Note 14. Income Taxes

The Company’s income (loss) before income taxes consisted of the following (in millions):



	Years Ended
	June 30, 2018			July 1, 2017		July 2, 2016
Domestic	$	(112.5	)	$	94.7	$	(110.9	)
Foreign	80.0			91.9		65.0
(Loss) income before income taxes	$	(32.5	)	$	186.6	$	(45.9	)

The Company’s income tax expense (benefit) consisted of the following (in millions):



	Years Ended
	June 30, 2018			July 1, 2017		July 2, 2016
Federal:
Current	$	(4.5	)	$	—	$	—
Deferred	(1.7		)	1.0		(26.2		)
Total federal income tax (benefit) expense	(6.2		)	1.0		(26.2		)
State:
Current	—			0.2		—
Deferred	(0.1		)	—		(1.5		)
Total state income tax (benefit) expense	(0.1		)	0.2		(1.5		)
Foreign:
Current	22.0			18.0		21.3
Deferred	(2.3		)	2.1		10.9
Total foreign income tax expense	19.7			20.1		32.2
Total income tax expense	$	13.4		$	21.3	$	4.5

The federal current tax benefit and federal deferred tax benefit primarily relates to the U.S. Tax Cuts and Jobs Act discussed below. The foreign current expense primarily relates to the Company’s profitable operations in certain foreign jurisdictions. The foreign deferred tax benefit primarily relates to the release of valuation allowances in foreign jurisdictions and the amortization of foreign purchased intangible assets.

A reconciliation of the Company’s income tax expense (benefit) at the federal statutory rate to the income tax expense at the effective tax rate is as follows (in millions):



	Years Ended
	June 30, 2018			July 1, 2017			July 2, 2016
Income tax (benefit) expense computed at federal statutory rate	$	(9.1	)	$	65.3		$	(16.1	)
Tax Reform E&P Inclusion	14.3
AMT Tax Repeal	(4.5		)
Goodwill impairment	—			—			19.4
Intraperiod allocation	—			—			(20.7		)
Foreign rate differential	(0.5		)	(6.6		)	(2.0		)
Valuation allowance	12.0			(27.4		)	18.2
Research and experimentation benefits and other tax credits	(0.7		)	(1.4		)	(1.1		)
Reversal of previously accrued taxes	(1.2		)	(0.2		)	—
Permanent items	1.7			(9.1		)	6.7
Withholding Taxes	0.7			0.4			0.3
Other	0.7			0.3			(0.2		)
Income tax expense	$	13.4		$	21.3		$	4.5

The components of the Company’s net deferred taxes consisted of the following (in millions):



	Years Ended
	June 30, 2018			July 1, 2017			July 2, 2016
Gross deferred tax assets:
Tax credit carryforwards	$	158.8		$	150.6		$	141.0
Net operating loss carryforwards	1,219.0			1,875.4			1,846.3
Capital loss carryforwards	63.9			102.4			145.9
Inventories	4.0			5.4			6.1
Accruals and reserves	21.8			30.3			27.4
Investments	0.4			0.7			34.4
Other	43.6			51.9			60.3
Acquisition-related items	31.5			55.5			65.2
Gross deferred tax assets	1,543.0			2,272.2			2,326.6
Valuation allowance	(1,383.7		)	(2,097.8		)	(2,174.3		)
Deferred tax assets	159.3			174.4			152.3
Gross deferred tax liabilities:
Acquisition-related items	(26.8		)	(6.5		)	(13.2		)
Undistributed foreign earnings	—			(3.0		)	—
Other	(38.1		)	(57.3		)	(31.1		)
Deferred tax liabilities	(64.9		)	(66.8		)	(44.3		)
Total net deferred tax assets	$	94.4		$	107.6		$	108.0

As of June 30, 2018, the Company had federal, state and foreign tax net operating loss carryforwards of $5,166.9 million, $723.6 million and $649.3 million, respectively, and federal, state and foreign research and other tax credit carryforwards of $106.6 million, $50.3 million and $1.8 million, respectively. The tax net operating loss, tax credit and capital loss carryforwards will start to expire in calendar 2019 and at various other dates through 2037 if not utilized. Utilization of the tax net operating losses may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state and foreign provisions. Loss carryforward limitations may result in the expiration or reduced utilization of a portion of the Company’s net operating losses.

Foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries have not been provided on $261.4 million of undistributed earnings for certain foreign subsidiaries. The Company intends to reinvest these earnings indefinitely outside of the United States. The Company estimates that an additional $26.2 million of foreign withholding taxes would have to be provided if these earnings were repatriated back to the U.S.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act was enacted. Income tax effects resulting from changes in tax laws are accounted for by the Company in accordance with the authoritative guidance, which requires that these tax effects be recognized in the period in which the law is enacted, and the effects are recorded as a component of the provision for income taxes from continuing operations. The law has significantly changed the way the U.S. taxes corporations. The Act repealed the alternative minimum tax (“AMT”) for corporations and provided that the existing AMT credit carryforwards would be refunded in 2022 if not utilized. As a result, the Company recognized a benefit of $4.5 million for the year ended June 30, 2018 for the release of the valuation allowance previously maintained against the AMT credit deferred tax asset. In addition, under the Act, the Company’s current year net operating losses and any future net operating losses can now be carried forward indefinitely. As a result, the Company’s deferred tax liability associated with indefinite-lived intangible assets may now offset these indefinite-lived deferred tax assets, resulting in a benefit of $2.0 million for the year ended June 30, 2018 due to release of valuation allowance.

