10. Income Taxes

The provision for income taxes on loss from continuing operations for fiscal 2016, 2015 and 2014 consists of the following (in thousands):


	2016		2015			2014
Federal:
Current	$	—	$	—		$	(324	)
Deferred		—		—			—

		—		—			(324	)
State:
Current		5		6			5
Deferred		—		—			—

		5		6			5
Foreign:
Current		237		561			81
Deferred		9		(12	)		8,666

		246		549			8,747
Total	$	251	$	555		$	8,428

Income (loss) before income taxes for fiscal 2016, 2015 and 2014 consisted of the following (in thousands):


	2016			2015			2014
U.S	$	(8,703	)	$	(9,538	)	$	(13,191	)
Foreign		1,513			927			(5,826	)

	$	(7,190	)	$	(8,611	)	$	(19,017	)

Effective tax rate		(3.5	)%		(6.4	)%		(44.3	)%

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 for income tax purposes. Significant components of deferred tax assets are as follows (in thousands):


	December 31, 2016			January 2, 2016
Deferred tax assets:
Vacation, warranty and other accruals	$	926		$	898
Depreciation and amortization		600			814
Intangible amortization		2,060			2,397
Inventory valuation		3,091			3,321
Deferred income		29			750
Equity-based compensation		3,821			3,612
Net operating loss, research and other tax credit carryforwards		54,844			51,186
Other		918			481

		66,289			63,459
Valuation allowance for deferred tax assets		(65,189	)		(62,365	)

Total deferred tax assets		1,100			1,094

Deferred tax liabilities:
Purchased technology		(720	)		(950	)
Unbilled revenue		(377	)		(132	)

Total deferred tax liabilities		(1,097	)		(1,082	)

Net deferred tax assets	$	3		$	12

As reported on the balance sheet:
Current deferred tax assets	$	—		$	12
Non-current deferred tax assets		3			—

	$	3		$	12

Intevac accounts for income taxes in accordance with accounting standards for such taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the financial reporting and tax bases of recorded assets and liabilities. Accounting standards also require that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of or all of the deferred tax asset will not be realized.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant element of objective negative evidence evaluated was the cumulative loss incurred over the three-year periods ended January 3, 2015, December 31, 2013 and December 31, 2012. Such objective evidence limits the ability to consider other subjective evidence such as Intevac’s projections for future growth. On the basis of this analysis and the significant negative objective evidence, for fiscal 2014, a valuation allowance of $9.4 million was added to record only the portion of the Singapore deferred tax asset that more likely than not will be realized. The Company recorded a valuation allowance decrease of $136,000 for fiscal 2016 and a valuation allowance increase of $631,000 for fiscal 2015, respectively, for the Singapore deferred tax asset.

In fiscal 2012, a valuation allowance of $23.4 million was added to record only the portion of the U.S. federal deferred tax asset that more likely than not will be realized. For fiscal 2016, 2015, 2014 and 2013, valuation allowance increases of $3.3 million, $1.6 million, $4.7 million and $7.2 million, respectively for the U.S. federal deferred tax asset were recorded. A valuation allowance is recorded against the entire state deferred tax asset which consists of state income tax temporary differences and deferred research and other tax credits that are not realizable in the foreseeable future.

The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.

As of December 31, 2016, our federal, foreign and state net operating loss carryforwards for income tax purposes were approximately $66.0 million, $60.3 million and $63.8 million, respectively. The federal and state net operating loss carryforwards are subject to various limitations under Section 382 of the Internal Revenue Code and applicable state tax laws. If not utilized, the federal net operating loss carryforwards and the state net operating loss carryforwards will begin to expire in 2028. The foreign net operating loss carryforwards do not expire. As of December 31, 2016, our federal and state tax credit carryforwards for income tax purposes were approximately $13.5 million and $13.4 million, respectively. If not utilized, the federal tax credit carryforwards will begin to expire in 2019 and the state tax credits carry forward indefinitely.

