Income Taxes

12 Months Ended

Jan. 02, 2015

Note 9 — Income Taxes

The provision for (benefit from) for income taxes consists of the following (in thousands):

	2014		2013		2012
Current tax provision:
U.S. federal (benefit)	$	3	$	(121)	$	—
State		15		12		11
Foreign		570		721		1,125
Total current provision		588		612		1,136
Deferred tax provision (benefit):
U.S. federal and state		—		—		—
Foreign provision (benefit)		(841)		104		108
Total deferred provision (benefit)		(841)		104		108
Provision (benefit) for income taxes	$	(253)	$	716	$	1,244

As of January 2, 2015, the Company had federal net operating loss carryforwards of $130.8 million available to reduce future income taxes. The federal net operating loss carryforwards expire in varying amounts between 2017 and 2033. In California, the main state from which the Company conducts its domestic operations, the Company has state net operating losses of $73.7 million available to reduce future California income taxes. The California net operating loss carryforwards expire in varying amounts between 2015 and 2034 and, approximately $16.3 million of those net operating loss carryforwards, will expire over the next three years.

The Company had accrued net income taxes receivable of $217,000 at January 2, 2015 and income taxes payable of $655,000 at January 3, 2014, primarily due to taxes from foreign jurisdictions.

The provision for (benefit from) for income before taxes differs from the amount computed by applying the statutory federal income tax rate to income before taxes as follows (in thousands):

	2014				2013				2012
Computed provision (benefit) for taxes based on income at statutory rate	34.0	%	$	(2,939)	34.0	%	$	379	34.0	%	$	(176)
Increase (decrease) in taxes resulting from:
Permanent differences	(0.2)			20	3.2			35	(7.9)			41
Federal minimum taxes	(0.1)			3	—			—	—			—
State minimum taxes, net of federal income tax benefit	(0.1)			10	0.7			8	(1.4)			8
Stock options	—			—	—			—	(56.0)			290
State tax benefit	4.6			(394)	6.4			71	9.2			(48)
Tax rate difference due to foreign statutory rate	3.3			(288)	43.7			487	(43.8)			227
Foreign tax detriment (benefit)	—			—	—			—	3.1			(16)
Foreign earnings not permanently reinvested	0.1			(11)	(7.7)			(86)	(223.4)			1,158
Foreign dividend withholding	(1.5)			132	12.5			140	(22.1)			114
Expiration of charitable contribution carryover	(0.2)			18	0.2			2	(16.1)			83
Reserve	—			—	(10.9)			(121)	—			—
Other	1.0			(85)	6.4			71	1.1			(6)
Valuation allowance	(38.0)			3,281	(24.2)			(270)	83.2			(431)
Effective tax provision (benefit) rate	2.9	%	$	(253)	64.3	%	$	716	(240.1)	%	$	1,244

The Company recorded income tax benefits of $1.4 million during the fourth quarter of 2014 principally related to its Swiss operations. These benefits were recorded after finalizing ongoing discussions with the Swiss tax authorities, or the STA, in connection with the completion of the Company’s manufacturing consolidation project, which had been in progress since 2012 and completed in June 2014 (see Note 18). These discussions included, among other things, the approval of a special Swiss tax ruling available to certain qualified companies doing business in Switzerland as a foreign operator, as defined by the STA. These discussions also included an agreement with the STA to consolidate the financial results of a foreign entity solely for Swiss income tax purposes, previously not taxable by the STA, to become subject to Swiss tax law. During the fourth quarter of 2014, the Company was advised by the STA that it had met those special ruling qualifications for 2014.

Included in the state tax provision for 2014 is an increase to the state deferred tax asset and corresponding increase to the valuation allowance of $394,000. For 2013 there was a decrease to the state deferred tax asset and corresponding decrease to the valuation allowance of $71,000. For 2012 there was an increase to the state deferred tax asset and corresponding increase to the valuation allowance of $48,000. This results in a total state tax provision of $15,000 for 2014, $12,000 for 2013, and $11,000 for 2012.

Included in the deferred foreign tax benefit for 2014 is a decrease in foreign deferred tax liabilities of $1,039,000. For 2013, there was a decrease to the foreign deferred tax assets of $630,000 and a corresponding decrease to the valuation allowance of $1,008,000. For 2012 there was an increase to the foreign deferred tax assets of $16,000 and a corresponding increase to the valuation allowance.

