of prior year deferred tax items		-		-		1,559
Other		(995)		(107)		(578)
Provision for income taxes	$	25,848	$	19,598	$	21,877

During fiscal year 2012, the Company conducted a reconciliation of its tax basis balance sheet and identified certain adjustments which were recorded in fiscal year 2012 to appropriately reflect the Company’s current and deferred tax accounts. As a result of this reconciliation process, the Company recorded an additional income tax provision of $1.6 million for fiscal year 2012. Management of the Company evaluated the impact of this adjustment and concluded the effect of this adjustment was immaterial to the current and prior year financial statements.

Deferred tax assets and liabilities consist of the following at August 31:


	2014		2013
Deferred tax assets:
Allowance for doubtful accounts and notes receivable	$	677	$	898
Leasing transactions		3,252		3,599
Deferred income		1,773		4,124
Accrued liabilities		3,399		1,995
Stock compensation		4,921		8,024
Other		688		676
State net operating losses		11,305		8,703
Total deferred tax assets		26,015		28,019
Valuation allowance		(11,305)		(8,703)
Total deferred tax assets after valuation allowance	$	14,710	$	19,316

Deferred tax liabilities:
Prepaid expenses	$	(1,498)	$	(1,369)
Investment in partnerships, including differences in capitalization,
depreciation and direct financing leases		(2,954)		(2,061)
Property, equipment and capital leases		(24,655)		(25,433)
Intangibles and other assets		(19,514)		(18,337)
Debt extinguishment		(3,353)		(4,191)
Total deferred tax liabilities		(51,974)		(51,391)
Net deferred tax liabilities	$	(37,264)	$	(32,075)

Net deferred tax assets and liabilities are classified as follows:
Current	$	347	$	2,840
Noncurrent		(37,611)		(34,915)
Total	$	(37,264)	$	(32,075)

State net operating loss carryforwards expire beginning in December 2014 through May 2035. Management does not believe the Company will be able to realize the state net operating loss carryforwards and therefore has provided a valuation allowance of $11.3 million and $8.7 million as of August 31, 2014 and 2013, respectively.

As of August 31, 2014 and 2013, the Company had approximately $2.5 million and $2.6 million of unrecognized tax benefits, including approximately $0.4 million and $0.3 million of accrued interest and penalty, respectively. The liability for unrecognized tax benefits decreased $0.1 million in fiscal year 2014. The decrease was primarily related to the IRS’ acceptance of a federal tax method change offset by a new uncertain position related to a federal credit. This entire change in balance impacted the Company’s tax rate.

The Company recognizes estimated interest and penalties as a component of its income tax expense, net of federal benefit, as a component of “Provision for income taxes” in the Consolidated Statements of Income. During the year ended August 31, 2014, the Company recognized negligible net expenses. The Company recognized a net benefit of $0.4 million and $0.1 million, for fiscal years 2013 and 2012, respectively.

As of August 31, 2014 and 2013, there are $2.5 million and $2.6 million, respectively, of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate. A reconciliation of unrecognized tax benefits is as follows for fiscal years ended August 31:



	2014		2013
Balance at beginning of year	$	2,583	$	5,451
Additions based on tax positions related to the current year		255		628
Additions for tax positions of prior years		115		960
Reductions for tax positions of prior years		(492)		(3,816)
Reductions due to statute expiration		-		(640)
Balance at end of year	$	2,461	$	2,583

The Company or one of its subsidiaries is subject to U.S. federal income tax and income tax in multiple U.S. state jurisdictions. The Company is currently undergoing examinations or appeals by various state and federal authorities. The Company anticipates that the finalization of these examinations or appeals, combined with the expiration of applicable statutes of limitations and the additional accrual of interest related to unrecognized benefits on various return positions taken in years still open for examination, could result in a change to the liability for unrecognized tax benefits during the next 12 months ranging from an increase of $0.1 million to a decrease of $1.9 million depending on the timing and terms of the examination resolutions. At August 31, 2014, the Company was subject to income tax examinations for its U.S. federal income taxes and for state and local income taxes generally after fiscal year 2009.

At August 31, 2014 and 2013, the Company had an income tax receivable of $1.9 million and $9.8 million, respectively, primarily relating to expected refunds from amended tax returns. Based on information available at August 31, 2014, the Company anticipates receiving or being able to apply a majority of these refunds to other tax obligations during fiscal year 2015. As a result, the entire amount was classified as current during fiscal year 2014.