Entity information:
Income Taxes
In December 2017, the U.S. government enacted the Tax Act which made broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; and (4) limiting the deductibility of certain executive compensation.
As a result of the Company’s analysis of the impact of the Tax Act, a discrete net tax benefit of $115 million was recorded in fiscal 2017, which primarily consists of a net benefit for the corporate rate reduction of $119 million. This rate reduction resulted in a corresponding net decrease of deferred tax liabilities.
The Company's accounting for the following elements of the Tax Act is not complete: (1) deemed repatriation tax, (2) cost recovery and (3) limitation on the deductibility of certain executive compensation. However, the Company was able to make reasonable estimates and has recorded provisional amounts. The Company expects to finalize its assessment of all provisional amounts within the maximum one year measurement period. There are no material elements of the Tax Act for which the Company was unable to make a reasonable estimate.
Less than 10% of the Company's income from continuing operations before income taxes for fiscal 2017, fiscal 2016 and the 11-month period ended January 1, 2016, was earned outside of the United States. The provision for income taxes related to continuing operations for the periods presented included the following:
 
 
12 Months Ended
 
11 Months Ended
 
 
December 29,
2017
 
December 30,
2016
 
January 1,
2016
 
 
(in millions)
Current:
 
 
 
 
 
 
Federal and foreign
 
$
130

 
$
88

 
$
71

State
 
30

 
16

 
14

Deferred:
 
 
 
 
 
 
Federal and foreign
 
(141
)
 
(29
)
 
20

State
 
10

 
(3
)
 
7

Total
 
$
29

 
$
72

 
$
112


A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to income from continuing operations before income taxes for the periods presented was as follows:
 
 
12 Months Ended
 
11 Months Ended
 
 
December 29,
2017
 
December 30,
2016
 
January 1,
2016
 
 
(in millions)
Amount computed at the statutory federal income tax rate (35%)
 
$
138

 
$
111

 
$
124

Change in statutory federal tax rate
 
(125
)
 
—

 
—

State income taxes, net of federal tax benefit
 
31

 
8

 
14

Excess tax benefits from stock-based compensation
 
(12
)
 
(8
)
 
—

Capitalized transaction costs
 
9

 
7

 
—

Change in valuation allowance for deferred tax assets
 
7

 
(8
)
 
(21
)
Research and development credits
 
(7
)
 
(4
)
 
(4
)
Dividends paid to employee stock ownership plan
 
(4
)
 
(38
)
 
(3
)
Impact of foreign operations
 
(4
)
 
—

 
—

Change in accruals for uncertain tax positions
 
—

 
1

 
(4
)
Other
 
(4
)
 
3

 
6

Total
 
$
29

 
$
72

 
$
112

Effective income tax rate
 
7.4
%
 
22.6
%
 
31.5
%

The Company's effective tax rate for fiscal 2017 was favorably impacted by the Tax Act's reduction of the federal corporate tax rate from 35% to 21% applied to the Company's fiscal 2017 year-end deferred tax balances and excess tax benefits related to employee stock-based payment transactions.

The Company's effective tax rate for fiscal 2016 was favorably impacted by the tax deductibility of the special cash dividend, related to the Transactions described in “Note 2—Acquisitions,” on shares held by the Leidos retirement plan, the income tax benefits of the research tax credit and the excess tax benefits related to employee stock-based payment transactions, partially offset by the impact of certain capitalized transactions costs related to the Transactions.
The Company's effective tax rate for the 11-month period ended January 1, 2016, was favorably impacted by the release of the valuation allowance related to the utilization of a capital loss carryforward for capital gains recognized during the current year and the favorable resolution of certain tax contingencies with the tax authorities. In addition, the Company's effective tax rate was favorably impacted by the research tax credit as well as the tax deduction for dividends on shares held by the Leidos Retirement Plan (an employee stock ownership plan).
Deferred income taxes are recorded for differences in the basis of assets and liabilities for financial reporting purposes and tax reporting purposes. Deferred tax assets (liabilities) were comprised of the following:
 
 
December 29,
2017
 
December 30,
2016
 
 
(in millions)
Reserves
 
$
62

 
$
103

Capital loss carryover
 
60

 
81

Accrued vacation and bonuses
 
54

 
89

Credits and net operating losses carryovers
 
33

 
35

Deferred compensation
 
22

 
38

Vesting stock awards
 
17

 
23

Deferred rent and tenant allowances
 
10

 
16

Investments
 
2

 
3

Employee benefit contributions
 
—

 
3

Other
 
18

 
17

Total deferred tax assets
 
278

 
408

Valuation allowance
 
(83
)
 
