Income Taxes

12 Months Ended

Jan. 02, 2021

20. Income Taxes

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


	Year Ended January 2, 2021		Year Ended December 28, 2019		Year Ended December 29, 2018
United States	$	214,816	$	181,664	$	173,848
Foreign	48,920		52,502		39,928
Total	$	263,736	$	234,166	$	213,776

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


	Year Ended January 2, 2021		Year Ended December 28, 2019		Year Ended December 29, 2018
Current:
Federal	$	13,901	$	30,218	$	20,418
State	6,444		5,273		3,075
Foreign	8,073		8,424		5,014
Subtotal	$	28,418	$	43,915	$	28,507
Deferred:
Federal	$	1,354	$	(3,732)	$	(6,678)
State	(6,191)		(1,985)		(1,258)
Foreign	(127)		(248)		(338)
Subtotal	(4,964)		(5,965)		(8,274)
Total	$	23,454	$	37,950	$	20,233

Included in the fiscal year 2020 and 2019 tax provisions are increases of $0.2 million and $1.8 million, respectively, for tax and accrued interest related to uncertain tax positions for each fiscal year. Fiscal year 2018 included a tax benefit of $1.6 million for tax and accrued interest related to uncertain tax positions.

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


	Year Ended January 2, 2021		Year Ended December 28, 2019		Year Ended December 29, 2018
Statutory regular federal income tax rate	21.0	%	21.0	%	21.0	%
State provision, net of federal benefit	0.1		1.1		0.7
Nondeductible executive compensation	1.8		2.1		1.9
Research and development tax credits	(2.2)		(1.1)		(1.4)
Foreign income taxed at different rates	(1.0)		(1.7)		(2.0)

U.S. tax on foreign income, net	1.0		0.1		0.7
Impact of 2017 Tax Act	—		—		0.1
Withholding taxes on undistributed foreign earnings, net	—		—		(0.6)
Excess stock-based compensation	(10.4)		(6.0)		(9.4)
Derecognition of uncertain tax position	(2.2)		—		(1.5)
Other	0.8		0.7		—
Total	8.9	%	16.2	%	9.5	%

During the year ended December 29, 2018, the Company completed its analysis of the income tax effects of the Tax Cuts and Jobs Act of 2017 (2017 Tax Act) and, pursuant to Staff Accounting Bulletin No. 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 January 2, 2021, the Company has accumulated undistributed earnings generated by its foreign subsidiaries of approximately $229.3 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 $142.8 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 $6.8 million.

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


	January 2, 2021		December 28, 2019
Deferred tax assets:
Deferred revenue	$	19,769	$	13,948
Net operating losses	19,140		724
Accrued liabilities	16,534		13,273
Tax credits	9,398		6,438
Stock-based compensation	8,385		7,926
Operating lease assets	5,782		4,174
Other	—		867
Total	79,008		47,350
Valuation allowance	(15,660)		—
Total deferred tax assets	$	63,348	$	47,350

Deferred tax liabilities:
Property and equipment	$	(12,818)	$	(6,604)
Acquired intangibles	(5,465)		—
Operating lease liabilities	(5,429)		(3,845)
Withholding taxes on undistributed foreign earnings	(3,108)		(2,829)
State taxes and other	(2,302)		(1,152)
Other	(1,110)		—
Total deferred tax liabilities	(30,232)		(14,430)
Net deferred tax assets	$	33,116	$	32,920

As of January 2, 2021, the Company has $1.9 million and $2.9 million of net operating losses from federal and various state jurisdictions, which will begin to expire in 2036 and 2039, respectively. Additionally, the Company has $76.8 million of net operating losses from foreign jurisdictions which will carryover indefinitely. The Company also has state research and development tax credits of $14.9 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 2033. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that all or some portion of the deferred tax assets will not 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. During the year ended January 2, 2021, the Company established a valuation allowance to reduce the deferred tax assets relating to certain acquired operating losses in certain foreign jurisdictions that the Company believes are not likely to be realized.

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 2022, which, upon meeting certain requirements, can be extended through 2026. For the year ended January 2, 2021 and December 29, 2018, the estimated income tax benefit related to such business arrangement was $0.9 million and $1.7 million, respectively, and favorably impacted net income per diluted share by $0.02 for each year.

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


	Year Ended January 2, 2021		Year Ended December 28, 2019
Unrecognized tax benefits (gross), beginning of period	$	17,009	$	15,412

Increase from tax positions in prior period	471		81
Increase from tax positions in current period	6,565		2,636

Lapse of statute of limitations	(6,040)		(1,120)
Unrecognized tax benefits (gross), end of period	$	18,005	$	17,009

The amount of unrecognized benefits which, if ultimately recognized, could favorably affect the tax rate in a future period was $16.3 million and $15.7 million as of January 2, 2021 and December 28, 2019, 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 January 2, 2021 and December 29, 2018, the Company recorded a benefit of $0.5 million and $0.8 million, respectively, for interest and penalties related to unrecognized tax benefits as part of income tax expense. For the year ended December 28, 2019, the Company recorded an expense of $0.5 million 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 January 2, 2021 and December 28, 2019 were $0.7 million and $1.3 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 2016. All material state, local and foreign income tax matters have been concluded for years through 2013.

In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was enacted and signed into law in response to the market volatility and instability resulting from the COVID-19 pandemic. It includes a significant number of tax provisions and lifts certain deduction limitations originally imposed by the 2017 Tax Act. The changes are primarily related to: (1) the business interest expense disallowance rules for 2019 and 2020; (2) net operating loss rules; (3) charitable contribution limitations; (4) employee retention credit; and (5) the realization of corporate alternative minimum tax credits.

The Company has reviewed the tax provision in the CARES Act and did not identify any material impact to the Company’s consolidated financial statements.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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