Income Taxes

12 Months Ended

Dec. 31, 2019

Income Taxes

Income taxes

NOTE 15 – INCOME TAXES

The following table identifies components of income from continuing operations before income taxes  included in “Income before income taxes” on the accompanying Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017 (in thousands):

	For the Year Ended
	December 31,
	2019		2018		2017
Domestic	$	1,790,207	$	1,694,087	$	1,637,804
International		122		—		—
Income before income taxes	$	1,790,329	$	1,694,087	$	1,637,804

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, 2019, 2018 and 2017 (in thousands):

	For the Year Ended
	December 31,
	2019		2018		2017
Current:
Federal income tax expense	$	315,061	$	289,953	$	467,577
State income tax expense		62,795		59,487		41,183
International income tax expense		273		—		—
Total current		378,129		349,440		508,760
Deferred:
Federal income tax expense (benefit)		19,367		16,309		(13,053)
State income tax expense		2,027		3,851		8,293
International income tax benefit		(236)		—		—
Total deferred		21,158		20,160		(4,760)
Net income tax expense	$	399,287	$	369,600	$	504,000

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, 2019, 2018 and 2017 (in thousands):

	For the Year Ended
	December 31,
	2019		2018		2017
Federal income taxes at statutory rate	$	375,942	$	355,758	$	573,231
State income taxes, net of federal tax benefit		54,739		56,345		39,062
Excess tax benefit from share-based compensation		(25,992)		(34,703)		(48,688)
Revaluation of deferred tax liability		—		(1,262)		(53,240)
Other items, net		(5,402)		(6,538)		(6,365)
Total provision for income taxes	$	399,287	$	369,600	$	504,000

The U.S. Tax Cuts and Jobs Act, enacted in December 2017 (the “Tax Act”), significantly reduced the federal corporate income tax rate for tax years beginning in 2018 and required the Company to revalue its deferred income tax liabilities.  The Company recorded a one-time tax benefit of $53.2 million in “Provision for income taxes” on the accompanying Consolidated Statements of Income for the year ended December 31, 2017, to reflect the reduced federal corporate income tax rate in the tax years the deferred tax differences are expected to reverse.  This provisional tax benefit from the revaluation of the Company’s deferred income tax liabilities was recorded based on the Company’s initial evaluation of the impact of the Tax Act.  During the year ended December 31, 2018, the Company completed its evaluation of the impact of the Tax Act and recorded an additional $1.3 million of tax benefit, finalizing the revaluation

of its deferred income tax liabilities due to the Tax Act, which was recorded in “Provision for income taxes” on the accompanying Consolidated Statements of Income for the year ended December 31, 2018.

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, 2019 and 2018 (in thousands):

	December 31,
	2019		2018
Deferred tax assets:
Allowance for doubtful accounts	$	2,008	$	1,944
Tax credits		3,417		5,606
Other accruals		97,189		105,894
Operating lease liability		494,093		—
Other		15,732		14,770
Total deferred tax assets		612,439		128,214
Deferred tax liabilities:
Inventories		65,346		62,846
Property and equipment		162,613		140,019
Operating lease asset		479,821		—
Other		37,939		30,915
Total deferred tax liabilities		745,719		233,780
Net deferred tax liabilities	$	(133,280)	$	(105,566)

As of December 31, 2019, the Company had tax credit carryforwards available for state tax purposes, net of federal impact, in the amount of $3.4 million, which 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, 2019, 2018 and 2017 (in thousands):

	2019		2018		2017
Unrealized tax benefit, balance at January 1,	$	33,766	$	35,388	$	34,798
Additions based on tax positions related to the current year		4,627		3,550		6,299
Additions based on tax positions related to prior years		—		4,255		—
Payments related to items settled with taxing authorities		(443)		(2,792)		—
Reductions due to the lapse of statute of limitations and settlements		(6,475)		(6,635)		(5,709)
Unrealized tax benefit, balance at December 31,	$	31,475	$	33,766	$	35,388

For the years ended December 31, 2019, 2018 and 2017, the Company recorded a reserve for unrecognized tax benefits, including interest and penalties, in the amounts of $36.6 million, $38.9 million and $40.9 million, respectively.  All of the unrecognized tax benefits recorded as of December 31, 2019, 2018 and 2017, respectively, would affect the Company’s effective tax rate if recognized, generally net of the federal tax effect of approximately $7.7 million.  The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.  As of December 31, 2019, 2018 and 2017, the Company had accrued approximately $5.1 million, $5.1 million and $5.5 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, 2019, 2018 and 2017, the Company recorded tax expense related to an increase in its liability for interest and penalties in the amounts of $2.7 million, $2.3 million and $2.0 million, respectively.  Although unrecognized tax benefits for individual tax positions may increase or decrease during 2020, the Company expects a reduction of $7.8 million of unrecognized tax benefits during the one-year period subsequent to December 31, 2019, resulting from settlement or expiration of the statute of limitations.

The Company’s United States federal income tax returns for tax years 2016 and beyond remain subject to examination by the Internal Revenue Service (“IRS”).  The IRS concluded an examination of the O’Reilly consolidated 2014, 2015 and 2016 federal income tax

returns in the third quarter of 2018.  The Company’s state income tax returns remain subject to examination by various state authorities for tax years ranging from 2008 through 2018.