I. Income Taxes
Significant components of the provision for income taxes are as follows:
| 2017 | 2016 | 2015 | ||||||||||
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Current: |
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Federal |
$ | 34,255 | $ | 35,390 | $ | 42,391 | ||||||
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State |
5,225 | 6,108 | 7,403 | |||||||||
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Total current |
39,480 | 41,498 | 49,794 | |||||||||
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Deferred: |
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Federal |
(22,489 | ) | 7,666 | 6,279 | ||||||||
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State |
102 | 608 | 523 | |||||||||
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Total deferred |
(22,387 | ) | 8,274 | 6,802 | ||||||||
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Total provision for income taxes |
$ | 17,093 | $ | 49,772 | $ | 56,596 | ||||||
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The Company’s reconciliations to statutory rates are as follows:
| 2017 | 2016 | 2015 | ||||||||||
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Statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
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State income taxes, net of federal benefit |
3.6 | 3.6 | 3.4 | |||||||||
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Deduction relating to U.S. production activities |
(3.2 | ) | (2.6 | ) | (2.7 | ) | ||||||
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Deduction relating to excess stock benefits |
(3.7 | ) | — | — | ||||||||
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Change relating to enacted Tax Cuts and Jobs Act |
(17.5 | ) | — | — | ||||||||
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Change in valuation allowance |
— | (0.3 | ) | — | ||||||||
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Other |
0.5 | 0.6 | 0.8 | |||||||||
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| 14.7 | % | 36.3 | % | 36.5 | % | |||||||
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Significant components of the Company’s deferred tax assets and liabilities are as follows at:
| December 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (in thousands) | ||||||||
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Deferred tax assets: |
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Accrued expenses |
$ | 2,484 | $ | 6,488 | ||||
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Stock-based compensation expense |
4,175 | 5,929 | ||||||
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Inventory |
435 | 1,117 | ||||||
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Other |
2,598 | 4,097 | ||||||
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Total deferred tax assets |
9,692 | 17,631 | ||||||
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Valuation allowance |
(439 | ) | (669 | ) | ||||
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Total deferred tax assets net of valuation allowance |
9,253 | 16,962 | ||||||
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Deferred tax liabilities: |
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Property, plant and equipment |
(42,076 | ) | (72,140 | ) | ||||
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Prepaid expenses |
(1,341 | ) | (1,204 | ) | ||||
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Goodwill |
(655 | ) | (879 | ) | ||||
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Total deferred tax liabilities |
(44,072 | ) | (74,223 | ) | ||||
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Net deferred tax liabilities |
$ | (34,819 | ) | $ | (57,261 | ) | ||
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Reduction of US federal corporate tax rate: The Tax Cuts and Jobs Act of 2017, enacted December 22, 2017, reduces the corporate tax rate to 21%, effective January 1, 2018. Consequently, the Company recorded a decrease related to deferred tax assets and deferred tax liabilities of $4.7 million and $25.0 million, respectively, with a corresponding net adjustment to deferred income tax benefit of $20.3 million for the year ended December 30, 2017.
The Company’s practice is to classify interest and penalties related to income tax matters in income tax expense. Interest and penalties included in the provision for income taxes amounted to $0.0 million, $0.0 million, and $0.1 million for fiscal years 2017, 2016, and 2015, respectively. Accrued interest and penalties amounted to $0.0 million and $0.3 million at December 30, 2017 and December 31, 2016, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| 2017 | 2016 | |||||||
| (in thousands) | ||||||||
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Balance at beginning of year |
$ | 589 | $ | 486 | ||||
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Increases related to current year tax positions |
64 | 80 | ||||||
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(Decreases) Increases related to prior year tax positions |
(259 | ) | 76 | |||||
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Decreases related to settlements |
(62 | ) | (50 | ) | ||||
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Decreases related to lapse of statute of limitations |
(40 | ) | (3 | ) | ||||
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Balance at end of year |
$ | 292 | $ | 589 | ||||
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Included in the balance of unrecognized tax benefits at December 30, 2017 and December 31, 2016 are potential net benefits of $0.3 million and $0.5 million, respectively, that would favorably impact the effective tax rate if recognized. Unrecognized tax benefits are included in accrued expenses in the accompanying consolidated balance sheets and adjusted in the period in which new information about a tax position becomes available or the final outcome differs from the amount recorded.
In September 2017, the Internal Revenue Service (“IRS”) commenced an examination of the Company’s 2015 consolidated corporate income tax return. The examination was still in process as of December 30, 2017. As of December 30, 2017, the Company’s 2014 and 2016 federal income tax returns remain subject to examination by IRS. The Company’s state income tax returns remain subject to examination for three or four years depending on the state’s statute of limitations. The Company is being audited by one state as of December 30, 2017. In addition, the Company is generally obligated to report changes in taxable income arising from federal income tax audits.
It is reasonably possible that the Company’s unrecognized tax benefits may increase or decrease in 2018 if there is a completion of certain income tax audits; however, the Company cannot estimate the range of such possible changes. The Company does not expect that any potential changes would have a material impact on the Company’s financial position, results of operations or cash flows.
As of December 30, 2017, the Company’s deferred tax assets include a capital loss carryforward. The capital loss carryforward, totaling $1.7 million as of December 30, 2017, which if unused, will expire in year 2019. For the year ended December 30, 2017, the Company recorded a net valuation allowance release of $0.3 million due to a decrease in the deferred tax asset for capital loss carryforwards.