All earnings from the Company’s subsidiaries are not considered to be permanently reinvested. Accordingly, the Company provides withholding and U.S. taxes on all unremitted foreign earnings. During 2014 and 2013 there were no withholding taxes paid to foreign jurisdictions and there were no earnings repatriated from foreign subsidiaries.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets (liabilities) as of January 2, 2015 and January 3, 2014 are as follows (in thousands):

	2014		2013
Current deferred tax assets (liabilities):
Allowance for doubtful accounts and sales returns	$	127	$	21
Inventories		511		11
Accrued vacation		397		375
State taxes		—		—
Accrued other expenses		119		105
Other		80		(137)
Valuation allowance		(939)		(741)
Total current deferred tax assets (liabilities)	$	295	$	(366)
Non-current deferred tax assets (liabilities):
Net operating loss carryforwards	$	53,747	$	50,409
Stock-based compensation		1,684		2,212
Business, foreign and AMT credit carryforwards		1,223		921
Capitalized R&D		423		525
Contributions		37		57
Pensions		489		731
Depreciation and amortization		870		360
Foreign tax withholding		(1,326)		(1,129)
Foreign earnings not permanently reinvested		(5,022)		(4,992)
Other		31		(40)
Valuation allowance		(53,165)		(50,082)
Total non-current deferred tax liabilities	$	(1,009)	$	(1,028)

As of January 2, 2015, the Company had net deferred tax liabilities in Switzerland of $1,371,000 (which included $1,326,000 of withholding taxes on unremitted foreign earnings) and net deferred tax assets of $658,000 in Japan included in the Company’s components of deferred income tax assets and liabilities table. As of January 3, 2014, the Company had net deferred tax liabilities in Switzerland of $1,683,000 (which included $1,129,000 of withholding taxes on unremitted foreign earnings) and net deferred tax assets of $289,000 in Japan included in the Company’s components of deferred income tax assets and liabilities table.

Valuation allowance

ASC 740 requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset may not be realizable.

The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. In evaluating the Company’s ability to recover the deferred tax assets within a jurisdiction from which they arise, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies and results of recent operations. In projecting future taxable income, the Company begins with historical results and incorporates assumptions including overall current and projected business and industry conditions, the amount of future federal, state, and foreign pretax operating income, the reversal of temporary differences and the successful implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company uses to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating results. Valuation allowances, or reductions to deferred tax assets, are recognized if, based on the weight of all the available evidence, it is more likely than not that some portion or all of the deferred tax asset may not be realized.

U.S. Jurisdiction

Due to the Company’s history of losses in the U.S., the valuation allowance fully offsets the value of U.S. deferred tax assets on the Company’s balance sheet as of January 2, 2015. Further, under Federal Tax Law Internal Revenue Code Section 382, significant changes in ownership may restrict the future utilization of these tax loss carry forwards.

Foreign Jurisdictions

STAAR Surgical AG

Due to STAAR Surgical AG’s history of profits, the deferred tax assets are considered fully realizable. Included in deferred tax assets and liabilities of STAAR AG is noncurrent deferred tax assets of $135,000 and $185,000 as of January 2, 2015 and January 3, 2014, respectively.

STAAR Japan, Inc.

Since 2012, STAAR Japan functions as a limited-risk distributor with a guaranteed return from STAAR AG and accordingly, STAAR Japan’s deferred tax assets are considered fully realizable. In 2013, STAAR Japan fully released its remaining valuation allowance and recorded an income tax benefit of approximately $433,000.

As of January 2, 2015, STAAR Japan’s net deferred tax assets were $658,000 (as translated using the Japanese Yen exchange rate on January 2, 2015). As of January 3, 2014, STAAR Japan’s net deferred tax assets were $289,000, including the remaining net operating loss carryover of $20,000 (as translated using the Japanese Yen exchange rate on January 3, 2014).

Other Income Tax Disclosures

The following tax years remain subject to examination:

Significant Jurisdictions		Open Years
U.S. Federal		2011 – 2013
California		2010 – 2013
Switzerland		2012 – 2013
Japan		2009 – 2013

Income (loss) from continuing operations before provision (benefit) for income taxes is as follows (in thousands):

	2014		2013		2012
Domestic	$	(8,113)	$	(2,131)	$	(2,967)
Foreign		(532)		3,245		2,448
	$	(8,645)	$	1,114	$	(519)

- 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+ Details