Note 6—Income Taxes

 

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. Significant components of the Company’s deferred tax assets and liabilities are as follows:

 

Year Ended

 

 

The Company evaluates whether a valuation allowance should be established against its deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. As of December 30, 2017 and December 31, 2016, a valuation allowance of $30.8 million and $44.4 million, respectively, has been provided based on the Company’s assessment that it is more likely than not that sufficient taxable income will not be generated to realize the tax benefits of the temporary differences. The valuation allowance decreased by $13.6 million and increased by $4.7 million during the years ended December 30, 2017 and December 31, 2016, respectively. The decrease in the year ended December 30, 2017 primarily relates to the revaluing of the Company’s deferred tax assets due to the change in U.S. federal tax law discussed below, and the increase in the year ended December 31, 2016 primarily relates to the increase in the Company’s net operating loss carryforward.

 

On December 27, 2017, new U.S. federal tax legislation was enacted that, among other things, lowers the corporate tax rate from 35% to 21%. In addition to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income the Company may record, the legislation affects the way the Company can use and carry forward net operating losses previously accumulated, and has resulted in a revaluation of the Company’s deferred tax assets and liabilities recorded on the accompanying consolidated balance sheet. Because the Company’s existing deferred tax assets are currently offset by a full valuation allowance, these tax law changes have had no net impact on the accompanying consolidated balance sheet. However, if and when the Company becomes profitable, it would receive a reduced benefit from its deferred tax assets. As a result, the impact of the new tax law on the Company was a reduction in its deferred tax assets and corresponding valuation allowance of $14.7 million.

 

As of December 30, 2017, the Company had (i) $104.0 million of federal net operating loss carryforwards, which begin to expire in 2024, (ii) $60.0 million of state net operating loss carryforwards, which begin to expire in 2018, ($2.0 million of the Company’s state net operating losses expired in the year ended December 30, 2017), (iii) federal tax credit carryforwards of $2.0 million, which begin to expire in 2026, and (iv) state tax credit carryforwards of $2.2 million, which do not expire. In addition, as of December 30, 2017, the Company had $3.3 million of operating loss carryforwards in the PRC and Taiwan, and during the year ended December 30, 2017, $0.5 million of the Company’s net operating loss carryforwards in the PRC and Taiwan expired in the year ended December 30, 2017. Utilization of the net operating losses and tax credit carryforwards is subject to an annual limitation due to the ownership percentage change limitations provided by Section 382 of the Internal Revenue Code and similar state and foreign law provisions. These annual limitations may result in the expiration of the net operating loss and tax credit carryforwards before utilization. As of December 30, 2017, the Company had not completed the determination of the amount subject to these annual limitations.

 

As a result of the Company’s adoption of ASU 2016-09, the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in the income tax provision or in additional paid-in capital has been eliminated. The Company’s deferred tax assets as of December 30, 2017 did not include any excess tax benefits from employee stock option exercises, which are a component of the federal and state net operating loss carryforwards, and on a go-forward basis, any excess tax benefits will be recognized as a component of income tax expense.

 

For financial reporting purposes, the Company’s loss before provision for income taxes included the following components for the periods presented:

 

 

 

The Company’s income tax provision consisted of the following for the periods presented:

 

 

 

A reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company’s loss before income taxes to the income tax provision is as follows:

 

 

 

The Company files tax returns with federal, state and foreign jurisdictions. The Company is no longer subject to Internal Revenue Service (“IRS”) or state examinations for periods prior to 2012, although certain carryforward attributes that were generated prior to 2012 may still be adjusted by the IRS.

 

The Company classifies accrued interest and penalties as part of the accrued tax liability in its provision for income taxes. For the years ended December 30, 2017 and December 31, 2016, the Company did not recognize any interest or penalties related to unrecognized tax benefits.

 

The Company’s recognizes interest and/or penalties related to income tax matters in income tax expense. As of December 30, 2017 and December 31, 2016, the Company had no accrued interest and penalties related to uncertain tax matters.

 

As of December 30, 2017, the Company had no uncertain tax positions that would be reduced as a result of a lapse of the applicable statute of limitations.