(102
)
Deferred tax assets, net of valuation allowance
 
195

 
306


 
 
 
 
Purchased intangible assets
 
(340
)
 
(748
)
Deferred revenue
 
(34
)
 
(42
)
Partnership interest
 
(17
)
 
(14
)
Accumulated other comprehensive income
 
(13
)
 
(8
)
Employee benefit contributions
 
(3
)
 
—

Fixed asset basis differences
 
—

 
(11
)
Other
 
(8
)
 
(7
)
Total deferred tax liabilities
 
(415
)
 
(830
)
Net deferred tax liabilities
 
$
(220
)
 
$
(524
)

Net deferred tax assets (liabilities) were as follows:
 
 
December 29,
2017
 
December 30,
2016
 
 
(in millions)
Net non-current deferred tax assets
 
$
—

 
$
16

Net non-current deferred tax liabilities
 
(220
)
 
(540
)
Total net deferred tax liabilities
 
$
(220
)
 
$
(524
)

At December 29, 2017, the Company had $20 million of federal net operating loss ("NOL") carryforwards and $180 million of state net operating losses, which will begin to expire in fiscal 2018. The Company also has $13 million of state tax credits, which will begin to expire in fiscal 2018. The Company expects to utilize $5 million and $71 million of these state tax credits and state net operating losses, respectively. The company also had foreign net operating losses of $35 million. The majority of the NOLs were acquired in the Transactions.
As of December 29, 2017, the Company had a capital loss carryforward of $234 million, $97 million of which will begin to expire in fiscal 2018. The Company does not believe it will be able to generate capital gains to realize the benefit from the capital loss carryforward. As a result, a full valuation allowance has been provided as of December 29, 2017.
The Company's unrecognized tax benefits are primarily related to certain recurring deductions customary for the Company’s industry. The changes in the unrecognized tax benefits, excluding accrued interest and penalties, were as follows:
 
 
12 Months Ended
 
11 Months Ended
 
 
December 29,
2017
 
December 30,
2016
 
January 1,
2016
 
 
(in millions)
Unrecognized tax benefits at beginning of year
 
$
9

 
$
11

 
$
17

Additions for tax positions related to current year
 
2

 
1

 
5

Additions for tax positions related to prior years
 
2

 
4

 
4

Reductions for tax positions related to prior years
 
(3
)
 
(7
)
 
(15
)
Unrecognized tax benefits at end of year
 
$
10

 
$
9

 
$
11

Unrecognized tax benefits that, if recognized, would affect the effective income tax rate
 
$
7

 
$
4

 
$
7


At December 29, 2017, December 30, 2016, and January 1, 2016, accrued interest and penalties totaled $1 million. A negligible amount of interest and penalties were recognized in the Company's consolidated statements of income in fiscal 2017, fiscal 2016 and the 11-month period ended January 1, 2016.
At December 29, 2017, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $11 million, $7 million of which were classified as other long-term liabilities on the Company's consolidated balance sheets. At December 30, 2016, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $10 million, $5 million of which were classified as other long-term liabilities on the Company's consolidated balance sheets. At January 1, 2016, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $12 million, $5 million of which were classified as other long-term liabilities on the Company's consolidated balance sheets.
The Company files income tax returns in the United States and various state and foreign jurisdictions. The Company participates in the Internal Revenue Service (“IRS”) Compliance Assurance Process, a real-time audit of the Company's consolidated federal corporate income tax return. The IRS has examined the Company's consolidated federal income tax returns through the year ended December 30, 2016. With a few exceptions, as of December 29, 2017, the Company is no longer subject to state, local, or foreign examinations by the tax authorities for years before fiscal 2015.
During the next 12 months, it is reasonably possible that resolution of reviews by taxing authorities, both domestic and international, could be reached with respect to $6 million of the Company's unrecognized tax benefits, depending on the timing of ongoing examinations, any litigation and expiration of statute of limitations, either because the Company's tax positions are sustained or because the Company agrees to their disallowance and pays the related income tax. While the Company believes it has adequate accruals for uncertain tax positions, the tax authorities may determine that the Company owes taxes in excess of recorded accruals or the recorded accruals may be in excess of the final settlement amounts agreed to by tax authorities.