We file a consolidated United States federal income tax return which includes all of our domestic operations. Our domestic subsidiaries also file income tax returns based on our operations in certain state and local jurisdictions. We file separate tax returns for each of our foreign subsidiaries in the countries in which they operate.
Loss before provision for income taxes consists of the following:
| | | | |
| | | | | | | |
| Domestic | | $ | (1,335 | ) | | $ | (11,565 | ) |
| Foreign | | | (328 | ) | | | (709 | ) |
| Total | | $ | (1,663 | ) | | $ | (12,274 | ) |
The provision for income taxes consists of the following:
| | | | |
| | | | | | | |
| Current tax provision (benefit): | | | | | | | | |
| U.S. Federal | | $ | 0 | | | $ | 0 | |
| State | | | 113 | | | | 196 | |
| Foreign | | | 414 | | | | 255 | |
| | | | 527 | | | | 451 | |
| Deferred tax provision: | | | | | | | | |
| U.S. Federal | | | 50 | | | | 14 | |
| Foreign | | | (103 | ) | | | (43 | ) |
| | | | (53 | ) | | | (29 | ) |
| Provision for income taxes | | $ | 474 | | | $ | 422 | |
The following is a reconciliation of the provision for income taxes to the United States federal statutory tax rate:
| | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Income taxes at the U.S. statutory rate | | $ | (582 | ) | | | 35.0 | % | | $ | (4,296 | ) | | | 35.0 | % |
| Equity compensation | | | 16 | | | | (0.9 | ) | | | 42 | | | | (0.3 | ) |
| Other permanent differences | | | 497 | | | | (29.9 | ) | | | 342 | | | | (2.8 | ) |
| Effects of foreign taxes and tax credits | | | 47 | | | | (2.9 | ) | | | 2,368 | | | | (19.3 | ) |
| State income taxes | | | 73 | | | | (4.4 | ) | | | (439 | ) | | | 3.6 | |
| Uncertain tax positions | | | 343 | | | | (20.6 | ) | | | 320 | | | | (2.6 | ) |
| Change in valuation allowance | | | 349 | | | | (21.0 | ) | | | 1,911 | | | | (15.6 | ) |
| Other | | | (269 | ) | | | 16.2 | | | | 174 | | | | (1.4 | ) |
| Total provision for income taxes | | $ | 474 | | | | (28.5 | %) | | $ | 422 | | | | (3.4 | %) |
Other permanent differences mainly relate to section
956
inclusion, meals and entertainment, and foreign permanent items.
Significant management judgment is required in determining our provision for income taxes and in determining whether any deferred tax assets will be realized in full or in part. When it is more likely than
not
that all or some portion of specific deferred
tax assets such as net operating losses or foreign tax credit carry-forwards will
not
be realized, a valuation allowance must be established for the amount of the deferred tax assets that would
not
be realized. Realization will be based on our ability to generate sufficient future taxable income. In fiscal year
2012,
we established a valuation allowance against our deferred tax assets in the United States due to current year and projected future pre-tax book losses. We continued to maintain this valuation allowance throughout fiscal years
2017
and
2016.
As of
September 29, 2017
and
September 30, 2016,
we have net operating loss carryforwards to utilize in the U.S. of
$20,294
and
$18,402,
respectively. Additionally, we have
$132
foreign tax credit carryforwards for tax return purposes as of
September 29, 2017
and
September 30, 2016.
The U.S. net operating loss and foreign tax credit carryforwards are scheduled to begin to expire in
2035
and
2021
respectively.
Deferred income tax assets and liabilities consist of the following:
| | | | |
| | | | | | | |
| Domestic operations: | | | | | | | | |
| Deferred tax assets: | | | | | | | | |
Deferred facilities rent charges | | $ | 2,544 | | | $ | 2,721 | |
| | | | 579 | | | | 1,772 | |
Foreign tax credit carryforwards | | | 132 | | | | 132 | |
Alternative minimum tax credit carryforwards | | | 189 | | | | 189 | |
| | | | 344 | | | | 360 | |
| | | | 83 | | | | 58 | |
Depreciation and amortization | | | 1,986 | | | | 2,418 | |
| | | | 8,446 | | | | 6,873 | |
| | | | 83 | | | | 78 | |
| | | | 307 | | | | 206 | |
Related party payables and Subpart F | | | 541 | | | | 193 | |
| | | | 140 | | | | 36 | |
| Deferred tax liabilities: | | | | | | | | |
| | | | (111 | ) | | | (158 | ) |
Undistributed earnings of foreign subsidiaries | | | (2,378 | ) | | | (2,287 | ) |
Domestic net deferred tax assets | | | 12,885 | | | | 12,591 | |
| Foreign operations: | | | | | | | | |
| Deferred tax assets: | | | | | | | | |
| | | | 505 | | | | 422 | |
| Deferred tax liabilities: | | | | | | | | |
| | | | (52 | ) | | | (73 | ) |
Foreign net deferred tax assets | | | 453 | | | | 349 | |
| Domestic and foreign deferred tax assets | | | 13,338 | | | | 12,940 | |
| Valuation allowances | | | (12,951 | ) | | | (12,602 | ) |
| | | $ | 387 | | | $ | 338 | |
We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. For fiscal year
201
7,
we recognized an expense of
$79
attributable to interest for uncertain tax positions related to transfer pricing and interest accrued. As of
September 29, 2017
and
September 30, 2016,
we had
$843
and
$762
accrued, respectively, for interest and penalties for uncertain tax positions. As of
September 29, 2017,
$1,398
of our total unrecognized tax benefits would favorably affect our effective tax rate if recognized. We do
not
believe it is reasonably possible that the amount of unrecognized tax benefits will significantly change within the next
12
months due to changes in circumstances other than related to these intercompany transactions. We file income tax returns in the United States and various state, local, and foreign jurisdictions, and remain subject to examinations by these jurisdictions for fiscal years
2011
through
2017.
The aggregate change in the balance of gross unrecognized tax benefits, which excludes interest and penalties, is as follows:
| | | | |
| | | | | | | |
| Balance, beginning of year | | $ | 713 | | | $ | 472 | |
Increases related to tax positions taken during the current period | | | 296 | | | | 241 | |
| Balance end of year | | $ | 1,009 | | | $ | 713 | |
Based on future forecasts and budgets, the Company expects to repatriate the unremitted earnings from the foreign subsidiaries to the United States which then become taxable to the Company in the foreseeable future.
As of
September 29, 2017
and
September 30, 2016,
the Company recorded a deferred tax liability for U.S. federal income of
$2,312
and
$2,271
and foreign withholding taxes of
$66
and
$16,
respectively. This is related to approximately
$6,606
and
$6,490
of its international subsidiaries’ undistributed earnings as of
September 29, 2017
and
September 30, 2016,
respectively. This deferred tax liability is offset by existing deferred tax assets in the United States; therefore, the net impact to tax expense for fiscal year
2017
is only the
$50
of foreign withholding taxes.