Note 9 — Income Taxes
The provision (benefit) for income taxes consists of the following (in thousands):
| | | 2017 | | 2016 | | 2015 | |
| Current tax provision: | | | | | | | | | | |
| U.S. federal | | $ | — | | $ | — | | $ | — | |
| State | | | 12 | | | 18 | | | 12 | |
| Foreign | | | 378 | | | 1,031 | | | 443 | |
| Total current provision | | | 390 | | | 1,049 | | | 455 | |
| Deferred tax provision (benefit): | | | | | | | | | | |
| U.S. federal and state | | | (546) | | | — | | | — | |
| Foreign provision | | | (1) | | | (1,364) | | | 473 | |
| Total deferred provision (benefit) | | | (547) | | | (1,364) | | | 473 | |
| Provision (benefit) for income taxes | | $ | (157) | | $ | (315) | | $ | 928 | |
As of December 29, 2017, the Company had federal net operating loss carryforwards of $132,506,000 available to reduce future income taxes of its U.S. operations. The federal net operating loss carryforwards expire in varying amounts between 2020 and 2037. In California, the main state from which the Company conducts its domestic operations, the Company has state net operating losses of $23,807,000 available to reduce future California income taxes. The California net operating loss carryforwards expire in varying amounts between 2028 and 2037.
The Company had accrued net income taxes payable of $29,000 and $409,000 at December 29, 2017 and December 30, 2016, respectively, primarily due to taxes owed in foreign jurisdictions.
The provision (benefit) for income before taxes differs from the amount computed by applying the statutory federal income tax rate to income before taxes as follows (in thousands):
| | | 2017 | | 2016 | | 2015 | |
| Computed provision (benefit) for taxes based on income at statutory rate | | | 34.0 | % | $ | (781) | | | 34.0 | % | $ | (4,231) | | | 34.0 | % | $ | (1,905) | |
| Increase (decrease) in taxes resulting from: | | | | | | | | | | | | | | | | | | | |
| Permanent differences | | | (0.9) | | | 21 | | | (3.0) | | | 373 | | | (0.6) | | | 33 | |
| Change in the future federal tax rate | | | (832.9) | | | 19,125 | | | — | | | — | | | — | | | — | |
| State minimum taxes, net of federal income tax benefit | | | (0.4) | | | 8 | | | (0.1) | | | 12 | | | (0.1) | | | 8 | |
| State tax benefit | | | 8.3 | | | (190) | | | 6.2 | | | (767) | | | (6.6) | | | 370 | |
| Tax rate difference due to foreign statutory rate | | | (1.2) | | | 29 | | | (8.9) | | | 1,109 | | | 1.6 | | | (90) | |
| Expiration of state net operating tax loss carryforwards | | | (36.5) | | | 836 | | | (7.2) | | | 892 | | | (47.3) | | | 2,650 | |
| Foreign earnings not permanently reinvested, net of the participation exemption | | | 108.1 | | | (2,482) | | | 6.5 | | | (809) | | | (9.8) | | | 547 | |
| Foreign dividend withholding | | | (0.3) | | | 7 | | | 3.8 | | | (478) | | | (3.8) | | | 211 | |
| Expiration of charitable contribution carryover | | | — | | | — | | | (0.1) | | | 12 | | | (0.3) | | | 15 | |
| Other | | | (2.6) | | | 59 | | | 1.2 | | | (151) | | | 2.5 | | | (140) | |
| Valuation allowance | | | 731.2 | | | (16,789) | | | (29.9) | | | 3,723 | | | 13.8 | | | (771) | |
| Effective tax provision (benefit) rate | | | 6.8 | % | $ | (157) | | | 2.5 | % | $ | (315) | | | (16.6) | % | $ | 928 | |
The Company recorded an income tax benefit of $157,000 during the fiscal year 2017 due primarily to a U.S. income tax benefit related to an alternative minimum tax carryforward (see discussion below – U.S. Federal Income Tax Reform), offset by income tax expense generated from profits in its foreign operations. The Company recorded an income tax benefit of $315,000 during the fiscal year 2016 due to losses generated in its foreign operations and a reduction in foreign withholding taxes in connection with the dissolution of one of its foreign subsidiaries. The Company recorded an income tax provision of $928,000 during the fiscal year 2015 due to profits generated in its foreign operations.
