Income Taxes
The following table presents domestic and foreign components of income (loss) from continuing operations before income taxes for the periods presented (in thousands): |
| | | | | | | | | | | |
| Fiscal Year Ended |
| December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
United States | $ | 4,457 |
| | $ | 721 |
| | $ | (13,318 | ) |
Foreign | 3,700 |
| | (154 | ) | | (3,340 | ) |
Income (loss) from continuing operations before income taxes | $ | 8,157 |
| | $ | 567 |
| | $ | (16,658 | ) |
The following table presents the components of the (benefit from) provision for income taxes for the periods presented (in thousands): |
| | | | | | | | | | | |
| Fiscal Year Ended |
| December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
| | | | | |
Current: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 137 |
| | 88 |
| | 94 |
|
Foreign | 340 |
| | 85 |
| | 33 |
|
Total current provision for income taxes | 477 |
| | 173 |
| | 127 |
|
Deferred: | | | | | |
Federal | (3,136 | ) | | 894 |
| | 883 |
|
State | 153 |
| | 216 |
| | 211 |
|
Foreign | — |
| | — |
| | — |
|
Total deferred tax (benefit) provision | (2,983 | ) | | 1,110 |
| | 1,094 |
|
Total (benefit from) provision for income taxes | $ | (2,506 | ) | | $ | 1,282 |
| | $ | 1,221 |
|
See Note 3 - Discontinued Operations for the losses from discontinued operations before income taxes and related income taxes reported for the years ended December 30, 2017, December 31, 2016, and December 26, 2015, respectively. All pre-tax income (loss) presented in discontinued operations for these periods were related to U.S. operations.
The following table presents a reconciliation of the statutory federal rate, and our effective tax rate on income (losses) from continuing operations, for the periods presented: |
| | | | | | | | |
| Fiscal Year Ended |
| December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
| | | | | |
U.S. federal taxes at statutory rate | 34 | % | | 34 | % | | 34 | % |
State income taxes, net of federal benefit | 3 |
| | 35 |
| | (1 | ) |
Permanent differences | (33 | ) | | 108 |
| | (3 | ) |
Foreign rate differential | (4 | ) | | (5 | ) | | (1 | ) |
Change in valuation allowance - U.S. | (250 | ) | | 27 |
| | (31 | ) |
Change in valuation allowance - foreign | (8 | ) | | 27 |
| | (5 | ) |
Deferred rate change | 227 |
| | — |
| | — |
|
Total | (31 | )% | | 226 | % | | (7 | )% |
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 34% to 21% beginning January 1, 2018, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. Additional work is necessary for a more detailed analysis of our deferred tax assets and liabilities, valuation allowance requirements, and our historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete. In addition, we plan to continue to monitor interpretations and guidance related to the Act and incorporate these matters into our analysis when additional information becomes available.
We recorded a provisional tax benefit of $1.7 million in the fourth quarter of fiscal 2017 primarily due to the remeasurement of net deferred tax liabilities related to indefinite lived intangible assets, mainly goodwill. The Act also provides for net operating losses generated on or after January 1, 2018 to have an indefinite carryforward period. In light of the Act, we evaluated our existing indefinite lived deferred tax liabilities and concluded they can serve as a source of income supporting the realization of certain deferred tax assets which, when they reverse, will become an indefinite lived net operating loss. This resulted in an additional provisional tax benefit of $2.3 million. We continue to refine our calculations of valuation allowances in light of the Act. These tax benefits were partially offset by income tax expense of $1.5 million pertaining to amortization of certain goodwill for tax purposes for which there is no corresponding book deduction and certain state and foreign taxes based on operating income that are payable without regard to our tax loss carry forwards
During fiscal 2016 we recorded an income tax expense of $1.3 million, primarily related to amortization of certain goodwill for tax purposes for which there is no corresponding book deduction and certain state and foreign taxes based on operating income that are payable without regard to our tax loss carry forwards.
During fiscal 2015 we recorded an income tax benefit of $1.2 million, primarily related to amortization of certain goodwill for tax purposes for which there is no corresponding book deduction and certain state taxes based on operating income that are payable without regard to our tax loss carry forwards.
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.
The following table presents the significant components of our deferred tax assets and liabilities, including those related to discontinued operations for the periods presented (in thousands):
|
| | | | | | | |
| Fiscal Year Ended |
| December 30, 2017 | | December 31, 2016 |
Deferred tax assets | | | |
Net operating loss carryforwards | $ | 38,050 |
| | $ | 53,611 |
|
Accrued expenses | 3,362 |
| | 3,202 |
|
Stock-based compensation | 2,446 |
| | 2,342 |
|
U.S. definite lived intangibles | 3,362 |
| | 5,214 |
|
Other temporary differences | 78 |
| | 433 |
|
Total deferred tax assets | 47,298 |
| | 64,802 |
|
Valuation allowance | (44,703 | ) | | (64,229 | ) |
Net deferred tax assets | 2,595 |
| | 573 |
|
Deferred tax liabilities | | | |
Foreign intangibles | (40 | ) | | (59 | ) |
U.S. goodwill | (3,640 | ) | | (4,276 | ) |
Fixed assets | (84 | ) | | (514 | ) |
Other temporary differences | (124 | ) | | — |
|
Total deferred tax liabilities | (3,888 | ) | | (4,849 | ) |
Net deferred tax liabilities | $ | (1,293 | ) | | $ | (4,276 | ) |
We re-measure certain deferred tax assets and liabilities based on the rates at which they are anticipated to reverse in the future. We are still examining certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
ASC 740 requires a valuation allowance to reduce the deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, we have recorded a valuation allowance of $44.7 million and $64.2 million at December 30, 2017 and December 31, 2016, respectively, because our management has determined that is it more likely than not that these assets will not be fully realized. The decrease of $19.5 million in the overall valuation allowance relates to the U.S. federal rate reduction from 34% to 21%, and our assessment that our indefinite lived deferred tax liabilities provide a source of income against the realization of certain deferred tax assets that we expect to become indefinite lived net operating losses when they reverse.
As of December 30, 2017, we had federal net operating loss carryforwards of $131.3 million and state net operating loss carryforwards of $108.8 million, which may be available to reduce future taxable income. The net operating losses (‘‘NOL’’) will expire at various dates through 2037.
As of December 30, 2017, we had foreign net operating losses primarily related to our German operations of $9.9 million, our U.K. operations of $2.9 million, and our Australia operations of $0.5 million that have an unlimited carryforward period under German, U.K. and Australia tax law.
The NOLs are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years.
As of December 30, 2017 and December 31, 2016, the Company had no recorded liabilities for uncertain tax positions. Interest and penalty charges, if any, related to uncertain tax positions would be classified as income tax expense in the accompanying consolidated statements of operations. As of December 30, 2017, December 31, 2016, and December 26, 2015, we had no accrued interest or penalties related to uncertain tax positions.
We file U.S. federal income tax returns and returns in various state, local, and foreign jurisdictions. Since we are in a loss carryforward position, the statute of limitations generally remains open for all tax years. Currently, we are not under examination relating to tax returns that have been previously filed.
We have not recorded income tax expense pertaining to the one-time transition tax on the mandatory deemed repatriation of foreign earnings as we remain in a cumulative earnings and profits deficit. Our investments in our subsidiaries are essentially permanent in duration. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities is not practicable. We are still in the process of analyzing the impact of the Act on our indefinite reinvestment assertion