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Note 8 - Income Taxes | 12 Months Ended
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May 27, 2018
Notes to Financial Statements |
Income Tax Disclosure [Text Block] | 8. Income Taxes U.S Tax Reform Impact On December 22, 2017, the U.S. Government enacted the reconciled tax reform bill, commonly known as the Tax Cuts and Jobs Act of 2017 (the “TCJA”), which became effective on January 1, 2018. The TCJA makes broad changes to the U.S. tax code including, but not limited to, reducing the Company’s federal statutory tax rate from 35%, to an average rate of 29.35% for the fiscal year ended May 27, 2018, and then 21% for fiscal years thereafter; requiring companies to pay a one -time transition tax on certain unrepatriated earnings of foreign subsidiaries; generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations' creating a global intangibles low-taxed income inclusion (GILTI) and the base erosion anti-abuse tax (BEAT), a new minimum tax. The TCJA also enhances and extends through 2026 the option to claim accelerated depreciation deductions on qualified property; however, the domestic manufacturing deduction, from which the Company has historically benefitted, has been eliminated. On December 22, 2017, SAB 118 was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for certain income tax effects of the TCJA. Pursuant to SAB 118, as of May 27, 2018, the Company had not yet completed its accounting for the tax effects of the enactment of the TCJA. The Company’s provision for income taxes for the year ended May 27, 2018 is based in part on its best estimate of the effects of the transition tax and existing deferred tax balances with its understanding of the TCJA and guidance available as of the date of this filing. For the amounts which were reasonably estimable, we recognized a provisional remeasurement of $16.2 million of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The provisional amount related to the one -time transition tax on the mandatory deemed repatriation of foreign earnings was an expense of $1.8 million. We are still analyzing certain aspects of the TCJA and refining the estimate of the expected reversal of our deferred tax balance. This can potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The (benefit) provision for income taxes from continuing operations consisted of the following (in thousands):
|  | Year Ended |
|  | May 27, 2018 |  |  | May 28, 2017 |  |  | May 29, 2016 |
Current: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | (2,854 | ) |  | $ | 1,388 |  |  | $ | 2,085 |
State |  |  | 60 |  |  |  | 39 |  |  |  | (96 | )
Foreign |  |  | 83 |  |  |  | 82 |  |  |  | 83 |
Total |  |  | (2,711 | ) |  |  | 1,509 |  |  |  | 2,072 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | (7,122 | ) |  |  | 2,270 |  |  |  | (9,165 | )
State |  |  | 470 |  |  |  | 261 |  |  |  | (611 | )
Total |  |  | (6,652 | ) |  |  | 2,531 |  |  |  | (9,776 | )
Income tax (benefit) expense |  | $ | (9,363 | ) |  | $ | 4,040 |  |  | $ | (7,704 | )
The actual provision for income taxes from continuing operations differs from the statutory U.S. federal income tax rate as follows (in thousands):
|  | Year Ended |
|  | May 27, 2018 |  |  | May 28, 2017 |  |  | May 29, 2016 |
Tax at U.S. statutory rate (1) |  | $ | 4,784 |  |  | $ | 4,922 |  |  | $ | (6,963 | )
State income taxes, net of federal benefit |  |  | 439 |  |  |  | 307 |  |  |  | (518 | )
Tax reform |  |  | (14,350 | ) |  |  | — |  |  |  | — |
Change in valuation allowance |  |  | (176 | ) |  |  | 85 |  |  |  | 6 |
Tax credit carryforwards |  |  | (777 | ) |  |  | (834 | ) |  |  | (156 | )
Other compensation-related activity |  |  | 566 |  |  |  | (365 | ) |  |  | 173 |
Domestic manufacturing deduction |  |  | — |  |  |  | (243 | ) |  |  | (307 | )
Other |  |  | 151 |  |  |  | 168 |  |  |  | 61 |
Income tax (benefit) expense |  | $ | (9,363 | ) |  | $ | 4,040 |  |  | $ | (7,704 | )
( 1 ) Statutory rate was 29.35% for fiscal year 2018 and 35% for fiscal years 2017 and 2016. The decrease in the income tax expense for fiscal year 2018 was primarily due to the TCJA such as the statutory rate change for federal and state, and one -time transition tax on the repatriation of foreign earnings. Additionally, the effective tax rate for fiscal year 2018 decreased from expense of 29% to a benefit of 64% in comparison to fiscal year 2017. Significant components of deferred tax assets and liabilities reported in the accompanying consolidated balance sheets consisted of the following (in thousands):
|  | Year Ended |
|  | May 27, 2018 |  |  | May 28, 2017 |
Deferred tax assets: |  |  |  |  |  |  |  |
Accruals and reserves |  | $ | 1,421 |  |  | $ | 3,242 |
Net operating loss carryforwards |  |  | 1,955 |  |  |  | 2,766 |
Stock-based compensation |  |  | 1,247 |  |  |  | 2,032 |
Research and AMT credit carryforwards |  |  | 2,032 |  |  |  | 1,050 |
Other |  |  | 427 |  |  |  | 661 |
Gross deferred tax assets |  |  | 7,082 |  |  |  | 9,751 |
Valuation allowance |  |  | (1,337 | ) |  |  | (1,325 | )
Net deferred tax assets |  |  | 5,745 |  |  |  | 8,426 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Basis difference in investment in non-public company |  |  | (3,722 | ) |  |  | (11,495 | )
Goodwill and other indefinite life intangibles |  |  | (8,201 | ) |  |  | (11,119 | )
Depreciation and amortization |  |  | (11,307 | ) |  |  | (10,393 | )
Deferred tax liabilities |  |  | (23,230 | ) |  |  | (33,007 | )
Net deferred tax liabilities |  | $ | (17,485 | ) |  | $ | (24,581 | )
