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Income Taxes | 12 Months Ended
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Jan. 02, 2022
Income Tax Disclosure [Abstract] |
Income Taxes |
9. INCOME TAXES
Income (loss) before income taxes summarized by region was as follows:
In millions | 2021 |  | 2020 |  | 2019
United States | $ | (115) |  |  | $ | 313 |  |  | $ | 242 |
Foreign | 999 |  |  | 543 |  |  | 876 |
Total income before income taxes | $ | 884 |  |  | $ | 856 |  |  | $ | 1,118 |
The provision for income taxes consisted of the following:
In millions | 2021 |  | 2020 |  | 2019
Current: |  |  |  |  |
Federal | $ | 54 |  |  | $ | 25 |  |  | $ | 32 |
State | 37 |  |  | 13 |  |  | 7 |
Foreign | 107 |  |  | 45 |  |  | 84 |
Total current provision | $ | 198 |  |  | $ | 83 |  |  | $ | 123 |
Deferred: |  |  |  |  |
Federal | $ | (50) |  |  | $ | 30 |  |  | $ | 1 |
State | (23) |  |  | 94 |  |  | (1) |
Foreign | (3) |  |  | (7) |  |  | 5 |
Total deferred (benefit) expense | (76) |  |  | 117 |  |  | 5 |
Total tax provision | $ | 122 |  |  | $ | 200 |  |  | $ | 128 |
The provision for income taxes reconciles to the amount computed by applying the federal statutory rate to income before taxes as follows:
In millions | 2021 |  | 2020 |  | 2019
Tax at federal statutory rate | $ | 186 |  |  | $ | 180 |  |  | $ | 235 |
State, net of federal benefit | 13 |  |  | 19 |  |  | 18 |
Research and other credits | (23) |  |  | (19) |  |  | (37) |
Change in valuation allowance | 33 |  |  | 69 |  |  | (2) |
Impact of foreign operations | (80) |  |  | (47) |  |  | (57) |
Impact of foreign derived intangible income (FDII) deduction | (12) |  |  | (11) |  |  | (4) |
Cost sharing adjustment | — |  |  | 28 |  |  | — |
Investments in consolidated variable interest entities | — |  |  | (2) |  |  | (5) |
Stock compensation | (10) |  |  | (18) |  |  | (20) |
Officer compensation | 13 |  |  | 7 |  |  | 5 |
Impact of acquisition related items | (16) |  |  | — |  |  | — |
Other | 18 |  |  | (6) |  |  | (5) |
Total tax provision | $ | 122 |  |  | $ | 200 |  |  | $ | 128 |
We have elected to account for the global intangible low-taxed income (GILTI) as a period cost in our consolidated financial statements. The impact of foreign operations primarily represents the difference between the actual provision for income taxes for our legal entities that operate primarily in jurisdictions that have statutory tax rates lower than the U.S. federal statutory tax rate of 21%. The most significant tax benefits from foreign operations were from our earnings in Singapore and the United Kingdom, which had statutory tax rates of 17% and 19%, respectively, in 2021. The impact of foreign operations also includes the impact of GILTI and the U.S. foreign tax credit impact of non-U.S. earnings and uncertain tax positions related to foreign items. The impact of acquisition related items includes the tax impact of the gain on our previously held investment in GRAIL, acquisition related compensation, continuation payments, transaction costs, and changes to the contingent value rights associated with the GRAIL acquisition. On June 22, 2020, the Supreme Court denied petition for certiorari for Altera Corporation v. Commissioner. This effectively means the Ninth Circuit decision that stock-based compensation must be included in intercompany cost sharing is final. As a result, tax expense of $28 million was recorded in 2020. Significant components of deferred tax assets and liabilities were as follows:
In millions | January 2, 2022 |  | January 3, 2021
Deferred tax assets: |  |  |
Net operating losses | $ | 513 |  |  | $ | 26 |
Tax credits | 128 |  |  | 70 |
Other accruals and reserves | 39 |  |  | 21 |
Stock compensation | 23 |  |  | 17 |
Other amortization | 225 |  |  | 17 |
Operating lease liabilities | 173 |  |  | 156 |
Other | 36 |  |  | 53 |
Total gross deferred tax assets | 1,137 |  |  | 360 |
Valuation allowance on deferred tax assets | (134) |  |  | (81) |
Total deferred tax assets | $ | 1,003 |  |  | $ | 279 |
Deferred tax liabilities: |  |  |
Purchased intangible amortization | $ | (828) |  |  | $ | (27) |
Convertible debt | (11) |  |  | (20) |
Property and equipment | (21) |  |  | (34) |
