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Income taxes | 12 Months Ended
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Sep. 29, 2018
Income Tax Disclosure [Abstract] |
Income taxes | Income taxes The Company’s income (loss) before provision for (benefit from) income taxes for fiscal 2018, 2017 and 2016 were as follows:
| 2018 |  | 2017 |  | 2016
(In thousands)
Domestic | $ | 2,803 |  |  | $ | (25,005 | ) |  | $ | (47,285 | )
Foreign | (17,351 | ) |  | 8,497 |  |  | 11,715 |
Income (loss) before provision for (benefit from) income taxes | $ | (14,548 | ) |  | $ | (16,508 | ) |  | $ | (35,570 | )
Components of the provision for (benefit from) income taxes consisted of the following:
| 2018 |  | 2017 |  | 2016
(In thousands)
Current: |  |  |  |  |
U.S. Federal | $ | — |  |  | $ | — |  |  | $ | 129 |
U.S. State | 177 |  |  | 62 |  |  | 59 |
Foreign | 816 |  |  | (3,791 | ) |  | 3,344 |
Total current | 993 |  |  | (3,729 | ) |  | 3,532 |
Deferred: |  |  |  |  |
U.S. Federal | (168 | ) |  | — |  |  | — |
U.S. State | — |  |  | — |  |  | — |
Foreign | 231 |  |  | 1,438 |  |  | (888 | )
Total deferred | 63 |  |  | 1,438 |  |  | (888 | )
Provision for (benefit from) income taxes | $ | 1,056 |  |  | $ | (2,291 | ) |  | $ | 2,644 |
Components of the Company’s net deferred income tax assets (liabilities) are as follows:
| 2018 |  | 2017
(In thousands)
Deferred tax assets |  |  |
Accrued expenses and reserves | $ | 5,639 |  |  | $ | 8,828 |
Deferred revenue | 10,317 |  |  | 218 |
Inventory deferral | — |  |  | 3,259 |
U.S. net operating loss carryforwards | 18,385 |  |  | 53,589 |
Foreign net operating loss carryforwards | 5,625 |  |  | 1,147 |
Tax credit carryforwards | 22,969 |  |  | 17,553 |
Stock-based compensation | 7,237 |  |  | 7,976 |
Amortization | 3,237 |  |  | 3,859 |
Other | 427 |  |  | 324 |
Total deferred tax assets | 73,836 |  |  | 96,753 |
Valuation allowance | (72,380 | ) |  | (94,956 | )
Deferred tax assets, net of valuation allowance | 1,456 |  |  | 1,797 |
Deferred tax liabilities |  |  |
Depreciation | (515 | ) |  | (690 | )
Total deferred tax liabilities | (515 | ) |  | (690 | )
Net deferred tax assets | $ | 941 |  |  | $ | 1,107 |
After considering all available positive and negative evidence, the Company has determined it is more likely than not that deferred tax assets will not be realized and that a full valuation allowance is required in the United States and the Netherlands. Both jurisdictions have generated cumulative losses in recent years. The Company has deferred tax assets in other foreign jurisdictions which it determined are more likely than not to be fully realized. As of September 29, 2018, the Company had gross federal and post-apportionment state net operating loss carryforwards of $74.7 million and $45.9 million, respectively, available to reduce future taxable income. The earliest federal and state net operating loss carryforwards expire in varying amounts beginning in 2033 and 2020, respectively. As of September 29, 2018, the Company had gross foreign net operating loss carryforwards of $21.9 million, of which $2.7 million have an indefinite life and $19.2 million that will expire in 2027. The Company also has gross federal and state research and development tax credits carryforwards of $25.4 million and $19.1 million, respectively. The federal research credits will begin to expire in the year 2025, and the state research credits will begin to expire in the year 2024. Because of the change of ownership provisions of Sections 382 and 383 of the Code, use of a portion of the Company’s domestic net operating losses and tax credit carryforwards may be limited in future periods depending upon future changes in ownership. Specifically, the Company’s net operating losses generated through July 18, 2012 may be subject to limitation under Section 382 of the Code. The amount of pre-change loss carryforward which may be subject to this limitation is $46.8 million. Further, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities if sufficient taxable income is not generated in future periods. The following table summarizes changes in the valuation allowance for fiscal 2018, 2017 and 2016:
(In thousands) | 2018 |  | 2017 |  | 2016
Beginning balance | $ | 94,956 |  |  | $ | 95,882 |  |  | $ | 33,264 |
Increase (decrease) during the period | (22,576 | ) |  | (926 | ) |  | 19,535 |
