Income Taxes

12 Months Ended

Dec. 29, 2018

Income Taxes

11. Income Taxes

The provision for (benefit from) income taxes on income (loss) from operations for fiscal 2018 and 2017 consists of the following (in thousands):

	2018			2017
Federal:
Current	$	(313	)	$	—
Deferred		—			—
		(313	)		—
State:
Current		5			13
Deferred		—			—
		5			13
Foreign:
Current		1,041			1,091
Deferred		(7,909	)		(1	)
		(6,868	)		1,090
Total	$	(7,176	)	$	1,103

Income (loss) before income taxes for fiscal 2018 and 2017 consisted of the following (in thousands):

	2018			2017
U.S	$	(11,634	)	$	(794	)
Foreign		8,039			6,015
	$	(3,595	)	$	5,221
Effective tax rate		199.6	%		21.1	%

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 29, 2018			December 30, 2017
Deferred tax assets:
Vacation, warranty and other accruals	$	515		$	601
Depreciation and amortization		656			91
Intangible amortization		902			1,071
Inventory valuation		1,401			1,341
Deferred income		256			22
Equity-based compensation		1,411			2,636
Net operating loss, research and other tax credit carryforwards		53,595			52,882
Other		545			543
		59,281			59,187
Valuation allowance for deferred tax assets	(50,804)			(58,455)
Total deferred tax assets		8,477			732
Deferred tax liabilities:
Purchased technology		(181	)		(307	)
Unbilled revenue		(383	)		(421	)
Total deferred tax liabilities		(564	)		(728	)
Net deferred tax assets	$	7,913		$	4
As reported on the balance sheet:
Non-current deferred tax assets	$	7,913		$	4

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. In fiscal 2014, a valuation allowance of $9.4 million was established to record the portion of the Singapore deferred tax asset that more likely than not will not be realized. The Company concluded that, as of December 29, 2018, it is more likely than not that the Company will generate sufficient taxable income in Singapore to realize its deferred tax assets and reversed the valuation allowance during the fourth quarter of 2018. This reversal resulted in the recognition of a non-cash income tax benefit of $7.9 million for fiscal 2018. The Company has considered all positive and negative evidence regarding the ability to fully realize the deferred tax asset, including past operating results and the forecast of future taxable income. This conclusion, and the resulting reversal of the deferred tax asset valuation allowance, is based upon consideration of a number of factors, including the Company’s completion of 7 consecutive quarters of profitability and its forecast of future profitability under multiple scenarios that support the utilization of net operating loss carryforwards. After recognizing the reversal, the Company does not have a remaining valuation allowance against the deferred tax assets in Singapore at December 29, 2018. The Company recorded a valuation allowance decrease of $603,000 for fiscal 2017.

In fiscal 2012, a valuation allowance of $23.4 million was established to record the portion of the U.S. federal deferred tax asset that more likely than not will not be realized. For fiscal 2018, a valuation allowance increase of $930,000 for the U.S. federal deferred tax asset was recorded. For fiscal 2017, a valuation allowance decrease of $6.9 million for the U.S. federal deferred tax asset was recorded that resulted from a revaluation of our deferred tax assets and liabilities at the newly enacted U.S federal tax rate. 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 29, 2018, our federal, foreign and state net operating loss carryforwards for income tax purposes were approximately $68.6 million, $45.3 million and $59.9 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 29, 2018, our federal and state tax credit carryforwards for income tax purposes were approximately $16.4 million and $15.4 million, respectively. If not utilized, the federal tax credit carryforwards will begin to expire in 2019 and the state tax credits carry forward indefinitely.

Tax Reform was enacted on December 22, 2017. Tax Reform reduced the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign sourced earnings. At December 30, 2017, we had not completed our accounting for the tax effects of enactment of Tax Reform; however, we made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax by applying the guidance of Staff Accounting Bulletin No. 118. At December 29, 2018, we have now completed our accounting for all of the enactment-date income tax effects of Tax Reform. As further discussed below, during 2018, we recognized net adjustments of $(57,000) to the provisional amounts recorded at December 30, 2017 and included these adjustments as a component of income tax expense from operations.

