Income Taxes
Tax Cuts and Jobs Act of 2017
The Tax Cuts and Jobs Act (“the Tax Act”) was enacted in December 2017. The Tax Act significantly changes U.S. tax law effective January 1, 2018 by, among other things, lowering U.S. corporate income tax rates from 35% to 21%, repealing corporate alternative minimum tax, implementing a territorial tax system and imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries.
The Tax Act provided for the repeal of corporate alternative minimum tax and made AMT tax credits fully refundable in future years. As a result, we reassessed the realizability of our deferred tax assets and released the valuation allowance against $0.8 million of AMT tax credits at December 30, 2017.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate , we revalued our ending U.S. deferred tax assets at December 30, 2017, offset by a corresponding change in the U.S. valuation allowance with no material impact to the fiscal 2017 tax provision.
The Tax Act provided for a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”). The estimated tax effects of the provisional income inclusion of $15.7 million for the deemed repatriation transition tax was fully offset by the benefit of current and carryforward foreign tax credits previously subjected to a full valuation allowance and we expect to pay no U.S. federal cash taxes on the deemed repatriation. The deemed repatriation of undistributed foreign earnings also resulted in a reassessment of the permanent reinvestment of undistributed foreign earnings and profits and we established a deferred tax liability of $66 thousand for withholding taxes associated with those earnings which are not permanently reinvested as of December 30, 2017.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act and allows the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We recognized the provisional impacts related to the one-time transition tax, the revaluation of deferred tax balances and reassessment of the realizability of deferred tax assets and included these estimates in our consolidated financial statements for the year ended December 30, 2017. We expect to complete our analysis within the measurement period in accordance with SAB 118 and do not expect the further analysis to have any material impact to our consolidated financial statements.
Components of Income (Loss) Before Income Taxes
The components of income (loss) before income taxes were as follows (in thousands):
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
United States | $ | 31,492 |
| | $ | (50,947 | ) | | $ | (3,069 | ) |
Foreign | 10,714 |
| | 752 |
| | 1,798 |
|
| $ | 42,206 |
| | $ | (50,195 | ) | | $ | (1,271 | ) |
Provision for Income Taxes
The components of the provision for income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
Current provision (benefit): | | | | | |
Federal | $ | (2,130 | ) | | $ | — |
| | $ | (3 | ) |
State | 17 |
| | 120 |
| | 72 |
|
Foreign | 4,069 |
| | 1,804 |
| | 198 |
|
| 1,956 |
| | 1,924 |
| | 267 |
|
Deferred provision (benefit): | | | | | |
Federal | 66 |
| | (42,150 | ) | | — |
|
State | — |
| | (2,165 | ) | | — |
|
Foreign | (729 | ) | | (1,247 | ) | | (15 | ) |
| (663 | ) | | (45,562 | ) | | (15 | ) |
Total provision (benefit) for income taxes | $ | 1,293 |
| | $ | (43,638 | ) | | $ | 252 |
|
Tax Rate Reconciliation
The following is a reconciliation of the difference between income taxes computed by applying the federal statutory rate of 35% for our current income tax provision and 21% for our deferred tax provision and the provision (benefit) from income taxes as recorded (in thousands):
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
U.S. statutory federal tax rate | $ | 14,772 |
| | $ | (17,568 | ) | | $ | (445 | ) |
State taxes and credits, net of Federal benefit | 951 |
| | (975 | ) | | 17 |
|
Amortization of stock-based compensation | (1,428 | ) | | 1,256 |
| | 907 |
|
Research and development credits | (1,979 | ) | | (1,654 | ) | | (1,872 | ) |
Foreign taxes at rates different than the U.S. | (271 | ) | | 504 |
| | (66 | ) |
Other permanent differences | 160 |
| | 2,048 |
| | 238 |
|
Mandatory deemed repatriation | 1,655 |
| | — |
| | — |
|
Change in valuation allowance | (12,207 | ) | | (27,120 | ) | | 1,457 |
|
Other | (360 | ) | | (129 | ) | | 16 |
|
Total | $ | 1,293 |
| | $ | (43,638 | ) | | $ | 252 |
|
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to be reversed.
