Aarons 2008 Annual Report Download - page 34

Note E: Income Taxes
Following is a summary of the Company’s income tax expense for
the years ended December 31:
(In Thousands) 2008 2007 2006
Current Income Tax
Expense (Benefit):
Federal $ (26,324) $ 49,409 $20,590
State 5,062 6,107 1,790
(21,262) 55,516 22,380
Deferred Income Tax
(Benefit) Expense:
Federal 73,375 (10,070) 16,888
State 1,698 (1,119) 2,087
75,073 (11,189) 18,975
$ 53,811 $ 44,327 $ 41,355
The Company generated a net operating loss (“NOL”) of
approximately $39.2 million in 2008 as a result of favorable
deductions related to bonus depreciation. The NOL will expire
in 2028. The Company expects to fully utilize the NOL in 2009
and therefore has recorded current tax benefit for the loss.
Significant components of the Company’s deferred income
tax liabilities and assets at December 31 are as follows:
(In Thousands) 2008 2007
Deferred Tax Liabilities:
Rental Merchandise and Property,
Plant and Equipment $163,707 $ 91,823
Other, Net 15,937 11,625
Total Deferred Tax Liabilities 179,644 103,448
Deferred Tax Assets:
Accrued Liabilities 14,638 6,586
Advance Payments 12,378 10,615
Other, Net 3,990 3,954
Total Deferred Tax Assets 31,006 21,155
Net Deferred Tax Liabilities $148,638 $ 82,293
The Company’s effective tax rate differs from the statutory
U.S. Federal income tax rate for the years ended December 31
as follows:
2008 2007 2006
Statutory Rate 35.0% 35.0% 35.0%
Increases in U.S. Federal Taxes
Resulting From:
State Income Taxes, Net of
Federal Income Tax Benefit 3.1 2.6 2.1
Other, Net .4 .0 (.3)
Effective Tax Rate 38.5% 37.6% 36.8%
The Company files a federal consolidated income tax return
in the United States and the separate legal entities file in
various states and foreign jurisdictions. With few exceptions,
the Company is no longer subject to federal, state and local
tax examinations by tax authorities for years before 2005.
The Company is subject to a Puerto Rico audit for the years
2002 through 2006 which could be settled within the next 12
months. While an estimate of the range of settlement cannot
be made, the Company believes that the ultimate resolution
will not have a material effect on the financial statements.
The following table summarizes the activity related to our
uncertain tax positions:
(In Thousands) 2008 2007
Balance at January 1, $3,482 $3,159
Additions based on tax positions
related to the current year 119 178
Additions for tax positions of prior years 559 343
Prior year reductions (349) —
Statute expirations (176) (61)
Settlements (525) (137)
Balance at December 31, $3,110 $3,482
As of December 31, 2008 and 2007, the amount of uncertain
tax benefits that, if recognized, would affect the effective tax
rate is $3.3 million and $3.5 million, respectively, including
interest and penalties. During the years ended December 31,
2008 and 2007, the Company recognized interest and penalties
of $435,000 and $530,000, respectively. The Company had
$877,000 and $735,000 of accrued interest and penalties at
December 31, 2008 and 2007, respectively. The Company
recognizes potential interest and penalties related to uncertain
tax benefits as a component of income tax expense.
Note F: Commitments and
Contingencies
The Company leases warehouse and retail store space for most of
its operations under operating leases expiring at various times
through 2028. The Company also leases certain properties under
capital leases that are more fully described in Note D. Most of
the leases contain renewal options for additional periods rang-
ing from one to 15 years or provide for options to purchase the
related property at predetermined purchase prices that do not
represent bargain purchase options. In addition, certain proper-
ties occupied under operating leases contain normal purchase
options. Leasehold improvements related to these leases are
generally amortized over periods that do not exceed the lesser of
the lease term or five years. While a majority of our leases do not
require escalating payments, for the leases which do contain such
provisions the Company records the related lease expense on a
straight-line basis over the lease term. The Company also leases
transportation and computer equipment under operating leases
expiring during the next five years. Management expects that
Notes to Consolidated Financial Statements
32