INCOME TAXES

Following is a summary of the (benefit) provision for income taxes (in thousands):



	2011			2010			2009
Currently payable:
Federal	$	4,112		$	1,379		$	(2,828	)
State	879			341			463
Foreign	(136		)	125			108
	4,855			1,845			(2,257		)
Deferred:
Federal	(3,161		)	(996		)	(371		)
State	(7,597		)	—			—
Foreign	(2,538		)	171			(209		)
	(13,296		)	(825		)	(580		)
Income tax (benefit) expense	$	(8,441	)	$	1,020		$	(2,837	)

Following is a summary of the difference between the effective income tax rate and the statutory federal income tax rate:



	2011		2010		2009
Statutory federal tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	5.2		1.6		7.2
Non-deductible permanent items	0.7		0.6		0.3
Valuation allowance reversal	(73.9	)	—		(42.1	)
Valuation allowance on net deferred tax assets	—		(33.4	)	(40.3	)
Uncertain tax positions	(4.7	)	1.1		11.7
Other	(2.1	)	2.3		(1.5	)
Effective tax rate	(39.8	)%	7.2	%	(29.7	)%

Deferred tax assets and liabilities are recognized for the expected tax consequences of the difference between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. Following is a summary of the tax effects of temporary differences that give rise to significant components of deferred tax assets and liabilities (in thousands):



	2011			2010
Current:
Accrued expenses	$	4,993		$	5,252
Deferred compensation costs	1,860			1,873
Prepaid expenses	(1,487		)	(1,551		)
Capitalized inventory costs	1,048			999
Federal effect of state and foreign deferred items	(1,414		)	(383		)
Net operating loss carryforwards	1,597			—
Change in tax accounting method	(825		)	(829		)
Other	1,661			1,756
Total current	7,433			7,117
Non-current:
Deferred rent	2,408			2,001
Fixed assets	(4,869		)	(3,487		)
Intangible assets	4,012			4,691
Charitable contribution carryforward	27			504
Net operating loss carryforwards	1,517			2,961
State tax credits	5,120			5,302
Federal effect of state and foreign deferred items	(2,072		)	—
Share-based compensation	2,162			2,145
Change in tax accounting method	(2,447		)	(1,657		)
Other	2,551			(1,298		)
Total non-current	8,409			11,162
Valuation allowance	(1,692		)	(16,874		)
Total deferred tax assets	$	14,150		$	1,405

Net deferred tax assets were in the accompanying consolidated balance sheet, as follows (in thousands):



	2011			2010
Current deferred income taxes	$	7,118		$	2,997
Non-current deferred income tax assets	7,800			—
Non-current (included in Deferred rent, and other)	(768		)	(1,592		)
Total deferred tax assets	$	14,150		$	1,405

In evaluating the Company's ability to recover its deferred tax assets, it considers all available positive and negative evidence, including past operating results, the existence of cumulative losses in past fiscal years and the Company's forecast of future taxable income in the jurisdictions in which it has operations. A valuation allowance must be provided if, based on all available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on historical profits and expectations of future results, the Company determined that it was more likely than not that it would have sufficient future taxable income to utilize the majority of its deferred tax assets and that there was sufficient positive evidence to support the release of the valuation allowance against all but a portion of its U.S. federal and state deferred tax assets in the second quarter of fiscal 2011. The Company, therefore, released $15.7 million of its valuation allowance in that quarter. The Company continues to maintain a valuation allowance in the amount of $1.7 million against its South Carolina state tax credits until sufficient positive evidence exists to support the reversal of this valuation allowance. In 2010 and 2009, the Company maintained a full valuation allowance against all federal, state and Canadian deferred tax assets in the amounts of $16.9 million and $23.2 million, respectively.

At year-end 2011, the Company had no federal income tax net loss carryforwards and $29.4 million of state income tax net loss carryforwards that expire between 2012 and 2029. In addition, the Company had California state enterprise zone credits of $3.4 million that may be used for an indefinite period of time and South Carolina tax credits of $1.7 million that expire between 2013 and 2017. These carryforwards are available to offset future state taxable income. At year-end 2011, the Company had foreign net loss carryforwards of $1.2 million that expire between 2012 and 2029.

Following is a summary of the change in valuation allowance (in thousands):



	2011			2010			2009
Valuation allowance—beginning of year	$	16,874		$	23,195		$	33,900
Valuation allowance reductions	(15,182		)	(6,321		)	(10,705		)
Valuation allowance—end of year	$	1,692		$	16,874		$	23,195

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various states, Puerto Rico and Canada. The federal statute of limitations for examination by authorities is open for the years 2008 through 2010. With few exceptions, the statute of limitations for state jurisdictions is open for the years 2007 through 2010. The statute of limitations for income tax return examinations is six years for Puerto Rico and seven years for Canada.

Unrecognized tax benefits activity for the fiscal years ending is summarized below (in thousands):



	2011		2010		2009
Unrecognized tax benefit—beginning of year	3,268		3,254		2,293
Additions based on tax positions related to the current year	—		—		57
Additions for tax positions of prior years	69		49		990
Reductions for tax positions of prior years	(218	)	(4	)	(27	)
Settlements	—		(22	)	(46	)
Lapse of statutes of limitations	(823	)	(9	)	(13	)
Unrecognized tax benefit—end of year	2,296		3,268		3,254

Included in the balance of unrecognized tax benefits at December 31, 2011 and January 1, 2011 are $2.0 million and $2.9 million, respectively, of tax benefits that, if recognized, would affect the Company’s effective tax rate.

In 2011, additions to uncertain tax positions related to prior years amounted to $0.1 million. These positions related to reserves for store closures. In 2010, additions to uncertain tax positions related to prior years amounted to less than $0.1 million.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision (benefit) for income taxes. During fiscal year 2011, the Company recognized a benefit for interest and penalties of $0.2 million, while in 2010, interest and penalties expense was $0.2 million. At December 31, 2011, the Company had an accrued interest balance of $0.3 million and penalties totaling less than $0.1 million. At January 1, 2011, the Company had an accrued interest balance of $0.4 million and penalties totaling $0.1 million. The Company is unable to make a determination as to whether or not recognition of any unrecognized tax benefits will occur within the next 12 months nor can we make an estimate of the range of any potential changes to the unrecognized tax benefits.