The Act imposed a deemed repatriation of the Company’s foreign subsidiaries’ post-1986 earnings and profits (“E&P”) which had previously been deferred from US income tax. The Company has made a provisional estimate of this deemed repatriation of E&P and has determined that there is no current period expense or liability due to the Company having sufficient estimated losses for the fiscal year to offset the income associated with the deemed repatriation. As previously noted, the impact of the deemed repatriation is a provisional estimate. The Company has not yet completed the calculation of the total post-1986 foreign E&P for all foreign subsidiaries. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation. In addition, further interpretations from U.S. federal and state governments and regulatory organizations may change the provisional estimate or the accounting treatment of the provisional estimate.

The Act reduces the U.S. federal corporate tax rate from 35% to 21% as of January 1, 2018. The Company has remeasured its US deferred tax assets and liabilities which resulted in a net reduction of $735.5 million of our net deferred tax assets and an equal and offsetting reduction to the valuation allowance against these deferred tax assets.

Upon adoption of the new guidance on share-based payment awards, the Company had $117.7 million of net operating loss carryforwards resulting from excess tax benefit deductions. The deferred tax asset recorded for these net operating loss carryforwards was fully offset by a corresponding increase in valuation allowance, resulting in no impact to opening accumulated deficit. In addition, due to the full valuation allowance on the U.S. deferred tax assets, there was no impact to the income tax provision from excess tax benefits for the year ended June 30, 2018.

The valuation allowance decreased by $714.1 million in fiscal 2018, decreased by $76.5 million in fiscal 2017, and decreased by $160.2 million in fiscal 2016. The decrease during fiscal 2018 was primarily due to the revaluation of the U.S. deferred tax assets as a result of the Act. The decrease during fiscal 2017 was primarily due to the utilization of deferred tax assets and the increase in deferred tax liabilities as result of the issuance of convertible debt. The decrease during fiscal 2016 was primarily related to the Lumentum transaction. The following table provides information about the activity of our deferred tax valuation allowance (in millions):



Deferred Tax Valuation Allowance	Balance at Beginning of Period		Additions Charged to Expenses or Other Accounts(1)		Deductions Credited to Expenses or Other Accounts(2)			Balance at End of Period
Year Ended June 30, 2018	$	2,097.8	$	31.8	$	(745.9	)	$	1,383.7
Year Ended July 1, 2017	$	2,174.3	$	44.7	$	(121.2	)	$	2,097.8
Year Ended July 2, 2016	$	2,334.5	$	227.5	$	(387.7	)	$	2,174.3


(1)	Additions include current year additions charged to expenses and current year build due to increases in net deferred tax assets, return to provision true-ups, other adjustments.


(2)	Deductions include current year releases credited to expenses and current year reductions due to decreases in net deferred tax assets, return to provision true-ups, other adjustments and increases in deferred tax liabilities.

During fiscal 2016, the Company recognized a tax expense of $8.9 million related to a one-time increase in valuation allowance associated with deferred tax assets transferred to Lumentum in connection with the Separation. The tax expense was partially offset by a deferred tax benefit of $9.5 million related to the write off of tax deductible goodwill and a tax benefit of $20.7 million related to the income tax intraperiod tax allocation rules for discontinued operations and other comprehensive income.

A reconciliation of unrecognized tax benefits between June 27, 2015 and June 30, 2018 is as follows (in millions):



Balance at June 27, 2015	$	36.8
Additions based on tax positions related to current year	5.1
Reductions for lapse of statute of limitations	(0.2		)
Balance at July 2, 2016	41.7
Additions based on tax positions related to current year	1.6
Additions based on tax positions related to prior year	0.9
Reduction based on tax positions related to prior year	(3.5		)
Reductions for lapse of statute of limitations	(1.8		)
Balance at July 1, 2017	38.9
Additions based on tax positions related to current year	4.4
Additions based on tax positions related to prior year	5.6
Reductions for lapse of statute of limitations	(0.3		)
Balance at June 30, 2018	$	48.6

The unrecognized tax benefits relate primarily to the allocations of revenue and costs among the Company’s global operations and the validity of some U.S. tax credits. Included in the balance of unrecognized tax benefits at June 30, 2018 are $3.3 million of tax benefits that, if recognized, would impact the effective tax rate. Also included in the balance of unrecognized tax benefits at June 30, 2018 are $45.3 million of tax benefits that, if recognized, would result in adjustments to the valuation allowance and are included in deferred taxes and other non-current tax liabilities, net in the Consolidated Balance Sheets.

The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits within the income tax provision. The amount of interest and penalties accrued as of June 30, 2018 and July 1, 2017 was approximately $1.9 million and $1.8 million, respectively. During fiscal 2018, the Company’s accrued interest and penalties increased by $0.1 million. The unrecognized tax benefits that may be recognized during the next twelve months is approximately $1.2 million.

The Company is routinely subject to various federal, state and foreign audits by taxing authorities. The Company believes that adequate amounts have been provided for any adjustments that may result from these examinations.

The following table summarizes the Company’s major tax jurisdictions and the tax years that remain subject to examination by such jurisdictions as of June 30, 2018:



Tax Jurisdictions	Tax Years
United States	2015 and onward
Canada	2017 and onward
China	2013 and onward
France	2015 and onward
Germany	2015 and onward
Korea	2013 and onward
United Kingdom	2017 and onward