Income Taxes

12 Months Ended

Jan. 03, 2020

INCOME TAXES

Our income before income taxes is derived solely from within the U.S. Our income tax provision (benefit) was as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017
Current:
Federal	$	—		$	—		$	—
State	6,095			6,133			4,350
Total current tax expense	6,095			6,133			4,350
Deferred:
Federal	71,580			(238,675		)	—
State	(578		)	(5,436		)	—
Total deferred tax expense	71,002			(244,111		)	—
Income tax provision (benefit)	$	77,097		$	(237,978	)	$	4,350

The income tax provision for the year ended December 31, 2019 primarily relates to the utilization of federal net operating loss and state taxes in jurisdictions outside of California, for which we do not have net operating loss carryforwards due to a limited operating history. The income tax benefit for the year ended December 31, 2018 primarily relates to the release of our valuation allowance against significantly all of our deferred tax assets offset by state taxes in jurisdictions outside of California. The income tax provision for the year ended December 31, 2017 primarily related to state taxes in jurisdictions outside of California. Our historical net operating losses were sufficient to fully offset any federal taxable income for the years ended December 31, 2019, 2018 and 2017.

The reconciliation of the U.S. federal income tax provision (benefit) at the statutory federal income tax rates of 21%, 21% and 34% for the years ended December 31, 2019, 2018 and 2017, respectively, to our income tax provision (benefit) was as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017
U.S. federal income tax provision at statutory rate	$	83,603		$	94,939		$	53,916
State tax expense	1,148			4,690			8,282
Change in valuation allowance	3,208			(315,394		)	(34,266		)
Research credits	(8,299		)	(18,308		)	—
Stock-based compensation	(9,177		)	(5,998		)	(20,548		)
Non-deductible executive compensation	4,228			1,111			1,239
Non-deductible interest	—			—			1,367
Other	2,386			982			(5,640		)
Income tax provision (benefit)	$	77,097		$	(237,978	)	$	4,350

Deferred tax assets and liabilities reflect the net tax effects of net operating loss and tax credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes.

Our deferred tax assets and liabilities were as follows (in thousands):



	December 31,
	2019			2018
Deferred tax assets:
Net operating loss carryforwards	$	65,131		$	146,701
Tax credit carryforwards	110,037			98,467
Depreciation and amortization	26,792			29,929
Stock-based compensation	14,966			11,366
Lease liabilities	11,211			3,265
Accruals and reserves not currently deductible	8,248			7,160
Deferred revenue	6,547			5,474
Other assets	345			1,140
Total deferred tax assets	243,277			303,502
Valuation allowance	(61,659		)	(58,112		)
Net deferred tax assets	181,618			245,390
Deferred tax liabilities:
Lease right-of-use assets	(9,244		)	(1,279		)
Total deferred tax liabilities	(9,244		)	(1,279		)
Net deferred taxes	$	172,374		$	244,111

ASC Topic 740: Income Taxes (Topic 740) requires that the tax benefit of net operating losses, temporary differences and credit carry forwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on our ability to generate sufficient taxable income within the carry forward period. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of December 31, 2019, based on the evaluation and weighting of both positive and negative evidence, including our achievement of a cumulative three-year income position as of December 31, 2019 and forecasts of future operating results, as well as considering the utilization of net operating losses and tax credits prior to their expiration, management determined that there is sufficient positive evidence to conclude that it is more likely than not the deferred tax assets are realizable. As of December 31, 2019 and 2018, we continue to carry a valuation allowance of $61.7 million and $58.1 million, respectively, against our California state deferred tax assets. Prior to December 31, 2018, because of our history of operating losses, management believed that recognition of the deferred tax assets was not more likely than not (as defined in Topic 740) to be realized and, accordingly, had provided a full valuation allowance. The valuation allowance increased by $3.5 million and decreased by $360.8 million during the years ended December 31, 2019 and 2018, respectively.

At December 31, 2019, we had federal net operating loss carryforwards of approximately $225 million, of which approximately $203 million will expire in the years 2035 through 2036, and federal business tax credits of approximately $112 million which expire in the years 2020 through 2039. We also had state net operating loss carryforwards of approximately $450 million, which expire in the years 2020 through 2036, and California research and development tax credits of approximately $38 million, which do not expire.

Under the Internal Revenue Code and similar state provisions, certain substantial changes in our ownership could result in an annual limitation on the amount of net operating loss and credit carryforwards that can be utilized in future years to offset future taxable income. The annual limitation may result in the expiration of net operating losses and credit carryforwards before utilization. We completed a Section 382 analysis through December 31, 2019, and concluded that an ownership change, as defined under Section 382, had not occurred.

The following table summarizes the activity related to our unrecognized tax benefits (in thousands):



	Year Ended December 31,
	2019		2018			2017
Beginning balance	$	76,060	$	79,342		$	61,809
Change relating to prior year provision	589		(4,254		)	247
Change relating to current year provision	2,429		1,083			17,378
Reductions based on the lapse of the applicable statutes of limitations	—		(111		)	(92		)
Ending balance	$	79,078	$	76,060		$	79,342

We do not anticipate that the amount of unrecognized tax benefits existing as of December 31, 2019 will significantly change over the next 12 months. As of December 31, 2019, we had $79.1 million in unrecognized tax benefits, of which $48.1 million would reduce our income tax provision and the effective tax rate, if recognized. Interest and penalties were nominal or zero for all periods presented. We have elected to record interest and penalties in the accompanying Consolidated Statements of Income as a component of income taxes.

We file U.S. and state income tax returns in jurisdictions with varying statues of limitations during which such tax returns may be audited and adjusted by the relevant tax authorities. The 1999 through 2019 tax years generally remain subject to examination by federal and most state tax authorities to the extent net operating losses and credits generated during these periods are being utilized in the open tax periods.