TUESDAY MORNING CORP/DE

(5) INCOME TAXES

Income tax provision/(benefit) consisted of (in thousands):

	Current			Deferred			Total
Fiscal Year Ended June 30, 2017
Federal	$	—		$	27		$	27
State and local		166			4			170
Total	$	166		$	31		$	197
Fiscal Year Ended June 30, 2016
Federal	$	(147	)	$	186		$	39
State and local		399			(175	)		224
Total	$	252		$	11		$	263
Fiscal Year Ended June 30, 2015
Federal	$	19		$	—		$	19
State and local		12			—			12
Total	$	31		$	—		$	31

The difference between income taxes computed at the statutory federal income tax rate of 34% in fiscal 2017, 2016 and 2015, and income taxes recognized in the Consolidated Statements of Operations was as follows (in thousands):

	Fiscal Year Ended
	June 30,
	2017			2016			2015
Federal income tax provision/(benefit) computed at statutory rate	$	(10,997	)	$	1,351		$	3,541
State income taxes, net of related federal tax benefit		106			157			106
Increase/(decrease) in federal valuation allowance		10,076			(668	)		(3,369	)
Federal tax credits		68			(670	)		(161	)
Stock option expiration/deficiencies		938			—			—
Other, net		6			93			(86	)
Provision for income taxes	$	197		$	263		$	31

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities for the fiscal years ended June 30, 2017, 2016 and 2015 were comprised of the following (in thousands):

	June 30,
	2017			2016			2015
Deferred tax assets:
Non-current:
Other payroll and benefits	$	681		$	1,482		$	1,139
Inventory reserves		195			268			195
Self-insurance reserves		4,517			4,611			4,285
Share-based compensation		3,564			3,807			3,736
Other current assets		2,829			2,250			1,535
Deferred rent		5,068			2,266			1,138
Net operating loss and tax credits		25,610			18,497			18,493
Other noncurrent assets		537			1,121			74
Total gross deferred tax assets	$	43,001		$	34,302		$	30,595
Deferred tax liabilities:
Non-current:
Inventory costs	$	9,468		$	8,199		$	6,526
Prepaid supplies		2,392			2,506			2,576
Property and equipment		4,033			7,616			4,804
Total gross deferred tax liabilities		15,893			18,321			13,906
Valuation allowance		(27,150	)		(15,992	)		(16,689	)
Net deferred tax asset/(liability)	$	(42	)	$	(11	)	$	—

During fiscal 2013, we established a valuation allowance related to deferred tax assets. In assessing whether a deferred tax asset would be realized, we considered whether it is more likely than not that some portion or all of the deferred tax assets would not be realized. We considered the reversal of existing taxable temporary differences, projected future taxable income, tax planning strategies and loss carry back potential in making this assessment. In evaluating the likelihood that sufficient future earnings would be available in the near future to realize the deferred tax assets, we considered our cumulative losses over three years including the then-current year. Based on the foregoing, we concluded that a valuation allowance was necessary. In fiscal 2017, the deferred tax asset valuation allowance increased $11.2 million. At the end of fiscal 2017, net deferred tax assets totaled $27.1 million, with an offsetting valuation allowance of $27.2 million.

We have federal net operating loss carryforwards of $58.0 million. These losses can only be carried forward and utilized to offset future taxable income, but will expire in fiscal year 2035 if not utilized before then. Additionally, we have state net operating loss carryforwards of $38.3 million, which will expire throughout the years 2018 through 2035, if not utilized before then.

Accounting for Uncertainty in Income Taxes. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before fiscal 2012. The Internal Revenue Service has concluded an examination of the Company for years ending on or before June 30, 2010.

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

Balance at June 30, 2014	$	220
Additions for tax positions of prior years	—
Reductions for lapse of statute of limitations		(73	)
Balance at June 30, 2015	$	147
Additions for tax positions of prior years		—
Reductions for lapse of statute of limitations		—
Balance at June 30, 2016	$	147
Additions for tax positions of prior years		—
Reductions for lapse of statute of limitations		—
Balance at June 30, 2017	$	147

The balance of taxes, interest, and penalties at June 30, 2017, that if recognized, would affect the effective tax rate is $247,000. We classify and recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the fiscal years ended June 30, 2017, 2016 and 2015, we recognized $9,000, $16,000, and $23,000 in interest, respectively. No interest or penalties were paid in the tax years ended June 30, 2017, 2016 and 2015.

We do not anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease the effective tax rate within 12 months of June 30, 2017.