Significant deferred tax assets and liabilities consisted of the following (in thousands):
|
| | | | | | | |
| As of |
| December 30, 2017 | | December 31, 2016 |
Tax credits | $ | 35,484 |
| | $ | 33,486 |
|
Inventory reserve | 10,763 |
| | 13,863 |
|
Other reserves and accruals | 5,667 |
| | 10,593 |
|
Non-statutory stock options | 2,642 |
| | 6,206 |
|
Depreciation and amortization | 3,677 |
| | 7,719 |
|
Net operating loss carryforwards | 70,457 |
| | 118,482 |
|
Gross deferred tax assets | 128,690 |
| | 190,349 |
|
Valuation allowance | (109,840 | ) | | (150,581 | ) |
Total deferred tax assets | 18,850 |
| | 39,768 |
|
Acquired intangibles and fixed assets | (18,921 | ) | | (39,801 | ) |
Unrealized investment gains | (109 | ) | | (289 | ) |
Tax on undistributed earnings | (66 | ) | | (71 | ) |
Total deferred tax liabilities | (19,096 | ) | | (40,161 | ) |
Net deferred tax liabilities | $ | (246 | ) | | $ | (393 | ) |
We are required to evaluate the realizability of our deferred tax assets in both our U.S. and non-U.S. jurisdictions on an ongoing basis to determine whether there is a need for a valuation allowance with respect to such deferred tax assets. During fiscal 2017 and 2016, we maintained a valuation allowance against our U.S. deferred tax assets. We intend to maintain a valuation allowance until sufficient positive evidence exists to support the realization of such deferred tax assets.
In accordance with rates specified in the Tax Act, we revalued our net deferred tax asset at 21% in the fourth quarter of fiscal 2017, which resulted in a reduction in the value of our net deferred tax asset of $31.3 million, which was offset by a corresponding decrease in the valuation allowance and did not impact our Statements of Operations.
Tax Credits and Carryforwards
Tax credits and carryforwards available to us at December 30, 2017 consisted of the following (in thousands):
|
| | | | | | |
| | Amount | | Latest Expiration Date |
Federal research and development tax credit | | $ | 23,883 |
| | 2018-2037 |
Federal net operating loss carryforwards | | 244,179 |
| | 2018-2037 |
Foreign tax credit carryforwards | | 844 |
| | 2018-2027 |
Alternative minimum tax credits | | 781 |
| | Indefinite |
California research credits | | 31,535 |
| | Indefinite |
Oregon research credits | | 748 |
| | 2018-2023 |
State net operating loss carryforwards | | 262,941 |
| | 2018-2037 |
Japan net operating loss carryforwards | | 86 |
| | 2026 |
Singapore net operating loss carryforwards | | 8,810 |
| | Indefinite |
Undistributed Earnings
As of December 30, 2017, unremitted earnings of foreign subsidiaries was estimated at $26.0 million and have now been subject to U.S. federal income tax due to the Tax Act one-time transition tax on the deemed repatriation of undistributed foreign earnings and profits. The enactment of the Tax Act also resulted in a reassessment of the permanent reinvestment of undistributed foreign earnings. We intend to permanently invest $13.0 million of undistributed earnings indefinitely outside of the U.S. To the extent we repatriate the remaining $13.0 million of undistributed foreign earnings to the U.S. we established a deferred tax liability of $66 thousand for foreign withholding taxes. Our estimates are provisional and subject to further analysis.
Unrecognized Tax Benefits
We recognize the benefits of tax return positions if we determine that the positions are “more-likely-than-not” to be sustained by the taxing authority. Interest and penalties accrued on unrecognized tax benefits are recorded as tax expense in the period incurred.
The following table reflects changes in the unrecognized tax benefits (in thousands):
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
Unrecognized tax benefit, beginning balance | $ | 17,978 |
| | $ | 17,033 |
| | $ | 16,333 |
|
Additions based on tax positions related to the current year | 694 |
| | 614 |
| | 667 |
|
Additions based on tax positions from prior years | — |
| | 450 |
| | 163 |
|
Reductions for tax positions of prior years | — |
| | — |
| | (18 | ) |
Reductions due to lapse of the applicable statute of limitations | (376 | ) | | (119 | ) | | (112 | ) |
Unrecognized tax benefit, ending balance | $ | 18,296 |
| | $ | 17,978 |
| | $ | 17,033 |
|
| | | | | |
Interest and penalties recognized as a component of Provision (benefit) from income taxes | $ | 67 |
| | $ | 22 |
| | $ | 50 |
|
Interest and penalties accrued at period end | 218 | | 209 | | — |
|
Of the unrecognized tax benefits at December 30, 2017, $1.0 million would impact the effective tax rate if recognized.
The amount of income taxes we pay is subject to ongoing audits by Federal, State and foreign tax authorities which might result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is judgmental in nature. However, we believe we have adequately provided for any reasonably foreseeable outcome related to those matters. Our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. As of December 30, 2017, changes to our uncertain tax positions in the next 12 months that are reasonably possible are not expected to have a significant impact on our financial position or results of operations.
We file income tax returns in the U.S. Federal jurisdiction, various states and non U.S. jurisdictions. Our significant income tax jurisdictions are the U.S. (Federal), California, Oregon, Germany and Japan. We are currently subject to corporate tax audit for tax years 2013 to 2015 in Germany. As a result of our net operating loss carryforwards, the statute of limitations is open for audit for tax years 2007 and forward for U.S. Federal purposes, 2008 and forward for California purposes and 2014 and forward for Oregon purposes. For Germany and Japan, the statute of limitations is open for audit for tax years 2013 and forward.