Income Taxes The Company’s income tax provision (benefit) was comprised of the following: |
| | | | | | | | | | | |
| Year Ended |
| December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
Current: | | | | | |
Federal | $ | (5,718 | ) | | $ | 11,979 |
| | $ | 14,086 |
|
Foreign | 346 |
| | 372 |
| | 396 |
|
State | 445 |
| | 1,865 |
| | 2,081 |
|
| (4,927 | ) | | 14,216 |
| | 16,563 |
|
Deferred: | | | | | |
Federal | (1,059 | ) | | (4,908 | ) | | 5,318 |
|
State | (1,649 | ) | | (792 | ) | | 139 |
|
| (2,708 | ) | | (5,700 | ) | | 5,457 |
|
Valuation allowance | (120 | ) | | (180 | ) | | 26 |
|
| $ | (7,755 | ) | | $ | 8,336 |
| | $ | 22,046 |
|
Deferred income taxes reflect the 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 components of deferred income tax assets and liabilities at December 31, 2017 and January 1, 2017 were as follows:
|
| | | | | | | | |
| | December 31, 2017 | | January 1, 2017 |
Deferred income tax assets: | | | | |
Accrued vacation benefits | | 1,051 |
| | 1,640 |
|
Incentive compensation | | 924 |
| | 986 |
|
Other accruals | | 3,187 |
| | 3,924 |
|
Deferred income on sale-leaseback of real estate | | 5,422 |
| | 9,861 |
|
Lease financing obligations | | — |
| | 162 |
|
Occupancy costs | | 6,669 |
| | 8,036 |
|
Tax credit carryforwards | | 883 |
| | 1,148 |
|
Property and equipment depreciation | | 1,665 |
| | — |
|
Other | | 1,073 |
| | 1,738 |
|
Gross deferred income tax assets | | 20,874 |
| | 27,495 |
|
Deferred income tax liabilities: | | | | |
Property and equipment depreciation | | — |
| | (8,311 | ) |
Amortization of other intangibles, net | | (2,094 | ) | | (3,250 | ) |
Other | | (812 | ) | | (701 | ) |
Gross deferred income tax liabilities | | (2,906 | ) | | (12,262 | ) |
Less: Valuation allowance | | (736 | ) | | (856 | ) |
Net deferred income tax assets | | $ | 17,232 |
| | $ | 14,377 |
|
The Company establishes a valuation allowance to reduce the carrying amount of deferred income tax assets when it is more likely than not that it will not realize some portion or all of the tax benefit of its deferred tax assets. The Company evaluates whether its deferred income tax assets are probable of realization on a quarterly basis. In performing this analysis, the Company considers all available evidence including historical operating results, the estimated timing of future reversals of existing taxable temporary differences and estimated future taxable income exclusive of reversing temporary differences and carryforwards. At December 31, 2017 and January 1, 2017, the Company had a valuation allowance of $736 and $856 respectively, against net deferred income tax assets due to foreign income tax credit carryforwards where it was determined to be more likely than not that
the deferred income tax asset amounts would not be realized. The valuation allowance decreased $120 and $180 in 2017 and 2016, respectively, primarily due to foreign tax credit carryforwards, net of expired foreign income tax credits. The estimation of future taxable income for federal and state purposes and the Company's ability to realize deferred income tax assets can significantly change based on future events and operating results.
The Company's effective tax rate was 17.6%, 33.3%, and 36.4% for the years ended December 31, 2017, January 1, 2017 and January 3, 2016, respectively. A reconciliation of the statutory federal income tax provision (benefit) to the effective tax provision (benefit) was as follows:
|
| | | | | | | | | | | |
| Year Ended |
| December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
Statutory federal income tax provision (benefit) | $ | (15,394 | ) | | $ | 8,767 |
| | $ | 21,204 |
|
State income taxes, net of federal benefit | (734 | ) | | 689 |
| | 1,435 |
|
Change in valuation allowance | (120 | ) | | (180 | ) | | 26 |
|
Change in federal income tax rate | 8,952 |
| | — |
| | — |
|
Net share-based compensation-tax benefit deficiencies(1) | 228 |
| | — |
| | — |
|
Non-deductible expenses | 84 |
| | (3 | ) | | 260 |
|
Foreign taxes | 346 |
| | 372 |
| | 396 |
|
Employment tax credits | (914 | ) | | (905 | ) | | (889 | ) |
Foreign tax credits/deductions | (121 | ) | | (372 | ) | | (396 | ) |
Other | (82 | ) | | (32 | ) | | 10 |
|
| $ | (7,755 | ) | | $ | 8,336 |
| | $ | 22,046 |
|
(1) See Note 1-- Basis of Presentation Guidance Adopted in 2017.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act"), which includes a provision that reduces the federal corporate income tax rate from 35.0% to 21.0% effective January 1, 2018, was signed into law. In accordance with generally accepted accounting principles, the enactment of this new tax legislation required the Company to revalue its net deferred income tax assets at the new corporate statutory rate of 21.0% as of the enactment date, which resulted in a one-time adjustment to its deferred income taxes of $9.0 million with a corresponding increase to the provision for income taxes as a discrete item during the fourth quarter of 2017. For fiscal years after 2017, the Company's federal statutory tax rate will be 21%.
On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for the impact of the Act, that, in effect, allows entities to use a methodology similar to the measurement period in a business combination. Pursuant to the disclosure provisions of SAB 118, the Company continues to evaluate the impact of the Act on various matters. The actual impact of the Act on the Company may differ from the provisional amounts recognized based on its reasonable estimates due to, among other things, changes in assumptions made in the Company's interpretation of the Act, guidance related to application of the Act that may be issued in the future, and actions that the Company may take as a result of the expected impact of the Act. The Company will adjust the amounts recognized related to the Act if more information becomes available.
The Company recognizes interest and/or penalties related to uncertain tax positions in income tax expense. As of December 31, 2017, and January 1, 2017, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.
The Company has tax benefits related to a federal net operating loss and employment tax credits totaling $5.4 million in 2017 that it expects to realize by carryback to prior years. The Company has a deferred tax benefit related to state net operating loss carryforwards of $0.2 million that will expire at various times from 2031 to 2037 depending on the tax jurisdiction.
The tax years 2014-2016 remain open to examination by the taxing jurisdictions to which the Company is subject. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to uncertainties regarding the timing of any examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.