Income Taxes

12 Months Ended

Dec. 28, 2019

20. Income Taxes

The components of income before provision for income taxes are as follows (in thousands):



	Year Ended December 28, 2019		Year Ended December 29, 2018		Year Ended December 30, 2017
United States	$	181,664	$	173,848	$	159,245
Foreign	52,502		39,928		26,555
Total	$	234,166	$	213,776	$	185,800

The following table presents the current and deferred provision (benefit) for income taxes (in thousands):



	Year Ended December 28, 2019			Year Ended December 29, 2018			Year Ended December 30, 2017
Current:
Federal	$	30,218		$	20,418		$	38,777
State	5,273			3,075			1,940
Foreign	8,424			5,014			3,018
Subtotal	$	43,915		$	28,507		$	43,735
Deferred:
Federal	$	(3,732	)	$	(6,678	)	$	20,735
State	(1,985		)	(1,258		)	(3,420		)
Foreign	(248		)	(338		)	(39		)
Subtotal	(5,965		)	(8,274		)	17,276
Total	$	37,950		$	20,233		$	61,011

Included in the fiscal year 2019, 2018 and 2017 tax provisions are increases/(decrease) of $1.8 million, ($1.6 million) and $1.6 million, respectively, for tax and accrued interest related to uncertain tax positions for each fiscal year.

The reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate is as follows:



	Year Ended December 28, 2019		Year Ended December 29, 2018		Year Ended December 30, 2017
Statutory regular federal income tax rate	21.0	%	21.0	%	35.0	%
State provision, net of federal benefit	1.1		0.7		(0.6	)
Nondeductible executive compensation	2.1		1.9		1.3
Research and development tax credits	(1.1	)	(1.4	)	(2.2	)
Foreign income taxed at different rates	(1.7	)	(2.0	)	(3.4	)
U.S. tax on foreign income, net	0.1		0.7		—
Impact of 2017 Tax Act	—		0.1		18.8
Withholding taxes on undistributed foreign earnings, net	—		(0.6	)	3.5
Excess stock-based compensation	(6.0	)	(9.4	)	(20.3	)
Derecognition of uncertain tax position	—		(1.5	)	—
Other	0.7		—		0.7
Total	16.2	%	9.5	%	32.8	%

The Tax Cuts and Jobs Act of 2017 that was signed in to law on December 22, 2017 (2017 Tax Act) included a number of changes to existing U.S. federal tax law impacting businesses including, among other things, a permanent reduction in the corporate income tax rate from 35% to 21%, a one-time transition tax on the “deemed repatriation” of cumulative undistributed foreign earnings as of December 31, 2017 and changes in the prospective taxation of the foreign operations of U.S. multinational companies. The SEC issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of GAAP in situations when a registrant did not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act and provided for a measurement period of one year from the enactment date to finalize the accounting for effects of the 2017 Tax Act. Given the complexity and lack of specificity related to certain provisions of the 2017 Tax Act, the Company made certain estimates and assumptions in connection with the calculation of its provision for income taxes for the year ended December 30, 2017 and recorded a discrete tax charge of approximately $37.0 million. In addition, as a result of this change in U.S. tax policy, the Company recorded a related discrete tax charge of $6.5 million as a result of its decision to repatriate certain accumulated undistributed earnings from the Company’s foreign subsidiaries.

During the year ended December 29, 2018, the Company completed its analysis of the income tax effects of the 2017 Tax Act and, pursuant to SAB 118, recorded an adjustment of approximately $0.9 million to reduce its previously estimated accrual based on additional information and guidance that became available with respect to the application of certain provisions of the 2017 Tax Act. The U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies will continue to interpret or issue guidance on how provisions of the 2017 Tax Act will be applied or otherwise administered. As future guidance is issued, the Company may make adjustments to amounts that it has previously recorded that may materially impact its provision for income taxes in the period in which such adjustments are made.