The U.S. federal corporate alternative minimum tax (“AMT”) has been repealed for tax years beginning after December 31, 2017. Intevac has recorded income tax receivables of $313,000 for unused AMT credit carryforwards. On the consolidated balance sheets, the short-term portion of the income tax receivable is included in trade and other accounts receivable, net, while the long-term portion is included in deferred income taxes and other long-term assets.

In fiscal 2017, we re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The provisional amount recorded related to the re-measurement of our deferred tax balance was $9.2 million. Upon further analysis of certain aspects of Tax Reform and refinement of our calculations during the fiscal 2018, we adjusted our provisional amount by $(725,000).

The one-time transition tax is based on our total post-1986 earnings and profits (“E&P”) for which we have previously deferred from U.S. income taxes. In fiscal 2017, we recorded a provisional amount of $1.8 million for our one-time transition tax liability for seven of our foreign subsidiaries, resulting in no increase in income tax expense due to current losses. We finalized our calculations of the transition tax liability during 2018 and adjusted our provisional amount by $1.8 million, which is included as a component of income tax expense from operations.

Tax Reform subjects a U.S. parent to tax on Global Intangible Low-Taxed Income (“GILTI’) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Because we were evaluating the provision of GILTI as of December 30, 2017, we recorded no GILTI-related deferred amounts in 2017. After further consideration in the current year, we have elected to account for GILTI in the year the tax is incurred.

The difference between the tax provision at the statutory federal income tax rate and the tax provision for fiscal 2018 and 2017 was as follows (in thousands):

	2018			2017
Income tax (benefit) at the federal statutory rate	$	(756	)	$	1,827
State income taxes, net of federal benefit		5			13
Change in valuation allowance:
U.S		930			(6,873	)
Foreign		(9,286	)		(603	)
Effect of foreign operations taxed at various rates		(254	)		(1,036	)
Research tax credits		(1,883	)		(2,267	)
Change in federal tax rate		—			9,201
Effect of tax rate changes, permanent differences and adjustments of prior deferrals		4,142			639
Unrecognized tax benefits		(74	)		202
Total	$	(7,176	)	$	1,103

Intevac has not provided for foreign withholding taxes on approximately $1.2 million of undistributed earnings from non-U.S. operations as of December 29, 2018 because Intevac intends to reinvest such earnings indefinitely outside of the United States. If Intevac were to distribute these earnings, foreign withholding tax would be payable. For all other undistributed foreign earnings, Intevac also intends to reinvest such earnings indefinitely outside of the United States.

The total amount of gross unrecognized tax benefits was $6.2 million as of December 29, 2018, of which $8,000 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 2018 and 2017:

	2018			2017
Beginning balance	$	5,678		$	7,544
Additions based on tax positions related to the current year		784			898
Settlements		(233	)		—
Change in federal tax rate		—			(2,764	)
Lapse of statute of limitations		(65	)		—
Ending balance	$	6,164		$	5,678

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 income. During fiscal 2018 and 2017, Intevac recognized a net tax expense (benefit) for interest of $2,000 and $2,000, respectively. As of December 29, 2018 Intevac had $2,000 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. Intevac has certain tax attributes that are subject to adjustment back to 1999. Intevac is subject to potential income tax return examination by tax authorities for tax years after 2009 in the following material jurisdictions: U.S. (Federal and California) and Singapore. Intevac has certain tax attributes that are subject to adjustment back to 1999.

The Inland Revenue Authority of Singapore (“IRAS”) is currently conducting a review of the fiscal 2009 through 2010 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. The contested tax deposits of $723,000 and $743,000 are included in other long-term assets at December 29, 2018 and December 30, 2017, 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.