(6)	INCOME TAXES

Income before provision for income taxes in 2011, 2012 and 2013 consists of the following (in thousands):


	2011		2012		2013
Domestic	$	164,996	$	180,270	$	217,468
Foreign		2,810		917		7,631

	$	167,806	$	181,187	$	225,099

The differences between the United States Federal statutory income tax provision (using the statutory rate of 35%) and the Company’s consolidated provision for income taxes for 2011, 2012 and 2013 are summarized as follows (in thousands):


	2011			2012			2013
Federal income tax provision based on the statutory rate	$	58,732		$	63,415		$	78,785
State and local income taxes, net of related Federal income taxes		5,418			5,179			5,880
Non-resident withholding and foreign income taxes		12,036			12,860			13,923
Foreign tax and other tax credits		(15,073	)		(14,678	)		(16,423	)
Non-deductible expenses, net		2,184			1,368			1,161
Valuation allowance		—			868			29
Unrecognized tax benefits, net of related Federal income taxes		(640	)		80			232
Other		(212	)		(297	)		(1,473	)

	$	62,445		$	68,795		$	82,114

The components of the 2011, 2012 and 2013 consolidated provision for income taxes are as follows (in thousands):


	2011		2012		2013
Provision for Federal income taxes –
Current provision	$	36,165	$	45,110	$	54,115
Deferred provision		7,000		3,264		5,280

Total provision for Federal income taxes		43,165		48,374		59,395

Provision for state and local income taxes –
Current provision		6,075		6,632		8,021
Deferred provision		1,169		929		775

Total provision for state and local income taxes		7,244		7,561		8,796

Provision for non-resident withholding and foreign income taxes		12,036		12,860		13,923

	$	62,445	$	68,795	$	82,114

As of December 30, 2012 and December 29, 2013, the significant components of net deferred income taxes are as follows (in thousands):


	2012			2013
Deferred Federal income tax assets –
Depreciation, amortization and asset basis differences	$	1,405		$	—
Insurance reserves		9,774			10,143
Equity compensation		11,564			12,586
Other accruals and reserves		12,732			11,606
Bad debt reserves		2,868			2,239
Valuation allowance		(770	)		(799	)
Other		6,187			4,579

Total deferred Federal income tax assets		43,760			40,354

Deferred Federal income tax liabilities –
Depreciation, amortization and asset basis differences		—			1,772
Capitalized software		11,674			13,017
Gain on debt extinguishments		22,682			22,682
Other		1,115			—

Total deferred Federal income tax liabilities		35,471			37,471

Net deferred Federal income tax asset		8,289			2,883
Net deferred state and local income tax asset		3,953			3,167

Net deferred income taxes	$	12,242		$	6,050

As of December 30, 2012, the classification of net deferred income taxes is summarized as follows (in thousands):


	Current			Long-term			Total
Deferred tax assets	$	16,405		$	31,308		$	47,713
Deferred tax liabilities		(1,115	)		(34,356	)		(35,471	)

Net deferred income taxes	$	15,290		$	(3,048	)	$	12,242

As of December 29, 2013, the classification of net deferred income taxes is summarized as follows (in thousands):


	Current			Long-term			Total
Deferred tax assets	$	15,246		$	28,275		$	43,521
Deferred tax liabilities		(4,536	)		(32,935	)		(37,471	)

Net deferred income taxes	$	10,710		$	(4,660	)	$	6,050

Realization of the Company’s deferred tax assets is dependent upon many factors, including, but not limited to, the Company’s ability to generate sufficient taxable income. Although realization of the Company’s net deferred tax assets is not assured, management believes it is more likely than not that the net deferred tax assets will be realized. On an ongoing basis, management will assess whether it remains more likely than not that the net deferred tax assets will be realized.

For financial reporting purposes the Company’s investment in foreign subsidiaries does not exceed its tax basis. Therefore no deferred income taxes have been provided.

The Company recognizes the financial statement benefit of a tax position if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. For tax positions meeting the “more likely than not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes accrued interest related to unrecognized tax benefits in interest expense and penalties in income tax expense.

During 2011, the Company accrued interest expense of $0.1 million and released interest of $0.2 million. At January 1, 2012, the amount of unrecognized tax benefits was $3.5 million of which, if ultimately recognized, $2.2 million would be recognized as an income tax benefit and reduce the Company’s effective tax rate. At January 1, 2012, the Company had $0.4 million of accrued interest and no accrued penalties. This amount is excluded from the $3.5 million total unrecognized tax benefit.

During 2012, the Company recorded a tax benefit of approximately $0.7 million to reflect an increased tax basis for certain Company assets due to the issuance of final tax regulations. Additionally, during 2012 and in connection with the sale of its six remaining Company-owned stores in a certain market to a franchisee, the Company recorded a deferred tax asset related to the capital loss that resulted from the write-off of the tax basis goodwill associated with the market that was sold. Management believes it is more likely than not that a portion of the deferred tax asset will not be realized and provided a valuation allowance of approximately $0.9 million. The valuation allowance was recorded as an increase to the provision for income taxes and increased the Company’s 2012 effective tax rate. On an ongoing basis, management will assess whether it remains more likely than not that the net deferred tax asset will be realized.

During 2012, the Company accrued interest expense of $0.1 million. At December 30, 2012, the amount of unrecognized tax benefits was $3.5 million of which, if ultimately recognized, $2.1 million would be recognized as an income tax benefit and reduce the Company’s effective tax rate. At December 30, 2012, the Company had $0.5 million of accrued interest and no accrued penalties. This amount is excluded from the $3.5 million total unrecognized tax benefit.

During 2013, the Company accrued interest expense of $0.1 million. At December 29, 2013, the amount of unrecognized tax benefits was $3.6 million of which, if ultimately recognized, $2.1 million would be recognized as an income tax benefit and reduce the Company’s effective tax rate. At December 29, 2013, the Company had $0.6 million of accrued interest and no accrued penalties. This amount is excluded from the $3.6 million total unrecognized tax benefit.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


Balance as of January 2, 2011	$	4,405
Additions for tax positions of current year		138
Additions for tax positions of prior years		119
Reductions in tax positions from prior years for:
Changes in prior year tax positions		(444	)
Lapses of applicable statute of limitations		(731	)

Balance as of January 1, 2012		3,487
Additions for tax positions of current year		239
Additions for tax positions of prior years		373
Reductions in tax positions from prior years for:
Changes in prior year tax positions		(111	)
Settlements during the period		(11	)
Lapses of applicable statute of limitations		(505	)

Balance as of December 30, 2012		3,472
Additions for tax positions of current year		337
Additions for tax positions of prior years		398
Reductions in tax positions from prior years for:
Changes in prior year tax positions		(157	)
Settlements during the period		(133	)
Lapses of applicable statute of limitations		(344	)

Balance as of December 29, 2013	$	3,573

The Company continues to be under examination by certain states. The Company’s Federal statute of limitation has expired for years prior to 2010 and the relevant state statutes vary. The Company expects the current ongoing examinations to be concluded in the next twelve months and does not expect the assessment of any significant additional amounts in excess of amounts reserved.