INCOME TAXES

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



	2012			2011			2010
Currently payable:
Federal	$	7,097		$	4,112		$	1,379
State	802			879			341
Foreign	79			(136		)	125
Current taxes payable	7,978			4,855			1,845
Deferred:
Federal	615			(3,161		)	(996		)
State	(256		)	(7,597		)	—
Foreign	463			(2,538		)	171
Deferred taxes (benefit)	822			(13,296		)	(825		)
Income tax (benefit) expense	$	8,800		$	(8,441	)	$	1,020

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



	2012		2011		2010
Statutory federal tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	1.5		5.2		1.6
Non-deductible permanent items	1.6		0.7		0.6
Valuation allowance reversal	—		(73.9	)	—
Valuation allowance on net deferred tax assets	—		—		(33.4	)
Uncertain tax positions	1.2		(4.7	)	1.1
Other	(3.1	)	(2.1	)	2.3
Effective tax rate	36.2	%	(39.8	)%	7.2	%

Deferred tax assets and liabilities are recognized for the differences between the bases of the related assets and liabilities for financial reporting and income tax purposes, and are calculated 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):



	2012			2011
Current:
Accrued expenses	$	4,241		$	4,993
Deferred compensation costs	2,321			1,860
Prepaid expenses	(1,721		)	(1,487		)
Capitalized inventory costs	2,050			2,083
Other inventory discounts	(958		)	(1,035		)
Federal effect of state and foreign deferred items	(1,080		)	(1,414		)
Net operating loss carryforwards	964			1,597
Change in tax accounting method	(2,731		)	(825		)
Other	1,841			1,661
Total current	4,927			7,433
Non-current:
Deferred rent	3,755			2,408
Fixed assets	(4,983		)	(4,869		)
Intangible assets	3,391			4,012
Charitable contribution carryforward	25			27
Net operating loss carryforwards	933			1,517
State tax credits	6,105			5,120
Federal effect of state and foreign deferred items	(2,292		)	(2,072		)
Share-based compensation	1,389			2,162
Change in tax accounting method	(1,612		)	(2,447		)
Other	2,616			2,551
Total non-current	9,327			8,409
Valuation allowance	(1,692		)	(1,692		)
Total deferred tax assets	$	12,562		$	14,150

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



	2012			2011
Current deferred income tax assets	$	4,622		$	7,118
Non-current deferred income tax assets	8,392			7,800
Non-current deferred income tax liabilities	(452		)	(768		)
Net deferred tax assets	$	12,562		$	14,150

A valuation allowance must be provided if it is more likely than not that some portion or all of the deferred tax assets will not be realized, based upon consideration of all positive and negative evidence. In 2011, based on historical profits and expectations of future results, the Company released the majority of the valuation allowance against federal and state deferred tax assets. 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.

At year-end 2012, the Company had no federal income tax net loss carryforwards and $18.1 million of state income tax net loss carryforwards that expire between 2013 and 2029. The Company also had foreign net loss carryforwards of $3.5 million that expire between 2013 and 2030. In addition, the Company had California state enterprise zone credits of $4.3 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 taxable income.

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



	2012		2011			2010
Valuation allowance—beginning of year	$	1,692	$	16,874		$	23,195
Valuation allowance reductions	—		(15,182		)	(6,321		)
Valuation allowance—end of year	$	1,692	$	1,692		$	16,874

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various states and cities, and Puerto Rico and Canada. The statute of limitations for examination by federal authorities is open for the years 2009 through 2011. With few exceptions, the statute of limitations for state jurisdictions is open for the years 2008 through 2011. The statute of limitations for Puerto Rico is six years and for Canada is seven years.

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



	2012		2011		2010
Unrecognized tax benefit—beginning of year	2,296		3,268		3,254
Additions based on tax positions related to the current year	—		—		—
Additions for tax positions of prior years	327		69		49
Reductions for tax positions of prior years	(36	)	(218	)	(4	)
Settlements	—		—		(22	)
Lapse of statutes of limitations	(34	)	(823	)	(9	)
Unrecognized tax benefit—end of year	2,553		2,296		3,268

Included in the balance of unrecognized tax benefits at December 29, 2012 and December 31, 2011 are $2.2 million and $2.0 million, respectively, of tax benefits that, if recognized, would affect the Company’s effective tax rate.

The Company recognizes accrued interest and penalties (not included in the table above) as a component of income tax expense. For fiscal year 2012, the Company recognized expense for interest and penalties of less than $0.1 million, while in 2011, interest and penalties expense was $0.2 million. At both December 29, 2012 and December 31, 2011, the Company had an accrued interest balance of $0.3 million and penalties totaling less than $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.