NOTE 7 — INCOME TAXES

H.R.1, originally known as the Tax Cuts and Jobs Act of 2017 (“Tax Reform”), was enacted on December 22, 2017. The changes to U.S. Tax law include, among other items, (i) a reduction in the federal corporate income tax rate from a maximum of 35% to a flat 21%, (ii) repealing the exception for deductibility of performance-based compensation to covered employees, along with expanding the number of covered employees, and (iii) allowing immediate expensing of machinery and equipment contracted for purchase after September 27, 2017. Tax Reform also establishes new tax provisions that will affect our fiscal year 2019, including, but not limited to eliminating the deduction for domestic manufacturing activities.

Since we have a June fiscal year-end, the lower corporate income tax rate was phased in during the 2018 calendar year, resulting in a U.S. statutory federal rate of approximately 28% for our fiscal year ending June 28, 2018, and a U.S. statutory federal rate of 21% for subsequent fiscal years. Our net deferred tax asset balances are recorded at the tax rate expected to be in effect during the period in which the related temporary differences reverse. Therefore, this reduction in the corporate federal income tax rate required a non-cash reduction of our net deferred tax asset balances and a corresponding non-cash increase in income tax expense of $3,119 during the year ended June 28, 2018, which is approximately $711 more than we initially estimated at the end of our second fiscal quarter. This net measurement period adjustment increased our annual effective tax rate approximately 1.4%. Our accounting for the income tax effects of Tax Reform are completed as of June 28, 2018.

The provision for income taxes is based entirely on income before income taxes earned in the United States, and is as follows for the last three fiscal years:


	For the Year Ended:
	June 28, 2018			June 29, 2017			June 30, 2016
Current:
Federal	$	10,722		$	17,013		$	14,015
State		2,464			2,744			2,222

Total current expense		13,186			19,757			16,237
Deferred:
Deferred federal		3,902			(1,698	)		(210	)
Deferred state		(238	)		(46	)		40

Total deferred expense (benefit)		3,664			(1,744	)		(170	)

Total income tax expense	$	16,850		$	18,013		$	16,067

The reconciliations of income taxes at the statutory federal income tax rate to income tax expense reported in the Consolidated Statements of Comprehensive Income for the last three fiscal years are as follows:


	June 28, 2018			June 29, 2017			June 30, 2016
Federal statutory income tax rate		28.1	%		35.0	%		35.0	%
State income taxes, net of federal benefit		3.1			3.3			3.2
Impact of Tax Reform		6.3			—			—
Research and development tax credit		(0.2	)		(0.1	)		(0.1	)
Domestic manufacturing deduction		(2.2	)		(3.1	)		(3.2	)
Windfall tax benefits		(1.0	)		(1.8	)		—
Uncertain tax positions		0.1			0.1			(0.6	)
Other		—			(0.1	)		0.3

Effective tax rate		34.2	%		33.3	%		34.6	%

After the adoption of ASU 2016-09 in fiscal 2017, windfall tax benefits are a permanent difference recognized as a component of income tax expense.

Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement basis and the tax basis of assets and liabilities using enacted statutory tax rates applicable to future years. Deferred tax assets and liabilities are comprised of the following:


	June 28, 2018			June 29, 2017
Deferred tax assets (liabilities):
Accounts receivable	$	305		$	423
Employee compensation		810			1,726
Inventory		273			345
Depreciation and amortization		(9,504	)		(12,826	)
Capitalized leases		1,020			1,508
Goodwill and intangible assets		3,160			4,939
Retirement plan		5,484			8,224
Workers’ compensation		1,692			2,365
Share based compensation		1,281			1,908
Capital loss carryforward		112			171
Other		503			483
Less valuation allowance		(112	)		(171	)

Net deferred tax asset — long term		5,024			9,095

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of the character necessary during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment. During fiscal 2018 and fiscal 2017 the net change in the total valuation allowance was not significant. If or when recognized, the tax benefits relating to any reversal of the valuation allowance will be recognized as a reduction of income tax expense.

For the years ending June 28, 2018 and June 29, 2017, unrecognized tax benefits and accrued interest and penalties were $214 and $173. Accrued interest and penalties related to uncertain tax positions are not material for any periods presented. Interest and penalties within income tax expense were not material for any period presented. The total gross amounts of unrecognized tax benefits were $207 and $174 at June 28, 2018 and June 29, 2017, respectively.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:


	June 28, 2018		June 29, 2017		June 30, 2016
Beginning balance	$	174	$	24	$	248
Gross increases — tax positions in prior year		6		7		70
Gross decreases — tax positions in prior year		—		—		(8	)
Settlements		—		—		(137	)
Gross increases — tax positions in current year		27		23		17
Lapse of statute of limitations		—		120		(166	)

Ending balance	$	207	$	174	$	24

Unrecognized tax benefits, that if recognized, would affect the annual effective tax rate on income from continuing operations, are as follows:


	June 28, 2018		June 29, 2017		June 30, 2016
Unrecognized tax benefits that would affect annual effective tax rate	$	177	$	136	$	27

During fiscal 2018, the change in unrecognized tax benefits due to statute expiration was not material. We do not anticipate that total unrecognized tax benefits will significantly change in the next twelve months.

There were certain changes in state tax laws during the period the impact of which was insignificant. We file income tax returns with federal and state tax authorities within the United States of America. Our federal and Illinois tax returns are open for audit for fiscal 2015 through 2017. Our California tax returns for fiscal 2015 through 2017 are open for audit. No other tax jurisdictions are material to us.