Included in the state tax provision is a decrease to the state deferred tax asset and corresponding decrease to the valuation allowance of $646,000, $125,000 and $3,020,000, for 2017, 2016 and 2015 respectively, primarily related to the expiration of state net operating loss carryforwards.
Included in the foreign deferred tax benefit is a decrease in foreign deferred liabilities of $47,000 and $617,000 for 2017 and 2016, respectively. For 2015, there was an increase in foreign deferred liabilities of $172,000.
All earnings from the Company’s subsidiaries are not considered to be permanently reinvested. Accordingly, the Company provides withholding and U.S. taxes on all unremitted foreign earnings. During 2016 and 2015 there were no withholding taxes paid to foreign jurisdictions and there were no earnings repatriated from foreign subsidiaries. For 2017, based on the newly enacted 2017 Tax Act, the Company was deemed to repatriate and include in its federal taxable income, $5,658,000 of unremitted (not previously taxed) earnings from its foreign subsidiaries (see discussion below – U.S. Federal Income Tax Reform). The Company anticipates using net operating loss carryforwards to offset the tax liability from the deemed repatriation.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. For 2017, the federal portion of the deferred tax assets and liabilities were revalued from 34 percent to 21 percent (see discussion below – U.S. Federal Income Tax Reform). Significant components of the Company's deferred tax assets (liabilities) as of December 29, 2017 and December 30, 2016 are as follows (in thousands):
| | | 2017 | | 2016 | |
| Deferred tax assets: | | | | | | | |
| Allowance for doubtful accounts and sales returns | | $ | 230 | | $ | 244 | |
| Inventories | | | 381 | | | 662 | |
| Accrued vacation | | | 322 | | | 437 | |
| Accrued other expenses | | | 559 | | | 596 | |
| Stock-based compensation | | | 1,444 | | | 2,154 | |
| Pensions | | | 720 | | | 625 | |
| Depreciation and amortization | | | 959 | | | 1,060 | |
| Net operating loss carryforwards | | | 33,770 | | | 53,232 | |
| Business, foreign, AMT and R&;D credit carryforwards | | | 3,706 | | | 1,665 | |
| Prepaid Expenses | | | 188 | | | — | |
| Capitalized R&;D | | | 941 | | | 920 | |
| Other | | | 92 | | | 94 | |
| Valuation allowance | | | (40,656) | | | (57,446) | |
| Total deferred tax assets | | $ | 2,656 | | $ | 4,243 | |
| Deferred tax liabilities: | | | | | | | |
| Foreign tax withholding | | $ | (881) | | $ | (881) | |
| Amortization of R&;D | | | (723) | | | (670) | |
| Net Foreign earnings not permanently reinvested | | | (160) | | | (2,468) | |
| Total deferred tax liabilities | | | (1,764) | | | (4,019) | |
| Total net non-current deferred tax assets | | $ | 892 | | $ | 224 | |
As of December 29, 2017, the Company had net deferred tax liabilities in Switzerland of $377,000 (which included $881,000 of withholding taxes on unremitted foreign earnings) and net deferred tax assets of $722,000 in Japan included in the Company’s components of deferred income tax assets and liabilities table. As of December 30, 2016, the Company had net deferred tax liabilities in Switzerland of $473,000 (which included $881,000 of withholding taxes on unremitted foreign earnings) and net deferred tax assets of $698,000 in Japan included in the Company’s components of deferred income tax assets and liabilities table.
Valuation allowance
ASC 740 requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset may not be realizable. The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. In evaluating the Company’s ability to recover the deferred tax assets within a jurisdiction from which they arise, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, the Company begins with historical results and incorporates assumptions including overall current and projected business and industry conditions, the amount of future federal, state, and foreign pretax operating income, the reversal of temporary differences and the successful implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company uses to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating results. Valuation allowances, or reductions to deferred tax assets, are recognized if, based on the weight of all the available evidence, it is more likely than not that some portion or all the deferred tax asset may not be realized.