Increase due to adoption of ASU 2016-09 | — |  |  | — |  |  | 43,083 |
Ending balance | $ | 72,380 |  |  | $ | 94,956 |  |  | $ | 95,882 |
During the year ended October 1, 2016, the Company elected early adoption of ASU 2016-09. Gross excess windfall tax benefits resulting from stock option exercises in the amount of $113.8 million and $59.8 million for federal and post-apportionment state net operating loss carryforwards, respectively, were not reported as components of gross deferred tax assets with an offsetting valuation allowance as of October 3, 2015. The Company applied a modified retrospective transition method to report the tax effected amount of $39.8 million and $3.2 million of U.S. federal and state net operating loss carryforwards, respectively, for the year ended October 1, 2016. The Company determined that these deferred tax assets are not more likely than not to be realized and recorded a corresponding increase to its valuation allowances. As a result, no tax benefit or effect on accumulated deficit was recognized in association with the adoption of ASU 2016-09. Reconciliation of U.S. statutory federal income taxes to the Company’s provision for (benefit from) income taxes is as follows:
(In thousands) | 2018 |  | 2017 |  | 2016
U.S. federal income taxes at statutory rate | $ | (3,570 | ) |  | $ | (5,778 | ) |  | $ | (12,450 | )
U.S. state and local income taxes | (1,441 | ) |  | (2,454 | ) |  | (1,813 | )
Foreign income tax rate differential | (53 | ) |  | (1,101 | ) |  | (4,680 | )
Dutch tax settlement | — |  |  | 7,361 |  |  | — |
Stock-based compensation | 4,025 |  |  | 1,503 |  |  | 6,521 |
Research tax credits | (2,343 | ) |  | (1,787 | ) |  | (4,036 | )
Change in tax rate | 25,725 |  |  | — |  |  | (624 | )
Other | 259 |  |  | 1,197 |  |  | 191 |
Change in valuation allowance | (21,546 | ) |  | (1,232 | ) |  | 19,535 |
Provision for (benefit from) income taxes | $ | 1,056 |  |  | $ | (2,291 | ) |  | $ | 2,644 |
In December 2013, the Company entered into a written Settlement Agreement with the Dutch Tax Administration related to taxable profits of Sonos Europe B.V. The Settlement Agreement, which expired on October 1, 2016, provided for a 3% profit based on the statutory revenue of Sonos Europe B.V. which is then allowed to be reduced to 1% for taxable income purposes by utilizing prior year’s net operating losses. As of October 3, 2015, these net operating losses had been fully utilized. In December 2016, the Company reached an agreement with the Dutch Tax Administration to amend the terms of the aforementioned Settlement Agreement (the "Amendment"). Based on a review of the functions, risks and assets of the Company, it was agreed that Sonos Europe B.V.’s arm’s length remuneration should be adjusted for fiscal years 2015 and 2016. The Company’s application of the terms of this Amendment generated a pre-tax loss in fiscal 2015 and 2016 in Sonos Europe B.V., a portion of which is treated as non-deductible for tax purposes and also resulted in an adjustment to the allocation of income and loss to Sonos, Inc., which led to the reduction of pre-existing net operating losses for U.S. tax purposes. As of September 30, 2017, the Company has utilized all of its Dutch tax loss carryforwards. Additionally, as a result of concluding the terms of the Amendment, the Company was released from previously accrued for Dutch income tax liabilities related to fiscal 2015 and fiscal 2016, resulting in a one-time tax benefit of $4.9 million for the year ended September 30, 2017. In January 2017, the Company entered into a unilateral Advance Pricing Agreement (the "APA") with the Dutch Tax Administration. The APA establishes an intercompany licensing arrangement whereby the operating profit or loss, as determined under U.S. GAAP, of Sonos Europe B.V. and Sonos, Inc. will be allocated between the two companies based on relative contribution to the development of marketing and technology intangibles. The APA has a five-year term that commenced on October 2, 2016 and ends on September 30, 2021. Change in unrecognized tax benefits as a result of uncertain tax positions are as follows:
| 2018 |  | 2017
(In thousands)
Beginning balance | $ | 13,780 |  |  | $ | 11,496 |
Increase (decrease) - tax positions in prior periods | 636 |  |  | (23 | )
Increase (decrease) - tax positions in current periods | 3,378 |  |  | 2,307 |
