Income Taxes

A summary of the components of the income tax provision is as follows (in thousands):



	Fiscal Year Ended
	January 31, 2015			February 1, 2014
Current:
Federal	$	(704	)	$	(618	)
State	(165		)	(391		)
	$	(869	)	$	(1,009	)
Deferred:
Federal	$	572		$	5,111
State	55			730
	$	627		$	5,841
(Benefit) Provision for income taxes	$	(242	)	$	4,832

Income tax provision is included in the financial statements as follows (in thousands):



	Fiscal Year Ended
	January 31, 2015			February 1, 2014
Continuing Operations	$	(242	)	$	4,832
Discontinued Operations	—			(66		)
(Benefit) Provision for income taxes	$	(242	)	$	4,766

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:



	Fiscal Year Ended
	January 31, 2015		February 1, 2014
Federal statutory income tax rate	34.0	%	34.0	%
State and local income tax provision	4.8	%	(23.0	)%
Change in valuation allowance	(49.0	)%	(166.4	)%
Nondeductible meals and entertainment expense	5.8	%	(1.2	)%
Other-permanent items	5.7	%	(2.6	)%
Rate differential	10.9	%	4.7	%
Uncertain tax benefit adjustment	(11.5	)%	13.8	%
Federal tax credits	(9.8	)%	6.4	%
Effective income tax rate	(9.1	)%	(134.3	)%

The effective rate for income tax purposes was (9.1)% for fiscal 2015 and (134.3)% for fiscal 2014. The net decrease in the effective tax rate was due to a number of factors, most of which were not directly associated with fiscal 2015 earnings. The primary factor causing the decreased tax rate is a fiscal 2015 reduction in the required valuation allowance recorded against deferred tax assets, as compared to an increase in such valuation allowance in fiscal 2014. Other items, including reductions in uncertain tax benefits and federal income tax credits, impacted the effective tax rate in both fiscal 2015 and fiscal 2014.

Temporary differences that created deferred tax assets (liabilities) at January 31, 2015 and February 1, 2014 were as follows (in thousands):



	As of January 31, 2015						As of February 1, 2014
	Current			Noncurrent			Current			Noncurrent
Property & Equipment	$	—		$	(2,094	)	$	—		$	(830	)
Accruals	2,751			—			1,944			—
Inventory	(17,182		)	—			(16,030		)	—
State net operating loss carry forwards	—			960			—			1,585
Deferred rent	647			1,891			685			1,237
Prepaids	(1,123		)	—			(801		)	—
Intangible Assets	—			8			—			593
Allowance for bad debts	36			—			26			—
State and local tax	—			(67		)	—			(67		)
Effect of flow-through entity	126			—			—			2
Stock compensation	—			228			—			326
Equity Investment	—			(176		)	—			—
Deferred tax asset (liability)	(14,745		)	750			(14,176		)	2,846
Less: Valuation allowance	(3,947		)	(1,973		)	(4,631		)	(3,252		)
Deferred tax (liability), net	$	(18,692	)	$	(1,223	)	$	(18,807	)	$	(406	)

The Company’s consolidated balance sheet as of January 31, 2015 includes deferred tax assets of $9.7 million related primarily to timing differences and a deferred tax asset of $1.0 million that was derived from state net operating loss carry forwards of $31.4 million that expire beginning in fiscal 2016 through fiscal 2035. The Company evaluates the realizability of its deferred tax assets on a quarterly basis. The Company takes into account such factors as prior earnings history, future taxable income in the form of existing temporary differences, expected future earnings, carryback and carryforward periods and tax strategies that could potentially enhance the likelihood of a realization of a deferred income tax asset. To the extent that recovery is not more likely than not, a valuation allowance is established against the deferred income tax asset, increasing income tax expense in the year in which such determination is made. The Company has concluded, based on the weight of all available positive and negative evidence, that $4.8 million of these tax benefits are more likely than not to not be realized in the future. During fiscal 2015, the Company decreased its valuation allowance by $2.0 million. During fiscal 2014, the Company increased its valuation allowance by $6.8 million.

The Company accounts for the recognition, measurement, presentation and disclosure of uncertain tax positions in accordance with the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. The Company evaluates these unrecognized tax benefits each reporting period. As of January 31, 2015 and February 1, 2014, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.1 million and $0.4 million, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	January 31, 2015			February 1, 2014
Balance at beginning of year	$	204		$	514
Additions based on tax positions related to current year	—			—
Additions based on tax positions related to prior period	—			—
Reductions for tax positions of previous year	(155		)	(310		)
Balance at end of year	$	49		$	204

The Company and its subsidiaries are subject to United States Federal income tax as well as income tax of multiple state jurisdictions. These uncertain tax positions are related to tax years that remain subject to examination by the relevant taxing authorities. The Company has operations in various state jurisdictions and is not currently under audit in any of them. With few exceptions, the Company is no longer subject to United States Federal, state or local income tax examinations for years prior to 2010.

It is reasonably possible that the amount of unrecognized tax benefits will increase or decrease in the next twelve months. These changes may be the result of new federal, state or local audits. It is also expected that the statute of limitations for certain unrecognized tax benefits will expire in the next 12 months, resulting in a reduction of the liability for unrecognized tax benefits of $0.1 million. The balance of the unrecognized tax benefits is primarily related to uncertain tax positions for which there are no current ongoing federal or state audits, and, therefore, an estimate of the range of the reasonably possible outcomes cannot be made.

The Company’s policy is to record interest and penalties related to income tax matters in income tax expense. Accrued interest and penalties were $0.1 million and $0.2 million as of January 31, 2015 and February 1, 2014, respectively, and are recorded as a component of accrued expenses on the consolidated balance sheet. During fiscal 2015 and fiscal 2014, the Company recognized $0.1 million and $0.2 million, respectively, of interest and penalties.