INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law and introduced significant changes to U.S. tax law. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. The new legislation also sets forth a variety of other changes, including a limitation on the tax deductibility of interest expense, the acceleration of business asset expensing, a limitation on the use of net operating losses generated in future years, the repeal of the alternative minimum tax ("AMT"), and a reduction in the amount of executive pay that could qualify as a tax deduction.
ASC 740 requires the Company to recognize the effect of the tax law changes in the period of enactment. The lower corporate income tax rate requires the Company to re-measure our U.S. deferred tax assets and liabilities as well as reassess the realizability of our deferred tax assets and liabilities. As a result, the Company recognized a $6.2 million non-cash tax benefit through income from continuing operations for the re-measurement of deferred tax assets and liabilities due to the reduction in the federal tax rate to 21%. This re-measurement of deferred taxes had no impact on cash flows.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118) which addresses income tax accounting implications of the Tax Act. The purpose of SAB 118 was to address any uncertainty or diversity of view in applying ASC 740 Income Taxes in the reporting period in which the Tax Act was enacted. SAB 118 allows for a measurement period to finalize the impacts of the Tax Act, not to extend beyond one year from the date of enactment.
The Tax Act requires the Company to recognize the impact of the transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and to recognize the impact of new taxes on foreign sourced earnings. The Company has a Canadian foreign subsidiary that was acquired in 2014. The Company has not made sufficient progress on the earnings and profit ("E&P") analysis of this foreign subsidiary to reasonably estimate the effects of the one-time transition tax and, therefore, have not recorded provisional amounts. Based upon the Company’s estimates, the impact of the deemed repatriation of foreign earnings is expected to be offset by net operating losses and the impact to the tax rate is expected to be immaterial, however further work is necessary to confirm this position. We have continued to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the Act being enacted. The Company will continue to refine its accumulated E&P calculation and associated tax pool support for the Canadian foreign subsidiary and will recognize the impact of the transition tax during the measurement period as provided in SAB 118.
Even though our fiscal year 2018 began on December 31, 2017, the Company will implement the new Tax Act effective for fiscal 2018.
The Company deducted for federal income tax purposes accelerated "bonus" depreciation on the majority of its capital expenditures for assets placed in service in fiscal 2011 through fiscal 2017. Therefore, the Company recorded a noncurrent deferred tax liability as to the difference between the book basis and the tax basis of those assets. In addition, as a result of the federal bonus depreciation, the Company recorded a Net Operating Loss ("NOL") of $44.7 million, which will begin to expire in 2031. The unexpired balance of the NOL generated in 2011 is $11.1 million as of December 30, 2017. The company recorded additional NOL during 2012 -2015 of $13 million. The balance on the federal NOL’s generated from 2011 through 2015 at December 30, 2017 was $24.1 million, and the remaining deferred tax asset related to the Company's state and federal NOL was a tax effected balance of $5.9 million.
ASU 2016-09 simplified the treatment for employee share-based compensation by allowing an entity to recognize excess tax benefits in the current period whether or not current taxes payable are reduced. Prior to 2017,the Company could not recognize windfall tax benefits associated with employee share-based compensation because it was in an NOL position and current taxes payable would not be reduced by the excess tax benefits. As a result of ASU 2016-09, the Company recognized excess tax benefits of $2.5 million from share-based compensation from prior years as an adjustment to opening retained earnings.
The Company's effective tax rate for fiscal 2017 was 17.3% compared to 31.8% in fiscal 2016. The difference in the effective tax rate is principally attributable to the impact on our deferred taxes as of December 30, 2017 of the reduction in the U.S. federal corporate tax rate to 21%.
