Note 6. Income Taxes

Earnings before income taxes were derived from the following sources:



	2016		2015	2014
Domestic	$	739,383	785,916	757,896
Foreign	50,346		40,104	29,538
Earnings before income taxes	$	789,729	826,020	787,434

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



2016:	Current		Deferred	Total
Federal	$	223,837	23,149	246,986
State	28,231		1,236	29,467
Foreign	12,634		1,164	13,798
Income tax expense	$	264,702	25,549	290,251



2015:	Current		Deferred	Total
Federal	$	256,748	7,362	264,110
State	31,297		227	31,524
Foreign	13,677		348	14,025
Income tax expense	$	301,722	7,937	309,659



2014:	Current		Deferred		Total
Federal	$	250,527	1,919		252,446
State	30,768		256		31,024
Foreign	10,518		(704	)	9,814
Income tax expense	$	291,813	1,471		293,284

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



	2016			2015		2014
Federal income tax expense at the 'expected' rate of 35%	$	276,405		289,107		275,602
Increase (decrease) attributed to:
State income taxes, net of federal benefit	20,038			21,613		20,549
Other, net	(6,192		)	(1,061	)	(2,867	)
Total income tax expense	$	290,251		309,659		293,284
Effective income tax rate	36.8		%	37.5	%	37.2	%

The tax effects of temporary differences that give rise to deferred income tax assets and liabilities at year end consisted of the following:



	2016			2015
Deferred income tax assets (liabilities):
Inventory costing and valuation methods	$	4,788		4,556
Allowance for doubtful accounts	4,339			4,529
Insurance reserves	11,489			10,930
Promotions payable	1,651			1,738
Stock-based compensation	6,789			8,270
Federal and state benefit of uncertain tax positions	1,908			1,911
Foreign net operating loss and credit carryforwards	5,121			5,155
Foreign valuation allowances	(3,998		)	(3,406	)
Other, net	2,123			1,541
Total deferred income tax assets	34,210			35,224
Property and equipment	(114,838		)	(90,281	)
Total deferred income tax liabilities	(114,838		)	(90,281	)
Net deferred income tax liabilities	$	(80,628	)	(55,057	)

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



	2016			2015
Balance at beginning of year:	$	5,417		3,772
Increase related to prior year tax positions	194			704
Decrease related to prior year tax positions	—			(43	)
Increase related to current year tax positions	846			984
Decrease related to statute of limitation lapses	(1,050		)	—
Balance at end of year:	$	5,407		5,417

Included in the liability for gross 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 gross unrecognized tax benefits that would favorably impact the effective tax rate, if recognized, is not material. We do not anticipate significant changes in total unrecognized tax benefits during the next twelve months.

Fastenal files income tax returns in the United States federal jurisdiction, all states, and various local and foreign jurisdictions. With limited exceptions, we are no longer subject to income tax examinations by taxing authorities for taxable years before 2014 in the case of United States federal examinations, and 2012 in the case of foreign, state, and local examinations.

In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when the tax impact is zero or very minimal. As of December 31, 2016, we have not made a provision for United States income taxes or for additional foreign withholding taxes on $147,000 of unremitted earnings. Such earnings are considered to be indefinitely reinvested and, accordingly, no U.S. federal or state deferred income taxes have been provided on this amount or any additional excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries. Earnings is the most significant component of the basis difference which is indefinitely reinvested. 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.