NOTE 7. Income Taxes

The following is a reconciliation of our effective tax rate to the federal statutory tax rate:

	Years Ended December 31,
	2016				2015			2014
U.S. federal statutory rate		35.0		%		35.0	%		35.0		%
State taxes, net of federal benefit		2.6			2.4			2.9
State incentives		(0.2	)		(0.5)				(0.8	)
State law changes		0.3			(0.9)				(0.9	)
Nondeductible expenses		0.7			0.4				0.9
Other		-			-				(0.1	)
Net effective rate		38.4		%		36.4	%		37.0		%

The following is a summary of our provision for income taxes (in thousands):

	Years Ended December 31,
	2016			2015			2014
Current
Federal	$	30,324		$	21,363		$	5,939
State and local		3,296			2,900			445
Foreign		108			284			249
		33,728			24,547			6,633

Deferred
Federal		11,981			16,538			23,600
State and local		971			(346	)		191
Foreign		(64	)		(106	)		(115	)
		12,888			16,086			23,676

Total provision	$	46,616		$	40,633		$	30,309

In November 2015, the FASB issued Update No. 2015-17—Income Taxes (Topic 740). This Standard provides guidance on the balance sheet classification of deferred taxes, amending the accounting for income taxes and requiring all deferred tax assets and liabilities to be classified as non-current on the consolidated balance sheet. We elected to early adopt this standard as of March 31, 2016 to simplify the presentation of our deferred income taxes and applied the guidance prospectively. As a result, we have presented all deferred tax assets and liabilities as non-current on our consolidated balance sheet as of December 31, 2016, but have not reclassified deferred tax assets and liabilities as noncurrent on our consolidated balance sheet as of December 31, 2015. In the following summary of our deferred tax assets and liabilities (in thousands), however, we are presenting all the deferred tax asset and liability balances as of both December 31, 2016 and December 31, 2015 as noncurrent for better year over year comparability:

	December 31,
	2016			2015
Accrued compensation		20,651			18,448
Other reserves		8,580			4,319
Tax credit carryforwards		1,694			1,257
Operating loss carryforwards		1,399			1,914
Total gross deferred income taxes		32,324			25,938
Valuation allowances		(456	)		(108	)
Total deferred tax assets		31,868			25,830

Prepaids		(3,401	)		(3,448	)
Other receivables		(3,051	)		(4,493	)
Property and equipment		(105,905	)		(87,148	)
Goodwill		(84,170	)		(82,511	)
Total deferred tax liabilities		(196,527	)		(177,600	)

Total deferred taxes	$	(164,659	)	$	(151,770	)

We are subject to income taxation in the U.S., numerous state jurisdictions, Mexico and Canada. Because income tax return formats vary among the states, we file both unitary and separate company state income tax returns. Our state tax net operating losses of $1.4 million expire between December 31, 2017 and December 31, 2035. Our state incentive tax credit carryforwards of $1.7 million expire between December 31, 2018 and December 31, 2021. Management believes it is more likely than not that these deferred tax assets will be realized with the exception of $0.1 million related to state tax net operating losses, and $0.3 million related to state tax incentive credit carryforwards. Valuation allowances totaling $0.5 million have been established for each of these amounts.

As of December 31, 2016 and December 31, 2015, the amount of unrecognized tax benefits was $1.8 million and $1.1 million, respectively. Of these amounts, our income tax provision would decrease $1.2 million and $0.7 million, respectively, if recognized. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	2016			2015
Gross unrecognized tax benefits - beginning of the year	$	1,139		$	1,065
Gross increases related to prior year tax positions		394			166
Gross increases related to current year tax positions		488			153
Lapse of applicable statute of limitations		(189	)		(245	)
Gross unrecognized tax benefits - end of year	$	1,832		$	1,139

We estimate it is reasonably possible that our reserve could either increase or decrease by up to $0.5 million during the next twelve months.

We recognize interest expense and penalties related to income tax liabilities in our provision for income taxes. In our 2016 provision for income taxes we recognized approximately fifteen thousand dollars of expense for combined income tax interest and income tax penalty.

In 2016, we were selected for examinations by the IRS for our 2014 tax year, by California for our 2012 and 2013 tax years, by New York for our 2012 through 2014 tax years, and by Ohio for our 2014 and 2015 tax years. The IRS and California examinations are ongoing. The New York audit was settled for approximately sixteen thousand dollars while the Ohio audit closed with no changes. In addition to the audits that are ongoing, tax years 2012 through 2015 generally remain open to examination by the major jurisdictions to which we are subject.