Income Taxes

The (benefit) provision for income taxes from continuing operations consists of the following for the fiscal years indicated:



	Fiscal Year
	2017			2016			2015
Current
State	$	5,000		$	33,000		$	50,000
Foreign	(568,000		)	1,656,000			—
Total current provision	(563,000		)	1,689,000			50,000
Deferred
Federal	15,461,000			(8,718,000		)	(5,356,000		)
State	(493,000		)	(1,264,000		)	(62,000		)
Foreign	(187,000		)	2,308,000			188,000
Change in valuation allowance	(17,181,000		)	9,115,000			5,155,000
Total deferred (benefit) provision	(2,400,000		)	1,441,000			(75,000		)
Total (benefit) provision for income taxes	$	(2,963,000	)	$	3,130,000		$	(25,000	)

The benefit for income taxes for the fiscal year ended 2017 of $3.0 million was driven by a reduction in foreign tax expense for the rate difference on a dividend distribution from the Company's Korean subsidiary of $0.8 million, an increase of uncertain tax positions of $0.2 million, the recognition of $1.1 million of net deferred tax liabilities in connection with the NVIS acquisition provided evidence of recoverability of the Company's net deferred tax tax assets that previously carried a full valuation allowance and resulted in a reduction in the valuation allowance of $1.1 million, a $1.0 million AMT credit carryforward that is expected to be utilized in the future and $0.3 million tax benefit related to the Kowon embezzlement loss.

The following table sets forth the changes in Kopin's balance of unrecognized tax benefits for the year ended:



	Total
Unrecognized tax benefits at December 26, 2015	$	—
Gross increases—prior year tax positions	374,000
Unrecognized tax benefits at December 31, 2016	374,000
Gross increases—current year tax positions	20,000
Unrecognized tax benefits at December 30, 2017	$	394,000

U.S. GAAP requires applying a 'more likely than not' threshold to the recognition and derecognition of uncertain tax positions either taken or expected to be taken by Kopin's income tax returns. The total amount of our gross tax liability for tax positions that may not be sustained under a 'more likely than not' threshold amounts to $0.4 million as of December 30, 2017 and December 31, 2016. Kopin's policy regarding the classification of interest and penalties is to include these amounts as a component of income tax expense. The total amount of accrued interest and penalties related to the Company's unrecognized tax benefits was $0.5 million and $0.3 million as of December 30, 2017 and December 31, 2016, respectively.

Net operating losses were not utilized in 2017, 2016 and 2015 to offset federal and state taxes.

The actual income tax (benefit) provision reported from operations are different than those which would have been computed by applying the federal statutory tax rate to loss before income tax (benefit) provision. A reconciliation of income tax (benefit) provision from continuing operations as computed at the U.S. federal statutory income tax rate to the provision for income tax benefit is as follows:



	Fiscal Year
	2017			2016			2015
Tax provision at federal statutory rates	$	(9,884,000	)	$	(6,965,000	)	$	(5,187,000	)
State tax liability	5,000			22,000			33,000
Foreign deferred tax rate differential	15,000			(678,000		)	153,000
Foreign withholding	(771,000		)	1,441,000			(75,000		)
Outside basis in Kowon, net unremitted earnings	(2,888,000		)	958,000			(180,000		)
Permanent items	774,000			259,000			(402,000		)
Increase in net state operating loss carryforwards	(300,000		)	(502,000		)	(158,000		)
Utilization of net operating losses for U.K. research and development refund	—			(142,000		)	719,000
Provision to tax return adjustments and tax rate change ⁽¹⁾	24,833,000			(66,000		)	264,000
Tax credits	24,000			(762,000		)	(501,000		)
Non-deductible 162M compensation limitations	199,000			—			40,000
Non-deductible equity compensation	1,901,000			(360,000		)	(34,000		)
Uncertain tax position for transfer pricing	203,000			671,000			—
Other, net	107,000			139,000			148,000
Change in valuation allowance	(17,181,000		)	9,115,000			5,155,000
	$	(2,963,000	)	$	3,130,000		$	(25,000	)


(1)	Due to the Tax Act which was enacted in December 2017, our U.S. deferred tax assets and liabilities as of December 30, 2017 were re-measured to 21%. The provisional amount recorded related to the remeasurement of our deferred tax balance was approximately $25.1 million of tax expense.