Ending balance | $ | 17,794 |  |  | $ | 13,780 |
The unrecognized tax benefits, if recognized, would increase a deferred tax asset which is expected to require a full valuation allowance based on the current circumstances and would not affect the Company’s effective tax rate for each period presented. The Company does not anticipate changes to unrecognized benefits within the next 12 months that would result in a material change to the Company’s financial position. The Company conducts business in a number of tax jurisdictions and, as such, is required to file income tax returns in multiple jurisdictions globally. U.S. federal income tax returns for the 2014 tax year and earlier are no longer subject to examination by the U.S. Internal Revenue Service (the "IRS"). All net operating losses and tax credits generated to date are subject to adjustment for U.S. federal and state purposes. The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. There was no accrued interest or penalties as of September 29, 2018 and September 30, 2017. As of September 29, 2018, no tax provision has been made for $5.7 million of undistributed earnings of certain of the Company’s subsidiaries as these earnings are considered indefinitely reinvested. If, in the future, the Company decides to repatriate the undistributed earnings from these subsidiaries in the form of dividends or otherwise, the Company could be subject to withholding taxes payable at that time. The amount of withholding tax liability is dependent on circumstances existing if and when a remittance occurs, but could be reasonably estimated to be $0.3 million. Tax Act On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (the "Tax Act") into law, implementing a wide variety of changes to the U.S. tax system. Among other changes at the corporate level, the Tax Act includes (i) a reduction in the U.S. federal corporate income tax rate from 35% to 21%, (ii) further limitations on the deductibility of interest expense and certain executive compensation, (iii) the repeal of the corporate alternative minimum tax, (iv) the imposition of a territorial tax system with a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries and (v) subjecting certain foreign earnings to U.S. taxation through a base erosion anti-abuse tax ("BEAT") and a new tax related to global intangible low taxed income ("GILTI"). Additionally, certain foreign derived intangible income ("FDII") may prospectively be subject to a reduced rate of income tax from the statutorily enacted rate of 21%. Some of these changes, including the BEAT, FDII and GILTI provisions, will not come into effect until the Company’s 2019 fiscal year, but because the decrease in the corporate income tax rate was effective January 1, 2018, the Company has reduced the future tax benefits of the Company’s existing U.S. deferred tax assets. However, since the Company maintains a full valuation allowance against these assets, it did not have a material impact on the Company’s results of operations or financial condition. The Company has not recorded a provision related to the one-time transition tax under Section 965 as the Company has estimated that its foreign subsidiaries have a consolidated deficit in accumulated and current earnings and profits. The Company’s accounting for the elements of the Tax Act is incomplete. The Company has made reasonable estimates of the effects to the consolidated statements of operations and comprehensive income (loss) and consolidated balance sheets and have preliminarily determined that a provision is not required. The ultimate impact of the Tax Act may differ from the above estimates due to potential future legislative action to address questions that have arisen because of the Tax Act, issuance of additional guidance by the IRS to provide clarity on certain provisions of the Tax Act and any changes in accounting standards for income taxes or related interpretations in response to the Tax Act. The SEC has issued rules that allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The Company currently anticipates finalizing and recording any resulting adjustments during its fiscal quarter ending December 29, 2018.

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- 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. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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