The difference between the tax provision (benefit) at the statutory federal income tax rate and the tax provision (benefit) for fiscal 2016, 2015 and 2014 was as follows (in thousands):


	2016			2015			2014
Income tax (benefit) at the federal statutory rate	$	(2,517	)	$	(3,014	)	$	(6,656	)
State income taxes, net of federal benefit		5			6			5
Change in valuation allowance:
U.S		3,333			1,625			4,733
Foreign		(136	)		631			9,394
Effect of foreign operations taxed at various rates		(232	)		(140	)		1,662
Research tax credits		(1,058	)		(931	)		(569	)
Effect of tax rate changes, permanent differences and adjustments of prior deferrals		1,137			2,114			153
Unrecognized tax benefits		(281	)		264			(294	)

Total	$	251		$	555		$	8,428

Intevac has not provided for U.S. federal income and foreign withholding taxes on approximately $14.3 million of undistributed earnings from non-U.S. operations as of December 31, 2016 because Intevac intends to reinvest such earnings indefinitely outside of the United States. If Intevac were to distribute these earnings, foreign tax credits may become available under current law to reduce the resulting U.S. income tax liability. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable. Intevac will remit the non-indefinitely reinvested earnings, if any, of Intevac’s non-U.S. subsidiaries where excess cash has accumulated and Intevac determines that it is advantageous for business operations, tax or cash reasons.

The total amount of gross unrecognized tax benefits was $7.5 million as of December 31, 2016, of which $73,000 would affect Intevac’s effective tax rate if realized. The aggregate changes in the balance of gross unrecognized tax benefits were as follows for fiscal 2016, 2015 and 2014:


	2016			2015		2014
	(in thousands)
Beginning balance	$	7,173		$	6,578	$	6,482
Additions based on tax positions related to the current year		652			574		57
Additions for tax positions of prior years		—			21		250
Settlements		(281	)		—		—
Lapse of statute of limitations		—			—		(211	)

Ending balance	$	7,544		$	7,173	$	6,578

The Company does not anticipate any changes in the amount of unrecognized tax benefits in the next twelve months. It is Intevac’s policy to include interest and penalties related to unrecognized tax benefits in the provision for income taxes on the consolidated statements of operations. During fiscal 2016, 2015 and 2014, Intevac recognized a net tax expense (benefit) for interest of ($1,000), $2,000 and ($110,000), respectively. As of December 31, 2016 Intevac had $9,000 of accrued interest related to unrecognized tax benefits, which was classified as a long-term liability in the consolidated balance sheets. Intevac did not accrue any penalties related to these unrecognized tax benefits because Intevac has other tax attributes which would offset any potential taxes due.

Intevac is subject to income taxes in the U.S. federal jurisdiction, and various state and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The material jurisdictions where Intevac is subject to potential examination by tax authorities for tax years after 2009 include the U.S. (Federal and California) and Singapore.

The Inland Revenue Authority of Singapore (“IRAS”) is currently conducting a review of the fiscal 2009 through 2012 tax returns of the Company’s wholly-owned subsidiary, Intevac Asia Pte. Ltd. IRAS has challenged the Company’s tax position with respect to certain aspects of the Company’s transfer pricing. Under Singapore tax law, the Company must pay all contested taxes and the related interest to have the right to defend its position. As a result, the Company made deposits of $318,000 for the 2009 tax year in fiscal 2014 and $1.1 million for the 2010 tax year in fiscal 2015, respectively. In fiscal 2016, IRAS allowed the deduction of a portion of the challenged deductions and the Company received a partial refund of $517,000 of the contested taxes. Accordingly, the Company derecognized a portion of the tax accrual of approximately $281,000 by reducing the income tax provision by $281,000. The contested tax deposits of $871,000 and $1.4 million are included in other long-term assets at December 31, 2016 and January 2, 2016, respectively, on the consolidated balance sheets. The ultimate outcome of this examination is subject to uncertainty. The Company’s management and its advisors continue to believe that the Company is “more likely than not” to successfully defend that the tax treatment was proper and in accordance with Singapore tax regulations. Based on the information currently available, the Company does not anticipate a significant increase or decrease to its unrecognized tax benefits for this matter within the next twelve months. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from this or other examinations. Presently, there are no other active income tax examinations in the jurisdictions where Intevac operates.