Income Taxes

12 Months Ended

Dec. 28, 2019

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



	Fiscal Year
	2019			2018			2017
Current
State	$	4,000		$	5,000		$	5,000
Foreign	104,000			25,000			(568,000		)
Total current provision (benefit)	108,000			30,000			(563,000		)
Deferred
Federal	(5,165,000		)	(7,307,000		)	15,461,000
State	(2,341,000		)	(360,000		)	(493,000		)
Foreign	(56,000		)	300,000			(187,000		)
Change in valuation allowance	7,562,000			7,367,000			(17,181,000		)
Total (benefit) deferred provision	—			—			(2,400,000		)
Total provision (benefit) for income taxes	$	108,000		$	30,000		$	(2,963,000	)

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



	Total
Unrecognized tax benefits at December 30, 2017	$	394,000
Gross increases—prior year tax positions	—
Unrecognized tax benefits at December 29, 2018	394,000
Gross increases—current year tax positions	—
Unrecognized tax benefits at December 28, 2019	$	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 the Company'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 28, 2019 and December 29, 2018. The Company'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 $0.8 million and $0.5 million as of December 28, 2019 and December 29, 2018 respectively.

Net operating losses were not utilized in 2019, 2018 and 2017 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
	2019			2018			2017
Tax provision at federal statutory rates	$	(6,196,000	)	$	(7,515,000	)	$	(9,884,000	)
State tax liability	4,000			5,000			5,000
Foreign deferred tax rate differential	(64,000		)	(39,000		)	15,000
Foreign withholding	—			301,000			(771,000		)
Outside basis in Kowon, net unremitted earnings	—			(468,000		)	(2,888,000		)
Permanent items	1,964,000			186,000			774,000
Increase in net state operating loss carryforwards	(1,985,000		)	(406,000		)	(300,000		)
Utilization of net operating losses for U.K. research and development refund	(148,000		)	—			—
Provision to tax return adjustments and tax rate change ⁽¹⁾	803,000			(76,000		)	24,833,000
Tax credits	(1,931,000		)	239,000			24,000
Non-deductible 162M compensation limitations	—			13,000			199,000
Non-deductible equity compensation	16,000			290,000			1,901,000
Uncertain tax position for transfer pricing	105,000			91,000			203,000
Other, net	(22,000		)	45,000			107,000
Change in valuation allowance	7,562,000			7,364,000			(17,181,000		)
Total provision (benefit)	$	108,000		$	30,000		$	(2,963,000	)


(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 income from continuing operations was approximately $1.3 million for fiscal year ended 2019, pretax foreign loss from continuing operations was approximately $0.7 million for fiscal year ended 2018 and pretax foreign income from continuing operations was approximately $0.4 million for fiscal year ended 2017. 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
	2019			2018
Deferred tax liability:
Foreign withholding liability	$	(525,000	)	$	(538,000	)
Deferred tax assets:
Federal net operating loss carryforwards	44,820,000			41,755,000
State net operating loss carryforwards	5,097,000			3,114,000
Foreign net operating loss carryforwards	1,293,000			1,259,000
Equity awards	428,000			444,000
Tax credits	9,161,000			7,231,000
Property, plant and equipment	524,000			640,000
Unrealized losses on investments	2,641,000			1,848,000
Other	1,603,000			1,707,000
Net deferred tax assets	65,042,000			57,460,000
Valuation allowance	(65,566,000		)	(58,006,000		)
	$	(524,000	)	$	(546,000	)

The valuation allowance was approximately $65.6 million and $58.0 million at December 28, 2019 and December 29, 2018, respectively, primarily driven by U.S. net operating loss carryforwards ("NOLs") and tax credits that the Company does not believe will ultimately be realized.

Deferred tax assets and liabilities—The Company has remeasured certain deferred tax assets and liabilities, excluding those items 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%. The 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. The Company has received $0.5 million refund from our AMT credit in 2019 and is expecting to receive another $0.5 million of this credit in the next three years. The current portion of receivable is $0.3 million and is recorded in "Prepaid expenses and other current assets" on the Company's consolidated balance sheet at December 28, 2019 and the non-current portion is recorded in "Other assets".

In addition to the changes described above, the 2017 Act imposes a U.S. tax on global intangible low taxed income ("GILTI") that is earned by certain foreign affiliates owned by a U.S. shareholder. The computation of GILTI is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. The Company has made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred.

As of December 28, 2019, the Company has available for tax purposes NOLs of $160.5 million expiring 2021 through 2037 and $52.9 million that have an unlimited carryover period. 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 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.