Entity information:
8
.
Income Taxes
 
The provision for income taxes consisted of the following (in thousands):
 
   
Year Ended
  
   
May 28, 2017
    
May 29, 2016
    
May
31, 2015
  
Current:
                        
Federal
   $
1,690
     $
2,382
     $
3,480
  
State
    
57
      
(82
)
    
43
  
Foreign
    
82
      
83
      
71
  
Total
    
1,829
      
2,383
      
3,594
  
                         
Deferred:
                        
Federal
    
2,244
      
(9,177
)
    
3,789
  
State
    
262
      
(610
)
    
363
  
Total
    
2,506
      
(9,787
)
    
4,152
  
Income tax expense
(benefit)
   $
4,335
     $
(7,404
)
   $
7,746
  
 
 
The actual provision for income taxes differs from the statutory U.S.
federal income tax rate of
35%
for all years presented as follows (in thousands):
 
   
Year Ended
  
   
May 28, 2017
    
May 29, 2016
    
May 31, 2015
  
Provision at U.S. statutory rate of
35%
   $
5,224
     $
(6,666
)
   $
7,451
  
State income taxes, net of
federal benefit
    
325
      
(504
)
    
566
  
Change in valuation allowance
    
85
      
6
      
353
  
Tax credits
    
(834
)
    
(156
)
    
(375
)
S
tock-based compensation
    
(365
)
    
173
      
142
  
Domestic manufacturing deduction
    
(243
)
    
(307
)
    
(369
)
Other
    
143
      
50
      
(22
)
Total
   $
4,335
     $
(7,404
)
   $
7,746
  
 
Significant components of deferred tax assets and liabilities consisted of the following (in thousands):
 
   
Year Ended
  
   
May 28, 2017
    
May
29, 2016
  
Deferred tax assets:
                
Accruals and reserves
   $
3,242
     $
1,836
  
Net operating loss carryforwards
    
2,766
      
3,030
  
Stock-based compensation
    
2,032
      
1,436
  
Research and AMT credit carryforwards
    
1,050
      
468
  
Other
    
661
      
926
  
Gross deferred tax assets
    
9,751
      
7,696
  
Valuation allowance
    
(1,325
)
    
(1,240
)
Net deferred tax assets
    
8,426
      
6,456
  
                 
Deferred tax liabilities:
                
Basis
difference in investment in non-public company
    
(11,495
)
    
(11,125
)
Goodwill and other indefinite life intangibles
    
(11,119
)
    
(8,015
)
Depreciation and amortization
    
(10,393
)
    
(9,758
)
Deferred tax liabilities
    
(33,007
)
    
(28,898
)
                 
Net deferred tax liabilities
   $
(24,581
)
   $
(22,442
)
 
 
The increase in the income tax expense for fiscal year
2017
was
primarily due the Company’s overall net income before tax position in fiscal year
2017
in comparison to an income tax benefit position in fiscal year
2016,
which was primarily due to the Company’s
$34
million impairment of its GreenLine trade name in fiscal year
2016,
which resulted in an overall net loss before taxes for fiscal year
2016.
Additionally, the effective tax rate for fiscal year
2017
decreased to
29%
from
39%
 in fiscal year
2016.
 
During the fiscal year ended
May 28, 2017,
excess tax benefits related to stock-based compensation of
$19
2,000
were reflected in the consolidated statements of comprehensive income as a component of income tax expense as a result of the early adoption of ASU
2016
-
09,
specifically related to the prospective application of excess tax benefits and tax deficiencies related to stock-based compensation.
 
The Company elected to early adopt the new guidance of ASU
2016
-
09,
Compensation – Stock Compensation (Topic
718
)
:
Improvements to Employee Share-Based Payments Accounting
, in the quarter beginning
May 30, 2016.
Accordingly the primary effects of the adoption are as follows: (
1
) using a modified retrospective application, the Company recorded unrecognized excess tax benefits of
$549
,000
as a cumulative-effect adjustment, which increased retained earnings, and reduced deferred taxes by the same, (
2
) using a modified retrospective application, the Company has elected to recognize forfeitures as they occur and recorded a
$200
,000
increase to additional paid in capital, a
$126
,000
reduction to retained earnings, and a
$74
,000
reduction to deferred taxes to reflect the incremental stock-based compensation expense, net of the related tax impacts, that would have been recognized in prior years under the modified guidance, and (
3
)
$150,000
and
$463,000
in excess tax benefits from stock-based compensation was reclassified from cash flows from financing activities to cash flows from operating activities for the fiscal years ended
May 29, 2016
and
May 31, 2015,
respectively, in the Consolidated Statements of Cash Flows.
 
As of
May 2
8,
2017,
the Company had federal, Indiana, and other state net operating loss carryforwards of approximately
$6.8
million,
$5.7
million, and
$3.0
million respectively. These losses expire in different periods through
2032
if
not
utilized. The Company acquired additional net operating losses through the acquisition of GreenLine in
2012.
Utilization of these acquired net operating losses in a specific year is limited due to the “change in ownership” provision of the Internal Revenue Code of
1986
and similar state provisions. The net operating losses presented above for federal and state purposes is net of any such limitation.
 
The Company has California research and development tax credits carryforwards of approximately
$1.2
million. The research and development tax credit carryforwards have an unlimited carryforward period for California purposes.
 
Valuation allowances are reviewed each period on a tax jurisdiction by
jurisdiction basis to analyze whether there is sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax assets. Based on this analysis and considering all positive and negative evidence, the Company determined that a valuation allowance of
$1.3
million should be recorded as a result of uncertainty around the utilization of certain state net operating losses, and a capital loss on the Company’s investment in Aesthetic Sciences as it is more likely than
not
that a portion of the deferred tax asset will
not
be realized in the foreseeable future. The valuation allowance increased by an immaterial amount from the prior year primarily due to uncertainty around the utilization of certain state net operating losses and credits.
 
The accounting for uncertainty in income taxes recognized
in an enterprise’s financial statements prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and the derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition.
 
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
 
   
As of
  
   
May 28
, 2017
    
May 29, 2016
    
May 31, 2015
  
Unrecognized tax benefits
– beginning of the period
   $
842
     $
987
     $
1,035
  
Gross increases
– tax positions in prior period
    
11
      
1
      
17
  
Gross decreases
– tax positions in prior period
    
(90
)
    
(223
)
    
(141
)
Gross increases
– current-period tax positions
    
93
      
77
      
76
  
Lapse of statute of limitations
    
(319
)
    
—
      
—
  
Unrecognized tax benefits
– end of the period
   $
537
     $
842
     $
987
  
 
As of
May 28, 2017,
the total amount of net unrecognized tax benefits was
$537
,000,
of which
$419
,000,
if recognized, would affect the effective tax rate. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest was
not
material as of
May 28, 2017.
Additionally, the Company expects its unrecognized tax benefits to decrease by approximately
$215
,000
within the next
12
months
.
 
Due to tax attribute carryforwards, the Company is subject to examination for tax years
2013
forward for U.S. tax purposes. The Company is also subject to examination in various state ju
risdictions for tax years
1998
forward,
none
of which were individually material.