Operating lease right-of-use assets | (129) |  |  | (108) |
Investments | (29) |  |  | (137) |
Other | (12) |  |  | (6) |
Total deferred tax liabilities | (1,030) |  |  | (332) |
Deferred tax liabilities, net | $ | (27) |  |  | $ | (53) |
A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis and includes a review of all available positive and negative evidence, including operating results and forecasted ranges of future taxable income. Based on the available evidence as of January 2, 2022, we were not able to conclude it is more likely than not certain deferred tax assets will be realized. Therefore, a valuation allowance of $134 million was recorded against certain U.S. and foreign deferred tax assets, of which $20 million was recorded as an adjustment to goodwill as a result of acquisitions that occurred in 2021. As of January 2, 2022, we had net operating loss carryforwards for federal and state tax purposes of $1,873 million and $1,290 million, respectively, which will begin to expire in 2022 and 2029, respectively, unless utilized prior. We also had federal and state tax credit carryforwards of $50 million and $165 million, which will begin to expire in 2036 and 2027, respectively, unless utilized prior. Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of net operating losses and credits may be subject to annual limitations in the event of any significant future changes in its ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. The deferred tax assets as of January 2, 2022 are net of any previous limitations due to Section 382 and 383. Our manufacturing operations in Singapore operate under various tax holidays and incentives that begin to expire in 2023. These tax holidays and incentives resulted in an $82 million, $30 million, and $33 million decrease to the provision for income taxes in 2021, 2020, and 2019, respectively. These tax holidays and incentives resulted in an increase in diluted earnings per share attributable to Illumina stockholders of $0.55, $0.20, and $0.22, in 2021, 2020, and 2019, respectively. As of January 2, 2022, we asserted that $1,067 million of foreign earnings would not be indefinitely reinvested, and accordingly, recorded a deferred tax liability of $11.5 million. The following table summarizes the gross amount of our uncertain tax positions:
In millions | January 2, 2022 |  | January 3, 2021 |  | December 29, 2019
Balance at beginning of year | $ | 80 |  |  | $ | 79 |  |  | $ | 88 |
Increases related to prior year tax positions | 19 |  |  | 2 |  |  | 1 |
Decreases related to prior year tax positions | (1) |  |  | — |  |  | — |
Increases related to current year tax positions | 39 |  |  | 12 |  |  | 12 |
Decreases related to lapse of statute of limitations | (6) |  |  | (13) |  |  | (22) |
Balance at end of year | $ | 131 |  |  | $ | 80 |  |  | $ | 79 |
Included in the balance of uncertain tax positions as of January 2, 2022 and January 3, 2021, was $111 million and $68 million, respectively, of net unrecognized tax benefits that, if recognized, would reduce the effective income tax rate in future periods. Any interest and penalties related to uncertain tax positions are reflected in the provision for income taxes. We recognized expense of $1 million in 2021, and income of $1 million and $3 million in 2020 and 2019, respectively, related to potential interest and penalties on uncertain tax positions. We recorded a liability for potential interest and penalties of $7 million and $6 million as of January 2, 2022 and January 3, 2021, respectively. Tax years 1997 to 2020 remain subject to future examination by the major tax jurisdictions in which we are subject to tax. The Internal Revenue Service continues to examine the U.S. Corporation Income Tax Returns for tax years 2017 and 2018. Given the uncertainty of potential adjustments from examination as well as the potential expiration of the statute of limitations, it is reasonably possible that the balance of unrecognized tax benefits could change significantly over the next 12 months. Due to the number of years remaining that are subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.

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