Entity information:
Note 6: Income Taxes
 
Income before income taxes includes income from foreign operations of $7,707,000, $5,616,000 and $6,656,000 for fiscal years 2017, 2016 and 2015, respectively.
 
Total income tax expense for fiscal years 2017, 2016 and 2015 consisted of the following:
 
 
 
Fiscal Years
 
(In thousands)
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
Current
 
 
 
 
 
 
 
 
 
 
Federal
 
$
22,821
 
$
18,877
 
$
25,081
 
Foreign
 
 
1,514
 
 
1,085
 
 
1,385
 
State
 
 
5,083
 
 
4,282
 
 
4,895
 
 
 
 
29,418
 
 
24,244
 
 
31,361
 
Deferred
 
 
 
 
 
 
 
 
 
 
Federal
 
 
12,570
 
 
(2,047)
 
 
(3,411)
 
State
 
 
(784)
 
 
(555)
 
 
(416)
 
 
 
 
11,786
 
 
(2,602)
 
 
(3,827)
 
Total
 
$
41,204
 
$
21,642
 
$
27,534
 
 
The Company’s effective tax rate differs from the statutory federal tax rate of 35% as shown in the following schedule:
 
 
 
Fiscal Years
 
(In thousands)
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
Tax at federal statutory rate
 
$
28,878
 
$
24,193
 
$
24,897
 
Re-measurement of deferred tax assets to lower enacted domestic tax rate
 
 
15,137
 
 
-
 
 
-
 
Mandatory repatriation of foreign earnings
 
 
1,370
 
 
-
 
 
-
 
State taxes, net of federal benefit
 
 
2,806
 
 
2,423
 
 
2,910
 
Tax exempt interest income
 
 
-
 
 
(7)
 
 
(23)
 
Non-deductible expenses
 
 
417
 
 
274
 
 
261
 
Non-deductible stock-based compensation
 
 
18
 
 
11
 
 
(42)
 
Excess tax benefit from equity incentive plans
 
 
(5,831)
 
 
(4,321)
 
 
-
 
Difference between statutory rate and foreign effective tax rate
 
 
(1,339)
 
 
(889)
 
 
(897)
 
Other
 
 
(252)
 
 
(42)
 
 
428
 
Tax expense
 
$
41,204
 
$
21,642
 
$
27,534
 
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate
 
 
49.9
%
 
31.3
%
 
38.7
%
 
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 29, 2017 and December 30, 2016 are presented in the following schedule:
 
 
 
Fiscal Years
 
(In thousands)
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Deferred tax assets:
 
 
 
 
 
 
 
Accrued liabilities and allowances
 
$
13,265
 
$
18,335
 
Deferred compensation
 
 
22,297
 
 
30,603
 
Property, equipment and leasehold improvements
 
 
288
 
 
-
 
Other
 
 
98
 
 
97
 
Total deferred tax assets
 
 
35,948
 
 
49,035
 
 
 
 
 
 
 
 
 
Deferred tax liabilities:
 
 
 
 
 
 
 
State taxes
 
 
(1,232)
 
 
(1,958)
 
Deductible goodwill
 
 
(2,078)
 
 
(3,075)
 
Property, equipment and leasehold improvements
 
 
-
 
 
(195)
 
Unrealized gain of deferred compensation plan assets
 
 
(2,119)
 
 
(1,641)
 
Other
 
 
(82)
 
 
-
 
Total deferred tax liabilities
 
 
(5,511)
 
 
(6,869)
 
Net deferred tax assets
 
$
30,437
 
$
42,166
 
 
Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.
 
The Tax Cuts and Jobs Act (Tax Legislation) was enacted on December 22, 2017 and lowers U.S. corporate income tax rates as of January 1, 2018, implements a territorial tax system and imposes a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The estimated impact of the Tax Legislation to the Company was an increase in income tax expense of $16,507,000 during 2017. The Company’s deferred tax assets were re-measured at the lower enacted corporate tax rate of 21% which contributed $15,137,000 to the estimated increase in income tax expense associated with the Tax Legislation. The Company also has foreign earnings that were subject to the mandatory repatriation tax. The total mandatory repatriation tax, net of the benefit of the Company’s foreign tax credits, contributed $1,370,000 to the estimated increase in income tax expense associated with the Tax Legislation. The mandatory repatriation tax may be elected to be paid over a period of eight years. The Company intends to make this election.
 
The Tax Legislation also includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries. The company will be subject to the GILTI provisions effective December 30, 2017 and is in the process of analyzing the effects, including how to account for the GILTI provision from an accounting policy standpoint.
 
Due to the change in U.S. federal tax law, the Company has decided not to indefinitely reinvest any of its unremitted foreign earnings as of December 29, 2017. Deferred U.S. state and foreign withholding taxes related to these undistributed foreign earnings are not expected to be material but are subject to further legislative action from the states regarding conformity with the Tax Legislation.
 
The Company is entitled to a deduction for federal and state tax purposes with respect to employees’ stock award activity. The net deduction in taxes otherwise payable arising from that deduction has been recorded as an income tax benefit for fiscal year 2017 and 2016. The net deduction in taxes otherwise payable arising from that deduction was credited to additional paid-in capital for fiscal year 2015. For fiscal years 2017, 2016 and 2015, the net deduction in tax payable arising from employees’ stock award activity was $6,528,000, $4,827,000 and $6,396,000, respectively.
 
The Company and its subsidiaries file income tax returns in the United States federal jurisdiction, California and various other state and foreign jurisdictions. The Company is no longer subject to United States federal income tax examination for years prior to 2014. The Company is no longer subject to California franchise tax examinations for years prior to 2013. With few exceptions, the Company is no longer subject to state and local or non-United States income tax examination by tax authorities for years prior to 2013.
 
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
 
Balance at January 1, 2016
 
$
1,878,000
 
Additions based on tax positions related to the current year
 
 
502,000
 
Additions for tax positions of prior years
 
 
6,000
 
Reductions due to lapse of statute of limitations
 
 
(430,000)
 
Settlements
 
 
-
 
Balance at December 30, 2016
 
$
1,956,000
 
Additions based on tax positions related to the current year
 
 
597,000
 
Additions for tax positions of prior years
 
 
11,000
 
Reductions due to lapse of statute of limitations
 
 
(338,000)
 
Reductions for tax positions of prior years
 
 
(437,000)
 
Settlements
 
 
-
 
Balance at December 29, 2017
 
$
1,789,000
 
 
Unrecognized tax benefits are included in other liabilities in the accompanying balance sheet. To the extent these unrecognized tax benefits are ultimately recognized, they will impact the effective tax rate by $1,459,000 in a future period. There are no uncertain tax positions whose resolution in the next 12 months is expected to materially affect operating results.