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, 2015

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



	May 31,
In millions	2015			2014
Deferred tax assets:
Compensation and employee benefit liabilities	$	20.9		$	18.7
Other current liabilities	6.9			6.9
Tax credit carry forward	40.1			38.3
Depreciation	11.9			8.3
Stock-based compensation	21.6			21.1
Other	24.9			28.7
Gross deferred tax assets	126.3			122.0
Deferred tax liabilities:
Capitalized software	53.6			50.1
Depreciation	3.8			12.2
Goodwill and Intangible assets	52.0			46.7
Revenue not subject to current taxes	13.1			12.6
Unrealized gains on available-for-sale securities	5.3			13.2
Other	0.3			0.4
Gross deferred tax liabilities	128.1			135.2
Net deferred tax liability	$	(1.8	)	$	(13.2	)

The deferred tax asset related to tax credit carry forward consists of alternative minimum tax credits, which may be carried forward indefinitely.

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



	Year ended May 31,
In millions	2015			2014			2013
Current:
Federal	$	341.4		$	314.5		$	274.2
State	47.8			51.0			62.9
Total current	389.2			365.5			337.1
Deferred:
Federal	(5.1		)	(3.5		)	5.5
State	1.0			(1.4		)	(0.2		)
Total deferred	(4.1		)	(4.9		)	5.3
Income taxes	$	385.1		$	360.6		$	342.4

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,
	2015		2014		2013
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
Increase/(decrease) resulting from:
State income taxes, net of federal tax benefit	3.0	%	3.3	%	3.0	%
Tax settlement	—	%	—	%	1.5	%
Tax-exempt municipal bond interest	(1.5	)%	(1.5	)%	(1.7	)%
Other items	(0.2	)%	(0.3	)%	(0.2	)%
Effective income tax rate	36.3	%	36.5	%	37.6	%

Uncertain income tax positions: 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 maintains a reserve for uncertain tax positions. As of May 31, 2015 and May 31, 2014, the total reserve for uncertain tax positions, including interest and net of federal benefits, was $29.1 million and $29.8 million, respectively. As of May 31, 2015 and May 31, 2014, $29.1 million and $28.6 million, respectively, of the total reserves for uncertain tax positions, including interest and net of federal benefits, were 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	2015			2014			2013
Balance as of beginning of fiscal year	$	40.0		$	26.7		$	41.7
Additions for tax positions of the current year	6.7			11.2			28.5
Additions for tax positions of prior years	0.8			4.2			12.2
Reductions for tax positions of prior years	(0.4		)	(1.8		)	(0.5		)
Settlements with tax authorities	(1.2		)	—			(55.0		)
Expiration of the statute of limitations	(6.0		)	(0.3		)	(0.2		)
Balance as of end of fiscal year	$	39.9		$	40.0		$	26.7

In May 2013, the Company executed a closing agreement that resolved tax matters related to the audits by New York State for the fiscal year ended May 31, 2004 (“fiscal 2004”) through the fiscal year ended May 31, 2011 (“fiscal 2011”). As a result, the reserve for uncertain tax positions was increased by $21.2 million in May 2013. The resolution and execution of the closing agreement in May 2013 on the open tax matters for fiscal 2004 through fiscal 2011 impacted the Company's effective income tax rate for fiscal 2013, as noted in the reconciliation of the U.S. federal statutory rate to the Company's effective income tax rate.

The reserve as of May 31, 2015 substantially relates to uncertain tax positions for state income tax matters. The Company believes the reserve for uncertain tax positions, including interest and net of federal benefits, of $29.1 million as of May 31, 2015 adequately covers open tax years and uncertain tax positions up to and including fiscal 2015 for major taxing jurisdictions. As of May 31, 2015, the entire $29.1 million of unrecognized tax benefits, if recognized, would impact the Company’s effective income tax rate. As of May 31, 2014, $24.6 million of the $29.8 million unrecognized tax benefits, if recognized, would have impacted the Company’s effective income tax rate.

The Company has concluded all U.S. federal income tax matters through the fiscal year ended May 31, 2011. Fiscal 2013 is currently under audit by the IRS and fiscal years 2012, 2014, and 2015 are subject to potential audit. With limited exception, state income tax audits by taxing authorities are closed through the fiscal year ended May 31, 2010, 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 and Comprehensive 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 2015, 2014, and 2013 was immaterial to the Company’s results of operations.