13. Income Taxes:

The provision for income taxes consisted of the following (in thousands):

	Fiscal Year
	2012			2011			2010

Income before income taxes	$	133,974		$	129,143		$	111,089
Income tax provision:
Current:
Federal	$	39,792		$	17,093		$	26,580
State	8,517			8,423			6,883
Total current	48,309			25,516			33,463
Deferred:
Federal	(11,055		)	9,284			(4,024		)
State	(1,703		)	(1,377		)	(63		)
Total deferred	(12,758		)	7,907			(4,087		)
Total provision	$	35,551		$	33,423		$	29,376

The following is a reconciliation between the U.S. federal statutory rate and the effective tax rate:

	Fiscal Year
	2012		2011		2010

Tax at U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
State and district income taxes, net of federal income tax benefit	3.3		3.6		4.1
FICA tip credit	(7.7	)	(6.9	)	(7.6	)
HIRE Act retention tax credit	—		(1.4	)	—
Other credits and incentives	(0.6	)	(0.8	)	(0.6	)
Change in uncertain tax positions	—		(1.3	)	(0.7	)
Manufacturing deduction	(2.8	)	(2.7	)	(3.1	)
Deferred compensation	(0.7	)	0.2		(0.6	)
Other	—		0.2		(0.1	)
Effective tax rate	26.5	%	25.9	%	26.4	%

Following are the temporary differences that created our deferred tax assets and liabilities (in thousands):

	January 1, 2013			January 3, 2012
Deferred tax assets:
Employee benefits	$	20,135		$	15,927
Insurance reserves	15,284			13,099
Accrued rent	23,945			21,257
Stock-based compensation	18,908			20,800
Deferred income	7,060			5,690
Tax credit carryforwards	1,751			1,918
Other	853			1,416
Subtotal	87,936			80,107
Less: Valuation allowance	(258		)	—
Total	$	87,678		$	80,107

Deferred tax liabilities:
Property and equipment	$	(146,763	)	$	(153,299	)
Inventory	(9,160		)	(8,847		)
Prepaid expenses	(8,350		)	(7,314		)
Total	$	(164,273	)	$	(169,460	)

Net deferred tax liability	$	(76,595	)	$	(89,353	)

Reported in consolidated balance sheets as:
Deferred income taxes — current asset	$	15,257		$	14,574
Deferred income taxes — noncurrent liability	(91,852		)	(103,927		)
Total	$	(76,595	)	$	(89,353	)

We had $2.7 million and $3.0 million of state tax credit carryforwards at January 1, 2013 and January 3, 2012, respectively. These credits begin to expire in 2013. Management assesses the available evidence to estimate if sufficient future taxable income will be generated to use these carryforwards. Based on this evaluation, we recorded a valuation allowance of $0.3 million as of January 1, 2013 to reflect the amount that more likely than not will not be realized. The valuation allowance relates to hiring and investment tax credits in North Carolina. We believe it is more likely than not that all other state tax credit carryforwards will be realized. However, this assessment could change if estimates of future taxable income during the carryforward period are revised. The earliest tax year still subject to examination by a significant taxing jurisdiction is 2003.

At January 1, 2013, we had $0.7 million of unrecognized tax benefits. If recognized, this amount would affect our effective income tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	Fiscal Year
	2012			2011			2010

Balance at beginning of year	$	590		$	2,135		$	6,460
Additions based on tax positions taken during a prior period	—			—			—
Reductions based on tax positions taken during a prior period	—			—			(3,085		)
Additions based on tax positions taken during the current period	230			199			163
Reductions related to settlements with taxing authorities and lapses of statutes of limitations	(125		)	(1,744		)	(1,403		)
Balance at end of year	$	695		$	590		$	2,135

We recognize interest related to uncertain tax positions in income tax expense. Penalties related to uncertain tax positions are part of general and administrative expenses. At both January 1, 2013 and January 3, 2012, we had approximately $0.1 million of accrued interest and penalties related to uncertain tax positions. Included in the balance of unrecognized tax benefits at January 1, 2013 is $0.1 million related to tax positions for which it is reasonably possible that the total amount could decrease during the next twelve months based on the lapses of statutes of limitations for certain jurisdictions.

In 2008, the IRS issued a Notice of Proposed Adjustment to us disallowing the deduction of approximately $5.1 million of compensation expense with respect to the exercise of stock options by certain current and former executive officers during 2003 through 2006. In 2008, we reserved for the estimated taxes and interest resulting from the proposed disallowance while pursuing administrative and judicial appeals of the matter. We believe that such stock option compensation qualifies as performance-based compensation that is not subject to the limitations on deductibility under Internal Revenue Code Section 162(m). In 2010, we agreed to a resolution of this dispute as to tax years 2005 and 2006, and in 2011, we agreed to a resolution as to tax years 2003 and 2004. An immaterial amount of penalties and interest remains unresolved.