NOTE 12 – 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 net deferred tax liabilities as presented on the accompanying Consolidated Balance Sheets as of December 31, 2015 and 2014 (in thousands):



	December 31,
	2015			2014
Deferred tax assets:
Allowance for doubtful accounts	$	2,492		$	2,357
Tax credits	11,747			14,725
Other accruals	151,635			131,436
Net operating losses	337			746
Other	19,051			16,468
Total deferred tax assets	185,262			165,732

Deferred tax liabilities:
Inventories	82,313			90,333
Property and equipment	141,930			139,604
Other	40,791			38,217
Total deferred tax liabilities	265,034			268,154

Net deferred tax liabilities	$	(79,772	)	$	(102,422	)

Provision for income taxes:

The following tables reconcile the “Provision for income taxes" included in the accompanying Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013 (in thousands):



	For the Year Ended December 31, 2015
	Current		Deferred			Total
Federal income tax expense (benefit)	$	504,558	$	(21,973	)	$	482,585
State income tax expense (benefit)	47,242		(677		)	46,565
Net income tax expense (benefit)	$	551,800	$	(22,650	)	$	529,150



	For the Year Ended December 31, 2014
	Current		Deferred			Total
Federal income tax expense	$	399,271	$	5,987		$	405,258
State income tax expense (benefit)	43,242		(4,500		)	38,742
Net income tax expense	$	442,513	$	1,487		$	444,000



	For the Year Ended December 31, 2013
	Current		Deferred		Total
Federal income tax expense	$	348,303	$	847	$	349,150
State income tax expense	38,428		1,072		39,500
Net income tax expense	$	386,731	$	1,919	$	388,650

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, 2015, 2014 and 2013 (in thousands):



	For the Year Ended December 31,
	2015			2014			2013
Federal income taxes at statutory rate	$	511,128		$	427,764		$	370,632
State income taxes, net of federal tax benefit	32,137			25,320			26,802
Other items, net	(14,115		)	(9,084		)	(8,784		)
Total provision for income taxes	$	529,150		$	444,000		$	388,650

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, 2015, the Company had tax credit carryforwards available for state tax purposes, net of federal impact, in the amount of $11.7 million. As of December 31, 2015, the Company had net operating loss carryforwards available for state purposes in the amount of $12.5 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, 2015, 2014 and 2013 (in thousands):



	2015			2014			2013
Unrealized tax benefit, balance at January 1,	$	49,598		$	50,459		$	51,004
Additions based on tax positions related to the current year	5,405			4,665			7,046
Additions based on tax positions related to prior years	995			—			—
Payments related to items settled with taxing authorities	(4,012		)	(300		)	(1,056		)
Reductions due to the lapse of statute of limitations and settlements	(15,058		)	(5,226		)	(6,535		)
Unrealized tax benefit, balance at December 31,	$	36,928		$	49,598		$	50,459

For the years ended December 31, 2015, 2014 and 2013, the Company recorded a reserve for unrecognized tax benefits, including interest and penalties, in the amounts of $43.6 million, $58.4 million and $58.6 million, respectively. All of the unrecognized tax benefits recorded as of December 31, 2015, 2014 and 2013, respectively, would affect the Company's effective tax rate if recognized, generally net of the federal tax effect of approximately $14.9 million. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of the years ended December 31, 2015, 2014 and 2013, the Company had accrued approximately $6.7 million, $8.8 million and $8.1 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, 2015, 2014 and 2013, the Company recorded tax expense related to an increase in its liability for interest and penalties in the amounts of $2.8 million, $2.8 million and $2.1 million, respectively. Although unrecognized tax benefits for individual tax positions may increase or decrease during 2016, the Company expects a reduction of $10.2 million of unrecognized tax benefits during the one-year period subsequent to December 31, 2015, resulting from settlement or expiration of the statute of limitations.

The Company's United States federal income tax returns for tax years 2014 and beyond remain subject to examination by the Internal Revenue Service ("IRS"). The IRS concluded an examination of the O'Reilly consolidated 2012 and 2013 federal income tax returns in the second quarter of 2015. The statute of limitations for the Company's federal income tax returns for tax years 2011 and prior expired on September 15, 2015. The statute of limitations for the Company's U.S. federal income tax return for 2012 will expire on September 15, 2016, unless otherwise extended. The IRS is currently conducting an examination of the Company's consolidated returns. The Company's state income tax returns remain subject to examination by various state authorities for tax years ranging from 2004 through 2014.