Components of the Company's income tax benefit and provision consist of the following for fiscal years 2017, 2016, and 2015:
|
| | | | | | | | | | | | |
| | For the Fiscal Years Ended, |
(Thousands) | | December 30, 2017 | | December 31, 2016 | | January 2, 2016 |
Current: | | | | | | |
Federal | | $ | 409 |
| | $ | 19 |
| | $ | 53 |
|
State | | 263 |
| | 203 |
| | 216 |
|
Foreign | | — |
| | — |
| | 9 |
|
Total current | | $ | 672 |
| | $ | 222 |
| | $ | 278 |
|
| | | | | | |
Deferred: | | | | | | |
Federal | | $ | 4,501 |
| | $ | 1,943 |
| | $ | 794 |
|
State | | 829 |
| | 643 |
| | (155 | ) |
Foreign | | (79 | ) | | 3 |
| | (18 | ) |
Total deferred | | $ | 5,251 |
| | $ | 2,589 |
| | $ | 621 |
|
| | | | | | |
Income tax provision | | $ | 5,923 |
| | $ | 2,811 |
| | $ | 899 |
|
A reconciliation of the expected income tax expense at the statutory federal rate to the Company's actual
income tax expense is as follows:
|
| | | | | | | | | | | | |
| | For the Fiscal Years Ended, |
(Thousands) | | December 30, 2017 | | December 31, 2016 | | January 2, 2016 |
Tax expense at statutory federal rate | | $ | 11,673 |
| | $ | 3,004 |
| | $ | 785 |
|
State and local tax, net of federal expense | | 720 |
| | 561 |
| | 42 |
|
Shortfalls from share-based compensation | | (412 | ) | | 23 |
| | 124 |
|
Transaction and transaction-related costs | | — |
| | (808 | ) | | (454 | ) |
Impact of Federal Rate Change | | (6,156 | ) | | — |
| | — |
|
Other | | 98 |
| | 31 |
| | 402 |
|
Total income tax provision | | $ | 5,923 |
| | $ | 2,811 |
| | $ | 899 |
|
Components of deferred tax assets (liabilities) are as follows:
|
| | | | | | | | |
| | As of, |
(Thousands) | | December 30, 2017 | | December 31, 2016 |
Deferred tax assets: | | | | |
Net operating loss carryforward | | $ | 5,869 |
| | $ | 16,213 |
|
Stock compensation | | 1,097 |
| | 1,629 |
|
Tax intangible assets | | 1,515 |
| | 2,317 |
|
Reserves and accruals | | 4,452 |
| | 2,894 |
|
Income tax credits | | 1,545 |
| | 912 |
|
Allowance for doubtful accounts | | 527 |
| | 858 |
|
Total deferred tax asset | | $ | 15,005 |
| | $ | 24,823 |
|
Less: valuation allowance | | 1 |
| | 127 |
|
Net deferred tax asset | | 15,004 |
| | 24,696 |
|
| | | | |
Deferred tax liabilities: | | | | |
Prepaids | | $ | (544 | ) | | $ | (754 | ) |
Depreciation and amortization | | (24,016 | ) | | (29,256 | ) |
Total deferred tax liability | | (24,560 | ) | | (30,010 | ) |
| | | | |
Net deferred tax liability | | $ | (9,556 | ) | | $ | (5,314 | ) |
As of December 30, 2017, the Company is no longer subject to U.S. federal examinations by taxing authorities for years prior to 2014. Federal and state income tax returns for fiscal years 2014 through 2017 are still open for examination.
The Company establishes reserves when it is more likely than not that the Company will not realize the full tax benefit of a position. The Company had a reserve of $2.5 million and $2.4 million for uncertain tax positions as of December 30, 2017 and December 31, 2016, respectively. The gross unrecognized tax benefits would, if recognized, decrease the Company's effective tax rate.
Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, we do not anticipate any significant changes to unrecognized tax benefits over the next 12 months.
The Company recognizes interest and penalties associated with income tax liabilities as income tax expense in the Statement of Operations. No significant penalties or interest are included in income taxes or accounted for on the balance sheet related to unrecognized tax positions as of December 30, 2017.
The following table summarizes the movement in unrecognized tax benefits:
|
| | | | | | | | |
| | For the Fiscal Years Ended, |
(Thousands) | | December 30, 2017 | | December 31, 2016 |
Gross Unrecognized Tax Benefits: |
Beginning Balance | | $ | 2,443 |
| | $ | 2,516 |
|
Additions based on current year's tax positions | | 10 |
| | 6 |
|
Net changes based on prior year's tax positions | | 56 |
| | (79 | ) |
Ending Balance | | $ | 2,509 |
| | $ | 2,443 |
|