Note 7. Income Taxes

Earnings before income taxes were derived from the following sources:



	2013		2012	2011
Domestic	$	697,062	649,098	545,527
Foreign	16,406		25,057	29,554
	$	713,468	674,155	575,081

Components of income tax expense (benefit) are as follows:



2013 :	Current		Deferred		Total
Federal	$	220,588	8,547		229,135
State	29,073		527		29,600
Foreign	7,487		(1,390	)	6,097
	$	257,148	7,684		264,832



2012 :	Current		Deferred		Total
Federal	$	202,095	14,742		216,837
State	27,586		981		28,567
Foreign	8,476		(261	)	8,215
	$	238,157	15,462		253,619



2011 :	Current		Deferred		Total
Federal	$	164,125	17,343		181,468
State	28,669		(244	)	28,425
Foreign	8,683		(1,424	)	7,259
	$	201,477	15,675		217,152

Income tax expense in the accompanying consolidated financial statements differs from the expected expense as follows:



	2013			2012		2011
Federal income tax expense at the ‘expected’ rate of 35%	$	249,714		235,954		201,278
Increase (decrease) attributed to:
State income taxes, net of federal benefit	17,150			19,565		18,210
State tax matters	(467		)	884		737
Other, net	(1,565		)	(2,784	)	(3,073	)
Total income tax expense	$	264,832		253,619		217,152

The tax effects of temporary differences that give rise to deferred income tax assets and liabilities at year end are as follows:



	2013			2012
Deferred income tax assets (liabilities):
Inventory costing and valuation methods	$	3,834		4,045
Allowance for doubtful accounts receivable	3,586			2,618
Insurance claims payable	10,594			7,825
Promotions payable	1,240			945
Accrued legal reserves	309			207
Stock-based compensation	5,974			4,715
Federal and state benefit of uncertain tax positions	1,158			1,871
Foreign net operating loss and credit carryforwards	5,089			3,309
Foreign valuation allowances	(2,819		)	(2,090	)
Other, net	(1,482		)	(952	)
Total deferred income tax assets	27,483			22,493
Property and equipment	(72,490		)	(59,371	)
Total deferred income tax liabilities	(72,490		)	(59,371	)
Net deferred income tax assets (liabilities)	$	(45,007	)	(36,878	)

A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows:



	2013			2012
Balance at start of year:	$	5,331		4,653
Increase related to prior year tax positions	37			172
Decrease related to prior year tax positions	(1,695		)	(1,025	)
Increase related to current year tax positions	1,058			2,170
Decrease related to statute of limitation lapses	—			—
Settlements	(1,449		)	(639	)
Balance at end of year:	$	3,282		5,331

Included in the liability for unrecognized tax benefits is an immaterial amount for interest and penalties, both of which we classify as a component of income tax expense. The amount of unrecognized tax benefits that would favorably impact the effective tax rate, if recognized, is not material.

Fastenal Company or one of its subsidiaries files income tax returns in the United States federal jurisdiction, all states, and various foreign jurisdictions. With limited exceptions, we are no longer subject to income tax examinations by taxing authorities for taxable years before 2010 in the case of United States federal and non-United States examinations and 2009 in the case of state and local examinations.

In general, it is our practice and intention to reinvest the earnings of our foreign subsidiaries into our foreign operations. As of December 31, 2013, we have not made a provision for United States income taxes or for additional foreign withholding taxes on approximately $85,000 of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. Generally, such amounts become subject to United States taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred income tax liabilities related to investments in these foreign subsidiaries.