11 — Income Taxes

Income before taxes consisted of the following:



	Year ended July 31,
(In thousands)	2015		2014		2013
U.S.	$	286,169	$	218,450	$	236,118
Non-U.S.	45,900		51,585		40,754
Total income before taxes	$	332,069	$	270,035	$	276,872

Income tax expense (benefit) from continuing operations consisted of the following:



	Year ended July 31,
(In thousands)	2015			2014			2013
Federal:
Current	$	95,468		$	90,207		$	87,484
Deferred	5,841			(9,589		)	(1,073		)
	101,309			80,618			86,411
State:
Current	1,160			1,912			3,871
Deferred	(86		)	(279		)	66
	1,074			1,633			3,937
Foreign:
Current	11,062			10,077			9,090
Deferred	(1,159		)	(980		)	(2,591		)
	9,903			9,097			6,499
Income tax expense	$	112,286		$	91,348		$	96,847

A reconciliation of the expected U.S. statutory tax rate to the actual effective income tax rate is as follows:



	Year ended July 31,
(In thousands)	2015		2014		2013
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	1.1		1.1		1.1
Foreign rate differential	(1.9	)	(2.1	)	(1.8	)
Compensation and fringe benefits	0.1		0.1		0.1
Other differences	(0.5	)	(0.3	)	0.6
Effective tax rate	33.8	%	33.8	%	35.0	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) are presented below:



	July 31,
(In thousands)	2015			2014
Deferred tax assets:
Allowance for doubtful accounts	$	992		$	1,209
Accrued compensation and benefits	40,391			36,780
State taxes	577			416
Accrued other	3,967			2,962
Deferred revenue	798			1,301
Property and equipment	16,957			18,627
Losses carried forward	4,362			4,312
Federal tax benefit	7,832			10,457
Total gross deferred tax assets	75,876			76,064
Less valuation allowance	(2,650		)	(2,210		)
Net deferred tax assets	73,226			73,854
Deferred tax liabilities:
Vehicle pooling costs	(7,749		)	(7,420		)
Prepaid insurance	(890		)	(1,950		)
Intangibles and goodwill	(37,673		)	(33,332		)
Total gross deferred tax liabilities	(46,312		)	(42,702		)
Net deferred tax assets	$	26,914		$	31,152

The above net deferred tax assets and liabilities have been reflected in the accompanying consolidated balance sheets as follows:



	July 31,
(In thousands)	2015			2014
North America current assets	$	3,396		$	1,803
North America non-current assets	28,856			36,639
Foreign non-current liabilities	(5,338		)	(7,290		)
Net deferred tax assets	$	26,914		$	31,152

The Company’s ability to realize deferred tax assets is dependent on its ability to generate future taxable income. Accordingly, the Company has established a valuation allowance in taxable jurisdictions where the utilization of the tax assets is uncertain. Additional timing differences or future tax losses may occur which could warrant a need for establishing additional valuation allowances against certain deferred tax assets. The valuation allowance for the years ended July 31, 2015 and 2014 was $2.7 million and $2.2 million, respectively.

As of July 31, 2015 and 2014, if recognized, the portion of liabilities for unrecognized tax benefits that would favorably affect the Company’s effective tax rate was $17.4 million and $18.4 million, respectively. It is possible that the amount of unrecognized tax benefits will change in the next twelve months, due to tax legislation updates or future audit outcomes; however an estimate of the range of the possible change cannot be made at this time.

The following table summarizes the activities related to the Company’s unrecognized tax benefits:



	July 31,
(In thousands)	2015			2014			2013
Beginning balance	$	18,419		$	17,178		$	16,946
Increases related to current year tax position	3,441			1,805			1,844
Prior year tax positions:
Prior year increase	599			2,997			1,474
Prior year decrease	—			(523		)	—
Cash settlement	(225		)	—			—
Lapse of statute of limitations	(4,806		)	(3,038		)	(3,086		)
Ending balance	$	17,428		$	18,419		$	17,178

It is the Company’s continuing practice to recognize interest and penalties related to income tax matters in income tax expense. As of July 31, 2015, 2014 and 2013, the Company had accrued interest and penalties related to unrecognized tax benefits of $3.8 million, $5.4 million and $5.9 million, respectively.

The Company is currently under audit by certain taxing authorities in the U.S. for fiscal years 2011 to 2014. The Company is no longer subject to U.S. federal and state income tax examination for fiscal years prior to 2012, except the jurisdictions currently under audit. At this time, the Company does not believe that the outcome of any examination will have a material impact on the Company’s consolidated results of operations and financial position.

In the years ended July 31, 2015, 2014 and 2013, the Company recognized a tax benefit of $3.0 million, $2.3 million and $6.1 million, respectively, upon the exercise of certain stock options, which was reflected in stockholders’ equity.

The Company has not provided for U.S. federal income and foreign withholding taxes on its $134.0 million foreign subsidiaries’ undistributed earnings as of July 31, 2015, because the Company intends to reinvest such earnings indefinitely in its foreign operations. Specifically, the earnings will be dedicated to the following areas outside the U.S. (i) funding operating and capital spending needs in existing foreign markets; (ii) funding merger and acquisition deals both in existing and new foreign markets; and (iii) other investments to help expand the Company's footprint in foreign emerging markets. The Company does not anticipate the need for any foreign cash in the U.S. operations. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes (subject to an adjustment for foreign tax credits). It is not practical to determine the income tax liability that might be incurred if these earnings were to be distributed.