The effective tax rates for fiscal year 2018 differ from the blended statutory federal income tax rate of 29.35% as a result of several factors, including change in ending federal and state deferred blended rate, one -time transition tax due to the repatriation of foreign earnings, the change in valuation allowance, limitation of deductibility of executive compensation, and the benefit of federal and state research and development credits. The effective tax rates for fiscal year 2017 differ from the statutory federal income tax rate of 35% as a result of several factors, including non-deductible stock-based compensation expense, disqualified dispositions of incentive stock options, excess equity compensation benefits from the adoption of ASU 2016 - 09, domestic manufacturing deduction, the benefit of federal and state research and development credits, the change in valuation allowance, all of which is partially offset by state taxes. The effective tax rates for fiscal year 2016 differ from the statutory federal income tax rate of 35% as a result of several factors, including state taxes, non-deductible stock-based compensation expense, disqualified dispositions of incentive stock options, domestic manufacturing deduction, 162m limitation, the benefit of federal and state research and development credits and the change in valuation allowance. During the fiscal year ended May 27, 2018, excess tax deficits related to stock-based compensation of $38,000 were reflected in the consolidated statements of income (loss) as a component of income tax expense as a result of the adoption of ASU 2016 - 09, specifically related to the prospective application of excess tax deficits and tax deficiencies related to stock-based compensation. The Company elected to early adopt the new guidance of ASU 2016 - 09, Compensation – Stock Compensation (Topic 718 ) : Improvements to Employee Share-Based Payments Accounting , in the quarter beginning May 30, 2016. Accordingly the primary effects of the adoption are as follows: ( 1 ) using a modified retrospective application, the Company recorded unrecognized excess tax benefits of $549,000 as a cumulative-effect adjustment, which increased retained earnings, and reduced deferred taxes by the same, ( 2 ) using a modified retrospective application, the Company has elected to recognize forfeitures as they occur and recorded a $200,000 increase to additional paid in capital, a $126,000 reduction to retained earnings, and a $74,000 reduction to deferred taxes to reflect the incremental stock-based compensation expense, net of the related tax impacts, that would have been recognized in prior years under the modified guidance, and ( 3 ) $150,000 and $463,000 in excess tax benefits from stock-based compensation was reclassified from cash flows from financing activities to cash flows from operating activities for the fiscal years ended May 29, 2016 and May 31, 2015, respectively, in the Consolidated Statements of Cash Flows. As of May 27, 2018, the Company had federal, Indiana, and other state net operating loss carryforwards of approximately $7.1 million, $5.6 million, and $3.1 million, respectively. These losses expire in different periods through 2032, if not utilized. The Company acquired additional net operating losses through the acquisition of GreenLine. Utilization of these acquired net operating losses in a specific year is limited due to the “change in ownership” provision of the Internal Revenue Code of 1986 and similar state provisions. The net operating losses presented above for federal and state purposes are net of any such limitation. The Company has federal, California, and Minnesota research and development tax credit carryforwards of approximately $0.4 million, $1.5 million, and $0.7 million, respectively. The research and development tax credit carryforwards have an unlimited carryforward period for state purposes and a 20 -year carryforward for federal purposes. Valuation allowances are reviewed each period on a tax jurisdiction by jurisdiction basis to analyze whether there is sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax assets. Based on this analysis and considering all positive and negative evidence, the Company determined that a valuation allowance of $1.3 million should be recorded as a result of uncertainty around the utilization of certain state net operating losses and a book impairment loss on the Company's investment in Aesthetic Sciences as it is more likely than not that a portion of the deferred tax asset will not be realized in the foreseeable future. The valuation allowance increased by an immaterial amount from the prior year primarily due to uncertainty around the utilization of certain state net operating losses and credits. The accounting for uncertainty in income taxes recognized in an enterprise’s financial statements prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and the derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|  | As of |
|  | May 27, 2018 |  |  | May 28, 2017 |  |  | May 29, 2016 |
Unrecognized tax benefits – beginning of the period |  | $ | 537 |  |  | $ | 842 |  |  | $ | 987 |
Gross increases – tax positions in prior period |  |  | 21 |  |  |  | 11 |  |  |  | 1 |
Gross decreases – tax positions in prior period |  |  | — |  |  |  | (90 | ) |  |  | (223 | )
Gross increases – current-period tax positions |  |  | 116 |  |  |  | 93 |  |  |  | 77 |
Settlements |  |  | (95 | ) |  |  | — |  |  |  | — |
Lapse of statute of limitations |  |  | (100 | ) |  |  | (319 | ) |  |  | — |
Unrecognized tax benefits – end of the period |  | $ | 479 |  |  | $ | 537 |  |  | $ | 842 |
As of May 27, 2018, the total amount of net unrecognized tax benefits is $479,000, of which, $372,000, if recognized, would change the effective tax rate. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest is not material as of May 27, 2018. Additionally, the Company expects its unrecognized tax benefits to decrease by approximately $25,000 within the next 12 months. Due to tax attribute carryforwards, the Company is subject to examination for tax years 2015 forward for U.S. tax purposes. The Company was also subject to examination in various state jurisdictions for tax years 2012 forward, none of which were individually material.

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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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