NOTE 13 – INCOME TAXES

Deferred income tax assets and liabilities:

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 amounts used for income tax purposes, and also include the tax effect of carryforwards.

The following table identifies significant components of the Company's deferred tax assets and liabilities as of December 31, 2014 and 2013 (in thousands):



	December 31,
	2014			2013
Deferred tax assets:
Current:
Allowance for doubtful accounts	$	2,357		$	1,997
Tax credits	3,250			1,636
Other accruals	67,468			61,100
Total current deferred tax assets	73,075			64,733
Noncurrent:
Tax credits	11,475			5,333
Net operating losses	746			1,180
Other accruals	63,968			59,176
Other	16,468			16,181
Total noncurrent deferred tax assets	92,657			81,870
Total deferred tax assets	165,732			146,603
Deferred tax liabilities:
Current:
Inventories	90,333			84,955
Total current deferred tax liabilities	90,333			84,955
Noncurrent:
Property and equipment	139,604			131,851
Other	38,217			30,732
Total noncurrent deferred tax liabilities	177,821			162,583
Total deferred tax liabilities	268,154			247,538
Net deferred tax liabilities	$	(102,422	)	$	(100,935	)

The following table reconciles the above net deferred tax assets (liabilities) as presented on the accompanying Consolidated Balance Sheets as of December 31, 2014 and 2013 (in thousands):



	December 31,
	2014			2013
Deferred tax assets - current	$	73,075		$	64,733
Deferred tax liabilities - current	(90,333		)	(84,955		)
Deferred tax liabilities - current	(17,258		)	(20,222		)

Deferred tax assets - noncurrent	92,657			81,870
Deferred tax liabilities - noncurrent	(177,821		)	(162,583		)
Deferred tax liabilities - noncurrent	(85,164		)	(80,713		)

Net deferred tax liabilities	$	(102,422	)	$	(100,935	)

Provision for income taxes:

The following table reconciles the “Provision for income taxes" included in the accompanying Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012 (in thousands):



	Current		Deferred			Total
2014
Federal	$	399,271	$	5,987		$	405,258
State	43,242		(4,500		)	38,742
	$	442,513	$	1,487		$	444,000
2013
Federal	$	348,303	$	847		$	349,150
State	38,428		1,072			39,500
	$	386,731	$	1,919		$	388,650
2012
Federal	$	311,631	$	10,030		$	321,661
State	35,982		(1,868		)	34,114
	$	347,613	$	8,162		$	355,775

The following table outlines the reconciliation of the “Provision for income taxes" amounts included in the accompanying Consolidated Statements of Income to the amounts computed at the federal statutory rate for the years ended December 31, 2014, 2013 and 2012 (in thousands):



	For the Year Ended December 31,
	2014			2013			2012
Federal income taxes at statutory rate	$	427,764		$	370,632		$	329,532
State income taxes, net of federal tax benefit	25,320			26,802			22,426
Other items, net	(9,084		)	(8,784		)	3,817
Total provision for income taxes	$	444,000		$	388,650		$	355,775

The excess tax benefit associated with the exercise of non-qualified stock options has been included within “Additional paid-in capital" on the accompanying consolidated financial statements.

As of December 31, 2014, the Company had tax credit carryforwards available for state tax purposes, net of federal impact, of $14.7 million. As of December 31, 2014, the Company had net operating loss carryforwards available for state purposes of $19.7 million. The Company's state net operating loss carryforwards generally expire in years ranging from 2022 to 2028, and the Company's tax credits generally expire in 2024.

CSK had net operating losses in various years dating back to the tax year 1993. For CSK, the statute of limitation for a particular tax year for examination by the IRS is three years subsequent to the last year in which the loss carryover is finally used. The IRS completed an examination of the CSK consolidated federal tax return for the fiscal years ended January 30, 2005, January 29, 2006, February 4, 2007 and February 2, 2008. The statute of limitation for a particular tax year for examination by various states is generally three to four years subsequent to the last year in which the loss carryover is finally used.

Unrecognized tax benefits:

The following table summarizes the changes in the gross amount of unrecognized tax benefits, excluding interest and penalties, for the years ended December 31, 2014, 2013 and 2012 (in thousands):



	For the Year Ended December 31,
	2014			2013			2012
Balance as of January 1,	$	50,459		$	51,004		$	45,800
Additions based on tax positions related to the current year	4,665			7,046			8,100
Additions based on tax positions related to prior years	—			—			1,301
Payments related to items settled with taxing authorities	(300		)	(1,056		)	(451		)
Reductions due to the lapse of statute of limitations and settlements	(5,226		)	(6,535		)	(3,746		)
Balance as of December 31,	$	49,598		$	50,459		$	51,004

For the years ended December 31, 2014, 2013 and 2012, the Company recorded a reserve for unrecognized tax benefits (including interest and penalties) of $58.4 million, $58.6 million and $59.3 million, respectively. All of the unrecognized tax benefits recorded as of December 31, 2014, would affect the Company's effective tax rate if recognized, generally net of the federal tax effect of approximately $16.8 million. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of the years ended December 31, 2014, 2013 and 2012, the Company had accrued approximately $8.8 million, $8.1 million and $8.3 million, respectively, of interest and penalties related to uncertain tax positions before the benefit of the deduction for interest on state and federal returns. During the years ended December 31, 2014, 2013 and 2012, the Company recorded tax expense related to an increase in its liability for interest and penalties of $2.8 million, $2.1 million and $2.6 million, respectively. Although unrecognized tax benefits for individual tax positions may increase or decrease during 2015, the Company expects a reduction of $17.0 million of unrecognized tax benefits during the one-year period subsequent to December 31, 2014, resulting from settlement or expiration of the statute of limitations.

The Company's United States federal income tax returns for tax years 2012 and beyond remain subject to examination by the Internal Revenue Service (“IRS"). The IRS concluded an examination of the O'Reilly consolidated 2011 federal income tax return in the second quarter of 2014. The statute of limitations for the Company's federal income tax returns for tax years 2010 and prior expired on September 15, 2014. The statute of limitations for the Company's U.S. federal income tax return for 2011 will expire on September 15, 2015, unless otherwise extended. The IRS is currently conducting an examination of the Company's consolidated returns for the tax year 2012 and 2013. The Company's state income tax returns remain subject to examination by various state authorities for tax years ranging from 2003 through 2013.