Paychex, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

May 31, 2011


Note I —	Income Taxes

The components of deferred tax assets and liabilities are as follows:


	May 31,
In millions	2011			2010

Deferred tax assets:
Compensation and employee benefit liabilities		16.3			14.7
Other current liabilities		9.4			8.3
Tax credit carry forward		27.4			22.5
Depreciation		6.7			12.0
Stock-based compensation		29.8			25.2
Other		18.2			7.6

Gross deferred tax assets		107.8			90.3
Deferred tax liabilities:
Capitalized software		33.2			27.6
Depreciation		16.6			0.1
Intangible assets		32.5			27.7
Revenue not subject to current taxes		10.0			10.5
Unrealized gains on available-for-sale securities		21.7			24.1
Other		0.5			0.2

Gross deferred tax liabilities		114.5			90.2

Net deferred tax (liability)/asset	$	(6.7	)	$	0.1

The components of the provision for income taxes are as follows:


	Year ended May 31,
In millions	2011		2010			2009

Current:
Federal	$	234.0	$	230.2		$	256.1
State		29.3		26.0			24.4

Total current		263.3		256.2			280.5

Deferred:
Federal		12.0		(3.9	)		(1.3	)
State		1.6		—			(0.6	)

Total deferred		13.6		(3.9	)		(1.9	)

Provision for income taxes	$	276.9	$	252.3		$	278.6

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:


	Year ended May 31,
	2011			2010			2009

Federal statutory tax rate		35.0	%		35.0	%		35.0	%
Increase/(decrease) resulting from:
State income taxes, net of federal tax benefit		2.5			2.3			1.9
Tax-exempt municipal bond interest		(2.2	)		(2.7	)		(2.6	)
Other items		(0.3	)		—			—

Effective income tax rate		35.0	%		34.6	%		34.3	%

Uncertain income tax positions: The Company maintains a reserve for uncertain tax positions. As of May 31, 2011 and May 31, 2010, the total reserve for uncertain tax positions was $34.4 million and $27.5 million, respectively. As of May 31, 2011 and May 31, 2010, $34.1 million and $27.5 million of the total reserve for uncertain tax positions was included in long-term liabilities on the Consolidated Balance Sheets.

A reconciliation of the beginning and ending amounts of the Company’s gross unrecognized tax benefits, not including interest or other potential offsetting effects, is as follows:


	Year ended May 31,
In millions	2011			2010			2009

Balance as of beginning of fiscal year	$	35.8		$	35.8		$	25.7
Additions for tax positions of the current year		6.0			0.5			10.7
Additions for tax positions of prior years		0.1			—			(0.2	)
Reductions for tax positions of prior years		(0.1	)		—			—
Settlements with tax authorities		—			—			(0.1	)
Expiration of the statute of limitations		(0.6	)		(0.5	)		(0.3	)

Balance as of end of fiscal year	$	41.2		$	35.8		$	35.8

The Company is subject to U.S. federal income tax, numerous local and state tax jurisdictions within the U.S., and income taxes in Germany.

The Company believes the reserve for uncertain tax positions of $34.4 million as of May 31, 2011 adequately covers open tax years and uncertain tax positions up to and including fiscal 2011 for major taxing jurisdictions. As of May 31, 2011, $29.2 million of the $34.4 million of unrecognized tax benefits, if recognized, would impact the Company’s effective income tax rate. As of May 31, 2010, substantially all of the unrecognized tax benefits, if recognized, would impact the Company’s effective income tax rate.

A significant portion of the reserve relates to uncertain tax positions currently under audit by New York state for the fiscal year ended May 31, 2004 (“fiscal 2004”) through fiscal 2009. On July 14, 2010, the Company received a summary of proposed tax adjustments for fiscal 2004 through the fiscal year ended May 31, 2007 from New York State, which was in excess of the reserve recorded as of May 31, 2011. The ultimate outcome of the unresolved state tax matters is uncertain and could be favorable or unfavorable to the Company. An unfavorable resolution of the uncertain tax positions in total could have a material impact on the Company’s results of operations and effective income tax rate, and generate additional cash outlays in the period in which the unfavorable resolution, if any, was recognized. The tax matters that are currently under audit are not expected to have a future impact on the Company’s effective income tax rate.

The Company has concluded all U.S. federal income tax matters through its fiscal year ended May 31, 2008. Fiscal 2009 and fiscal 2010 are still subject to potential audit. With limited exception, state income tax audits by taxing authorities are closed through the fiscal year ended May 31, 2006, primarily due to expiration of the statute of limitations.

The Company continues to follow its policy of recognizing interest and penalties accrued on tax positions as a component of income taxes on the Consolidated Statements of Income. The amount of accrued interest and penalties associated with the Company’s tax positions is immaterial to the Consolidated Balance Sheets. The amount of interest and penalties recognized for fiscal years 2011, 2010, and 2009 was immaterial to the Company’s results of operations.