Pretax foreign loss from continuing operations was approximately $0.4 million for fiscal year ended 2017, pretax foreign income from continuing operations was approximately $5.4 million for fiscal year ended 2016 and pretax foreign losses from continuing operations were approximately $1.0 million for fiscal year ended 2015. Deferred income taxes are provided to recognize the effect of temporary differences between tax and financial reporting. Deferred income tax assets and liabilities consist of the following:



	Fiscal Year
	2017			2016
Deferred tax liability:
Foreign withholding liability	$	(812,000	)	$	(2,571,000	)
Foreign unremitted earnings	(468,000		)	(3,659,000		)
Intangible assets	(259,000		)	—
Deferred tax assets:
Federal net operating loss carryforwards	34,555,000			46,968,000
State net operating loss carryforwards	2,708,000			2,129,000
Foreign net operating loss carryforwards	1,500,000			1,375,000
Equity awards	55,000			2,258,000
Tax credits	7,470,000			7,495,000
Property, plant and equipment	544,000			814,000
Unrealized losses on investments	1,792,000			3,535,000
Other	3,037,000			5,823,000
Net deferred tax assets	50,122,000			64,167,000
Valuation allowance	(50,642,000		)	(66,738,000		)
	$	(520,000	)	$	(2,571,000	)

The valuation allowance was approximately $50.6 million and $66.7 million at December 30, 2017 and December 31, 2016, respectively, primarily driven by U.S. net operating loss carryforwards ("NOLs") and tax credits that the Company does not believe will ultimately be realized.

On December 22, 2017, the 2017 Tax Cuts and Jobs Act ("the Tax Act") was enacted into law and the new legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. The Company are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. At December 30, 2017, the Company has not completed our accounting for the tax effects of enactment of the Act; however, as described below, the Company has made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. For these items, the Company did not recognize any provisional amounts in the (benefit) provision for income taxes from continuing operations in accordance with SAB 118. The Company expects to finalize these provisional estimates before the end of 2018 after completing our reviews and analysis, including reviews and analysis of any interpretations issued during this measurement period.

Deferred tax assets and liabilities—The Company provisionally remeasured certain deferred tax assets and liabilities, excluding those items that will be included on the Company's 2017 tax return, based on the rates the Company expects to realize the deferred tax assets and liabilities at in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Act, such as the transition rules and the minimum tax on foreign earnings, and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts in the measurement period. The provisional amount recorded related to the remeasurement of the Company's deferred tax balance was approximately $25.1 million of tax expense.

The Company recorded a reduction in the valuation allowance during 2017 of approximately $1.0 million which was previously recorded against the Company’s AMT credit carryforward. The Company expects to receive a refund of $1.0 million from our AMT credit carryforward in accordance with the Tax Act and have recorded the receivable in "Other assets" on the Company's consolidated balance sheets at December 30, 2017.

With the adoption of a minimum tax on foreign earnings, the Company will be subject to tax on global intangible low-taxed income (“GILTI”) in future years. The Company is continuing to evaluate this provision and will not make a policy election on how to account for GILTI (as a period expense or as part of our rate on deferred taxes) until the Company has the necessary information available, including the interpretations of the new rules, to analyze the impacts and complete our analysis. The Company will make an election before the end of 2018. Because the Company has not made a policy election, no amounts for GILTI are included in our deferred taxes.

Foreign tax effects—The one-time transition tax is based on our total post-1986 earnings and profits (“E&P”) for which the Company has previously deferred U.S. income taxes. The Company is estimating that the Compan will not have a provisional requirement amount for our one-time transition tax liability, using an estimated applicable tax rate of 15.5%, resulting in no increase in income tax expense. The Company has not yet completed our calculation of the total post-1986 foreign E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. The Company also expects additional clarifying and interpretative technical guidance to be issued related to the calculation of our one-time transition tax. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax and any additional outside basis difference inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations.

Although the Company believes the significant impacts from the Tax Act are those described above, the Company will continue to review and evaluate the other provisions of the Tax Act. This review could result in changes to the amounts the Company has provisionally recorded. The Company expects to complete this review and evaluation before the end of 2018.

As of December 30, 2017, the Company has available for tax purposes NOLs of $164.5 million expiring 2022 through 2037. The Company has recognized a full valuation allowance on its net deferred tax assets as the Company has concluded that such assets are not more likely than not to be realized. The decrease in valuation allowance during fiscal year 2017 was a result of decreases in the federal tax rate as part of the Tax Act and a reduction in the valuation allowance as a result of deferred tax liabilities assumed as part of the acquisition of NVIS.

The Tax Act imposes a mandatory transition tax on accumulated foreign earnings and eliminates U.S. taxes on foreign subsidiary distribution. As a result, earnings in foreign jurisdictions are available for distribution to the U.S. without incremental U.S. taxes.

Under the provisions of the Section 382, certain substantial changes in Kopin’s ownership may limit in the future the amount of net operating loss carryforwards that could be used annually to offset future taxable income and income tax liability.

The Company’s income tax returns have not been examined by the Internal Revenue Service and are subject to examination for all years since 2001. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states.

International jurisdictions have statutes of limitations generally ranging from three to twenty years after filing of the respective return. Years still open to examination by tax authorities in major jurisdictions include Korea (2009 onward), Japan (2009 onward), Hong Kong (2011 onward) and United Kingdom (2014 onward). The Company is not currently under examination in these jurisdictions.