INCOME TAXES

Earnings from continuing operations before income tax expense was as follows for fiscal years 2015, 2014 and 2013:



	2015			2014		2013
United States	$	7,346		$	2,939	$	14,144
Outside the United States	(52		)	1,065		1,165
Earnings from continuing operations before income tax expense	$	7,294		$	4,004	$	15,309

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



	2015			2014			2013
Current:
Federal	$	1,754		$	(1,125	)	$	3,536
State	(316		)	31			195
Foreign	368			296			412
Current taxes (benefit)	1,806			(798		)	4,143
Deferred:
Federal	672			1,200			194
State	117			511			2,937
Foreign	179			1,143			198
Deferred taxes	968			2,854			3,329
Income tax expense	$	2,774		$	2,056		$	7,472

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



	2015		2014		2013
Statutory federal tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	4.5		5.6		4.4
Non-deductible permanent items	(0.5	)	1.4		(0.3	)
Change in valuation allowance	0.7		47.5		9.3
Uncertain tax positions	(1.6	)	(23.7	)	(0.5	)
Impact of foreign operations	0.9		(3.7	)	2.6
Prior period true-up adjustments	(1.0	)	(10.2	)	(2.3	)
Other	—		(0.6	)	0.6
Effective tax rate	38.0	%	51.3	%	48.8	%

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):



	2015			2014
Assets:
Accrued payroll and benefits	$	6,431		$	6,652
Capitalized inventory costs	139			118
Accrued expenses	3,145			3,068
Intangible assets	1,333			2,005
Net operating losses and tax credits	8,210			8,755
Deferred rent	4,844			4,852
Vendor allowances	2,453			2,344
Other	2,583			2,592
Total deferred income tax assets	29,138			30,386
Valuation allowance	(6,209		)	(6,807		)
Deferred income taxes, net of valuation allowance	22,929			23,579
Liabilities:
Prepaid expenses	(2,007		)	(2,474		)
Property and equipment	(14,257		)	(12,579		)
Federal effect of state and foreign deferred items	(1,512		)	(1,672		)
Other liabilities	(1,101		)	(1,024		)
Total deferred tax liabilities	(18,877		)	(17,749		)
Net deferred income tax assets	$	4,052		$	5,830

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which amends the existing guidance to require presentation of deferred tax assets and liabilities as noncurrent within a classified statement of financial position. The Company adopted this guidance on a prospective basis on January 2, 2016. No prior reporting periods were retrospectively adjusted.

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



	2015			2014
Current deferred income tax assets	$	—		$	5,585
Non-current deferred income tax assets	4,321			3,993
Non-current deferred income tax liabilities	(269		)	(3,748		)
Net deferred tax assets	$	4,052		$	5,830

At year-end 2015, the Company had $12.7 million of state income tax net loss carryforwards that expire between 2019 and 2034. The Company also had foreign net loss carryforwards in the amount of $3.1 million that expire between 2028 and 2035. In addition, the Company had California state Enterprise Zone credits of $5.3 million available for use in the tax years 2016 through 2024, and South Carolina tax credits of $0.9 million, which are available for use for tax years 2016 through 2018. These carryforwards are available to offset future taxable income.

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. Sources of evidence include, among other things, a history of pretax earnings or losses, expectations of future results, tax planning opportunities, and appropriate tax law.

Since the Company has a significant net operating loss carryforward in South Carolina, realization of a benefit from state tax credits is not more likely than not. Therefore a full valuation allowance remains in place against these credits until such time as the Company determines it is able to either benefit from the credits or they expire. The Company has also determined that it is not more likely than not that the Company will be able to realize the tax benefit for a portion of the California Enterprise Zone credits before they expire in 2024. Therefore, the Company maintains a valuation allowance against these state tax credits in the amount of $3.9 million. This valuation allowance will also remain in place until such time as the Company determines it is able to either benefit from the credits, or they expire.

Due to the Company's 2014 decision to exit the Canadian market and close all Canadian stores as the leases expire, a valuation allowance was established in 2014 for the majority of the Canadian deferred tax assets. In 2015, the Company determined that it would close all Canadian stores as of the end of 2017; therefore, the Canadian valuation allowance was increased to $0.9 million.

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



	2015			2014		2013
Valuation allowance—beginning of year	$	6,807		$	3,884	$	1,692
Valuation allowance increases	143			2,923		2,552
Valuation allowance reductions	(741		)	—		(360		)
Valuation allowance—end of year	$	6,209		$	6,807	$	3,884

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 Company has substantially settled all federal income tax matters through 2011, state and local jurisdictions through 2010 and foreign jurisdictions through 2007. The Company could be subject to audits in these jurisdictions for the subsequent years.

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



	2015			2014			2013
Unrecognized tax benefit—beginning of year	$	1,093		$	2,476		$	2,553
Additions based on tax positions related to the current year	50			167			32
Additions for tax positions of prior years	31			218			22
Reductions for tax positions of prior years	—			—			—
Settlements	(22		)	(1,463		)	(65		)
Lapse of statutes of limitations	(290		)	(305		)	(66		)
Unrecognized tax benefit—end of year	$	862		$	1,093		$	2,476

Included in the balance of unrecognized tax benefits at January 2, 2016 and January 3, 2015 are $0.4 million and $0.5 million, respectively, of tax benefits that, if recognized, would affect the Company’s effective tax rate.

During 2015, the Company released $0.3 million of uncertain tax positions related to state liabilities which expired under statute of limitations.

The Company recognizes accrued interest and penalties (not included in the table above) as a component of income tax expense. For each of the years ended January 2, 2016 and January 3, 2015, the Company recognized a benefit of less than $0.1 million in accrued interest. For each of the years ended January 2, 2016 and January 3, 2015, the Company recognized less than $0.1 million in penalties. The accrued interest balance at January 2, 2016 and January 3, 2015 was $0.3 million and $0.4 million, respectively, and accrued penalties balance at the end of both years was $0.1 million.