INCOME TAXES

12 Months Ended

Dec. 31, 2021

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, 2021, 2020 and 2019 (in thousands):

	For the Year Ended
	December 31,
	2021		2020		2019
Domestic	$	2,770,485	$	2,260,385	$	1,790,207
International		11,429		6,020		122
Income before income taxes	$	2,781,914	$	2,266,405	$	1,790,329

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, 2021, 2020 and 2019 (in thousands):

	For the Year Ended
	December 31,
	2021		2020		2019
Current:
Federal income tax expense	$	485,988	$	401,331	$	315,061
State income tax expense		104,837		97,085		62,795
International income tax expense		6,021		3,306		273
Total current		596,846		501,722		378,129
Deferred:
Federal income tax expense		20,543		16,749		19,367
State income tax (benefit) expense		2,432		(2,865)		2,027
International income tax benefit		(2,592)		(1,503)		(236)
Total deferred		20,383		12,381		21,158
Net income tax expense	$	617,229	$	514,103	$	399,287

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, 2021, 2020 and 2019 (in thousands):

	For the Year Ended
	December 31,
	2021		2020		2019
Federal income taxes at statutory rate	$	584,202	$	474,681	$	375,942
State income taxes, net of federal tax benefit		90,360		76,810		54,739
Excess tax benefit from share-based compensation		(35,202)		(16,918)		(25,992)
Benefit from investment in renewable energy tax credits		(18,592)		(17,904)		(875)
Other items, net		(3,539)		(2,566)		(4,527)
Total provision for income taxes	$	617,229	$	514,103	$	399,287

The Company has invested in tax credit equity investments for the purposes of receiving renewable energy tax credits.  During the years ended December 31, 2021, 2020 and 2019, the Company recognized investment tax credits in the amount of $177.1 million, $170.5 million and $8.5 million, respectively, all of which were realized through reductions in cash income taxes paid and were reflected as a component of the change in Income taxes payable on the accompanying Consolidated Statements of Cash Flows for the respective years.  See Note 1 for further information concerning the Company’s investment in tax credit funds.

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, 2021 and 2020 (in thousands):

	December 31,
	2021		2020
Deferred tax assets:
Allowance for doubtful accounts	$	1,538	$	1,574
Tax credits		284		1,444
Other accruals		142,714		143,387
Operating lease liability		513,492		513,134
Other		16,117		16,594
Total deferred tax assets		674,145		676,133
Deferred tax liabilities:
Inventories		64,562		79,326
Property and equipment		212,649		194,000
Operating lease asset		496,996		498,042
Other		75,150		60,664
Total deferred tax liabilities		849,357		832,032
Net deferred tax liabilities	$	(175,212)	$	(155,899)

As of December 31, 2021, the Company had tax credit carryforwards available for state tax purposes, net of federal impact, in the amount of $0.3 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, 2021, 2020 and 2019 (in thousands):

	2021		2020		2019
Unrealized tax benefit, balance at January 1,	$	30,967	$	31,475	$	33,766
Additions based on tax positions related to the current year		5,446		4,795		4,627
Payments related to items settled with taxing authorities		(2,570)		—		(443)
Reductions due to the lapse of statute of limitations and settlements		(6,996)		(5,303)		(6,475)
Unrealized tax benefit, balance at December 31,	$	26,847	$	30,967	$	31,475

For the years ended December 31, 2021, 2020 and 2019, the Company recorded a reserve for unrecognized tax benefits, including interest and penalties, in the amounts of $30.7 million, $35.9 million and $36.6 million, respectively.  The timing related to the ultimate resolution or settlement of these uncertain tax positions cannot be determined.  All of the unrecognized tax benefits recorded as of December 31, 2021, 2020 and 2019, respectively, would affect the Company’s effective tax rate if recognized, generally net of the federal tax effect of approximately $6.4 million.  The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.  As of December 31, 2021, 2020 and 2019, the Company had accrued approximately $3.8 million, $5.0 million and $5.1 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, 2021, 2020 and 2019, the Company recorded tax expense related to an increase in its liability for interest and penalties in the amounts of $1.6 million, $2.2 million and $2.7 million, respectively.  Although unrecognized tax benefits for individual tax positions may increase or decrease during 2022, the Company expects a reduction of $5.5 million of unrecognized tax benefits during the one-year period subsequent to December 31, 2021, resulting from settlement or expiration of the statute of limitations.

The Company’s United States federal income tax returns for tax years 2018 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 2010 through 2020.