As of December 28, 2019, the Company has accumulated undistributed earnings generated by its foreign subsidiaries of approximately $183.5 million. Because such earnings have previously been subject to U.S. tax, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of its foreign investments would generally be limited to foreign withholding and state taxes. The Company considers $86.5 million of these accumulated undistributed earnings as no longer permanently reinvested and has accrued foreign withholding and state taxes, net of estimated foreign tax credits, of $1.6 million. The Company intends, however, to indefinitely reinvest the remaining $97.0 million of earnings. If the Company decides to distribute such permanently reinvested earnings, the Company would accrue estimated additional income tax expense of up to approximately $4.8 million.

The components of the deferred tax assets are as follows (in thousands):



	December 28, 2019			December 29, 2018
Deferred tax assets:
Tax credits	$	6,438		$	5,672
Deferred revenue	13,948			331
Accrued liabilities	13,273			12,645
Stock-based compensation	7,926			6,615
Operating lease assets	4,174			—
Other	1,591			—
Total	47,350			25,263
Valuation allowance	—			—
Total deferred tax assets	$	47,350		$	25,263

Deferred tax liabilities:
Property and equipment	$	(6,604	)	$	(2,504	)
State taxes and other	(1,152		)	(857		)
Withholding taxes on undistributed foreign earnings	(2,829		)	(2,803		)
Operating lease liabilities	(3,845		)	—
Other	—			(845		)
Total deferred tax liabilities	(14,430		)	(7,009		)
Net deferred tax assets	$	32,920		$	18,254

As of December 28, 2019, the Company has $1.2 million of net operating losses from various states, which will begin to expire in 2023. The Company also has state research and development tax credits of $10.1 million that will carry forward indefinitely and $0.3 million of Canadian investment tax credits on research and development expenditures that will begin to expire in 2032. The Company believes that it is more likely than not that the deferred tax assets related to these carryforwards will be realized. In making this determination, the Company considered all available positive and negative evidence, including scheduled reversals of liabilities, projected future taxable income, tax planning strategies and recent financial performance.

As a result of certain business and employment actions undertaken by the Company, income earned in a certain European country is subject to a reduced tax rate through 2018 as the Company has met certain employment thresholds. For the years ended December 29, 2018 and December 30, 2017, the estimated income tax benefit related to such business arrangement was $1.7 million and $1.0 million, respectively, and favorably impacted net income per diluted share by $0.03 and $0.02, respectively. These estimated benefit amounts exclude any incremental U.S. taxes imposed as a result of various provisions of the 2017 Tax Act.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):



	Year Ended December 28, 2019			Year Ended December 29, 2018
Unrecognized tax benefits (gross), beginning of period	$	15,412		$	16,157
Increase from tax positions in prior period	81			701
Increase from tax positions in current period	2,636			2,633
Settlements	—			(33		)
Lapse of statute of limitations	(1,120		)	(4,046		)
Unrecognized tax benefits (gross), end of period	$	17,009		$	15,412

The amount of unrecognized benefits which, if ultimately recognized, could favorably affect the tax rate in a future period was $15.7 million and $14.2 million as of December 28, 2019 and December 29, 2018, respectively. It is reasonably possible that the amount of unrecognized tax benefits in various jurisdictions may change in the next 12 months due to the expiration of statutes of limitation and audit settlements. However, due to the uncertainty surrounding the timing of these events, an estimate of the change within the next 12 months cannot be made at this time.

For the years ended December 28, 2019, December 29, 2018 and December 30, 2017, the Company recorded an expense/(benefit) of $0.5 million, ($0.8 million) and $0.3 million, respectively, for interest and penalties related to unrecognized tax benefits as part of income tax expense. Total accrued interest and penalties related to unrecognized tax benefits as of December 28, 2019 and December 29, 2018 were $1.3 million and $0.8 million, respectively.

The Company conducts business in multiple jurisdictions, and as a result, one or more of the Company’s subsidiaries files income tax returns in the U.S. federal, various state, local and foreign jurisdictions. The Company has concluded all U.S. federal income tax matters for years through 2015. All material state, local and foreign income tax matters have been concluded for years through 2012. The Company does not believe that the results of any tax authority examination would have a significant impact on its financial statements.