U.S. Jurisdiction
Due to the Company’s history of losses in the U.S., the valuation allowance fully offsets the value of U.S. deferred tax assets on the Company’s balance sheet as of December 29, 2017, with the exception of the $546,000 alternative minimum tax credit (see discussion below – U.S. Federal Income Tax Reform). Further, pursuant to the provisions of Internal Revenue Code Section 382, significant changes in ownership may restrict the future utilization of these tax loss carry forwards.
Foreign Jurisdictions
STAAR Surgical AG
Due to STAAR Surgical AG’s history of profits, the deferred tax assets are considered fully realizable. The Company had net deferred tax assets in Switzerland of $505,000 and $407,000 as of December 29, 2017 and December 30, 2016, respectively.
STAAR Japan, Inc.
Since 2012, STAAR Japan functions as a limited-risk distributor with a guaranteed return from STAAR AG and accordingly, STAAR Japan’s deferred tax assets are considered fully realizable. The Company had net deferred tax assets of $722,000 and $698,000 as of December 29, 2017 and December 30, 2016, respectively.
U.S. Federal Income Tax Reform
As discussed in Note 1, on December 22, 2017, the United States enacted major tax reform legislation, the 2017 Tax Act, which enacted a broad range of changes to the federal tax code. On December 22, 2017, the SEC staff issued SAB 118 that allows corporations to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company is currently analyzing the 2017 Tax Act, and in certain areas, has made reasonable estimates of the effects on their Consolidated Financial Statements and tax disclosures, including the amount of the repatriation tax and changes to its existing deferred tax balances.
Most of the changes from the new law are effective for years beginning after December 31, 2017, with the noted exception of the deemed repatriation of the offshore earnings. As a result, the Company included $5,658,000 in foreign earnings in federal income for the current year. The federal taxable income was offset by the Company’s net operating loss carryforwards resulting in no federal tax due. In addition, the Company remeasured certain net deferred tax assets and liabilities based on the tax rates at which they are expected to reverse in the future. The estimated amount recorded related to the remeasurement of these balances was a reduction to the Company’s net deferred asset of $19,125,000, with a corresponding decrease to the valuation allowance. The Company considers the key estimates on the repatriation tax and net deferred tax remeasurement to be incomplete due to its continuing analysis of final year-end data and tax positions. The Company’s analysis could affect the measurement of these balances and give rise to new deferred and other tax assets and liabilities. Since the 2017 Tax Act was passed late in the fourth quarter of 2017, and further guidance and accounting interpretation is expected over the next 12 months, the Company review is still pending. The Company expects to complete its analysis within the measurement period.
Also under the 2017 Tax Act, corporations are no longer subject to the alternative minimum tax (“AMT”), effective for taxable years beginning after December 31, 2017. As the Company has an AMT credit from a prior year, the Company can carry the credit forward to offset regular tax. To the extent the Company does not have a federal tax liability, a portion of the credit is now refundable each year starting in 2018, with any remaining balance fully refundable in 2021. As the Company will ultimately receive a full refund for the credit, the valuation allowance attributable to the AMT credit carryforward was released, creating a deferred tax benefit of $546,000 for 2017.
Other Income Tax Disclosures
The following tax years remain subject to examination:
| Significant Jurisdictions | | Open Years |
| U.S. Federal | | 2014 – 2016 |
| California | | 2013 – 2016 |
| Switzerland | | 2016 |
| Japan | | 2015 – 2016 |
Loss from continuing operations before provision (benefit) for income taxes is as follows (in thousands):
| | | 2017 | | 2016 | | 2015 | |
| Domestic | | $ | (3,318) | | $ | (10,399) | | $ | (7,678) | |
| Foreign | | | 1,022 | | | (2,045) | | | 2,073 | |
| | | $ | (2,296) | | $ | (12,444) | | $ | (5,605) | |