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 included in “Deferred income taxes” on the accompanying Consolidated Balance Sheets as of December 31, 2016 and 2015 (in thousands):



	December 31,
	2016			2015
Deferred tax assets:
Allowance for doubtful accounts	$	2,686		$	2,492
Tax credits	9,363			11,747
Other accruals	153,955			151,635
Net operating losses	304			337
Other	19,870			19,051
Total deferred tax assets	186,178			185,262

Deferred tax liabilities:
Inventories	76,694			82,313
Property and equipment	157,228			141,930
Other	42,422			40,791
Total deferred tax liabilities	276,344			265,034

Net deferred tax liabilities	$	(90,166	)	$	(79,772	)

Provision for income taxes:

The following tables reconcile the amounts included in “Provision for income taxes” on the accompanying Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014 (in thousands):



	For the Year Ended December 31, 2016
	Current		Deferred		Total
Federal income tax expense	$	540,090	$	7,558	$	547,648
State income tax expense	49,016		2,836		51,852
Net income tax expense	$	589,106	$	10,394	$	599,500



	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

The following table outlines the reconciliation of the “Provision for income taxes” amounts included on the accompanying Consolidated Statements of Income to the amounts computed at the federal statutory rate for the years ended December 31, 2016, 2015 and 2014 (in thousands):



	For the Year Ended December 31,
	2016			2015			2014
Federal income taxes at statutory rate	$	573,020		$	511,128		$	427,764
State income taxes, net of federal tax benefit	35,285			32,137			25,320
Other items, net	(8,805		)	(14,115		)	(9,084		)
Total provision for income taxes	$	599,500		$	529,150		$	444,000

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 Balance Sheets.

As of December 31, 2016, the Company had tax credit carryforwards available for state tax purposes, net of federal impact, in the amount of $9.4 million. As of December 31, 2016, the Company had net operating loss carryforwards available for state purposes in the amount of $9.8 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.

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, 2016, 2015 and 2014 (in thousands):



	2016			2015			2014
Unrealized tax benefit, balance at January 1,	$	36,928		$	49,598		$	50,459
Additions based on tax positions related to the current year	6,116			5,405			4,665
Additions based on tax positions related to prior years	—			995			—
Payments related to items settled with taxing authorities	(195		)	(4,012		)	(300		)
Reductions due to the lapse of statute of limitations and settlements	(8,051		)	(15,058		)	(5,226		)
Unrealized tax benefit, balance at December 31,	$	34,798		$	36,928		$	49,598

For the years ended December 31, 2016, 2015 and 2014, the Company recorded a reserve for unrecognized tax benefits, including interest and penalties, in the amounts of $40.6 million, $43.6 million and $58.4 million, respectively. All of the unrecognized tax benefits recorded as of December 31, 2016, 2015 and 2014, respectively, would affect the Company’s effective tax rate if recognized, generally net of the federal tax effect of approximately $13.8 million. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2016, 2015 and 2014, the Company had accrued approximately $5.8 million, $6.7 million and $8.8 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, 2016, 2015 and 2014, the Company recorded tax expense related to an increase in its liability for interest and penalties in the amounts of $2.4 million, $2.8 million and $2.8 million, respectively. Although unrecognized tax benefits for individual tax positions may increase or decrease during 2017, the Company expects a reduction of $7.4 million of unrecognized tax benefits during the one-year period subsequent to December 31, 2016, resulting from settlement or expiration of the statute of limitations.

The Company’s United States federal income tax returns for tax years 2015 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 2012 and prior expired on September 15, 2016. The statute of limitations for the Company’s U.S. federal income tax return for 2013 will expire on September 15, 2017, unless otherwise extended. The IRS is currently conducting an examination of the Company’s consolidated returns for tax years 2014 and 2015. The Company’s state income tax returns remain subject to examination by various state authorities for tax years ranging from 2005 through 2015.