3. Income Taxes

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


	Fiscal Year Ended
	February 1, 2014			February 2, 2013
Current:
Federal	$	(618	)	$	2,238
State		(391	)		(78	)

	$	(1,009	)	$	2,160

Deferred:
Federal	$	5,111		$	(1,473	)
State		730			1,187

	$	5,841		$	(286	)

Provision for income taxes	$	4,832		$	1,874

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


	Fiscal Year Ended
	February 1, 2014			February 2, 2013
Continuing Operations	$	4,832		$	1,874
Discontinued Operations		(66	)		(15	)

Provision for income taxes	$	4,766		$	1,859

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


	Fiscal Year Ended
	February 1, 2014			February 2, 2013
Federal statutory income tax rate		34.0	%		34.0	%
State income tax provision		(23.0	%)		(7.5	%)
Change in valuation allowance		(166.4	%)		23.6	%
Nondeductible meals and entertainment expense		(1.2	%)		0.9	%
Other-permanent items		(2.6	%)		0.2	%
Other-rate differential		4.7	%		0.0	%
Uncertain tax benefit adjustment		13.8	%		(5.6	%)
Federal tax credits		6.4	%		(3.4	%)

Effective income tax rate		(134.3	%)		42.2	%

The effective rate for income tax purposes was (134.3)% for fiscal 2014 and 42.2% for fiscal 2013. The net decrease in the effective tax rate is due to a number of factors, most of which are not directly associated with current period earnings. Significant increases in the effective tax rate are due to changes in uncertain tax positions and federal tax credits recorded during fiscal 2014 that resulted in income tax benefits and had the result of increasing the overall effective rate in the current fiscal year. Similar items existed in the prior year but resulted in decreases in the effective tax rate due to the existence of taxable income. The increases in the effective tax rate as described above are offset by the tax expense impact of a valuation allowance recorded against deferred tax assets in fiscal 2014.

Temporary differences that created deferred tax assets (liabilities) at February 1, 2014 and February 2, 2013 were as follows (in thousands):


	As of February 1, 2014						As of February 2, 2013
	Current			Noncurrent			Current			Noncurrent
Depreciation	$	—		$	(830	)	$	—		$	(2,822	)
Accruals		1,944			—			1,112			—
Inventory		(16,030	)		—			(15,365	)		—
State net operating loss carry forwards		—			1,585			—			1,413
Deferred rent		685			1,237			583			3,209
Prepaids		(801	)		—			(1,082	)		—
Amortization		—			593			—			242
Allowance for bad debts		26			—			22			—
State tax		—			(67	)		—			28
Effect of flow-through entity		—			2			—			48
Stock compensation		—			326			—			406

Deferred tax asset (liability)		(14,176	)		2,846			(14,730	)		2,524
Less: Valuation allowance		(4,631	)		(3,252	)		(166	)		(871	)

Deferred tax asset (liability), net	$	(18,807	)	$	(406	)	$	(14,896	)	$	1,653

The Company’s consolidated balance sheet as of February 1, 2014 includes a deferred tax asset of $1.6 million that was derived from state net operating loss carry forwards of $26.4 million that expire beginning in fiscal 2014 through fiscal 2037 and other deferred tax assets of $8.8 million related primarily to timing differences. 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 such determination is made. The Company has concluded, based on the weight of all available positive and negative evidence, that $7.9 million of these tax benefits are more likely than not to not be realized in the future. During fiscal 2014 and fiscal 2013 the Company increased its valuation by $6.8 million and $1.0 million, respectively.

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 February 1, 2014 and February 2, 2013, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.4 million and $0.9 million, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


	February 1, 2014			February 2, 2013
Balance at beginning of year	$	909		$	1,026
Additions based on tax positions related to current year		0			26
Additions based on tax positions related to prior period		0			129
Reductions for tax positions of previous year		(497	)		(272	)

Balance at end of year	$	412		$	909

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, we are 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 $0.3 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 $0.2 million and $0.4 million as of February 1, 2014 and February 2, 2013, respectively, and are recorded as a component of accrued expenses on the consolidated balance sheet. During fiscal years 2014 and 2013, the Company recognized $0.2 million and $0.1 million, respectively, of interest and penalties.