Income Taxes

12 Months Ended

Dec. 28, 2019

11. Income Taxes

The provision for (benefit from) income taxes on income (loss) from operations for fiscal 2019 and 2018 consists of the following (in thousands):


	2019		2018
Federal:
Current	$	—	$	(313	)
Deferred		—		—

		—		(313	)
State:
Current		4		5
Deferred		—		—

		4		5
Foreign:
Current		1,694		1,041
Deferred		1,661		(7,909	)

		3,355		(6,868	)
Total	$	3,359	$	(7,176	)

Income (loss) before income taxes for fiscal 2019 and 2018 consisted of the following (in thousands):


	2019			2018
U.S	$	(4,875	)	$	(11,634	)
Foreign		9,382			8,039

	$	4,507		$	(3,595	)

Effective tax rate		74.5	%		199.6	%

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 28, 2019			December 29, 2018
Deferred tax assets:
Vacation, warranty and other accruals	$	635		$	515
Depreciation and amortization		89			656
Intangible amortization		804			902
Inventory valuation		1,288			1,401
Deferred income		—			256
Equity-based compensation		1,593			1,411
Net operating loss, research and other tax credit carryforwards		54,818			53,595
Other		43			545

		59,270			59,281
Valuation allowance for deferred tax assets		(52,099	)		(50,804	)

Total deferred tax assets		7,171			8,477

Deferred tax liabilities:
Purchased technology		(45	)		(181	)
Unbilled revenue		(874	)		(383	)

Total deferred tax liabilities		(919	)		(564	)

Net deferred tax assets	$	6,252		$	7,913

As reported on the balance sheet:
Non-current deferred tax assets	$	6,252		$	7,913

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, was 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 28, 2019.

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 2019 a valuation allowance decrease of $689,000 and for fiscal 2018 a valuation allowance increase of $930,000, respectively, were recorded for the U.S. federal deferred tax asset. 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 28, 2019, our federal, foreign and state net operating loss carryforwards for income tax purposes were approximately $70.5 million, $35.3 million and $70.5 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 28, 2019, our federal and state tax credit carryforwards for income tax purposes were approximately $18.0 million and $16.1 million, respectively. If not utilized, the federal tax credit carryforwards will begin to expire in 2020 and the state tax credits carry forward indefinitely.

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 $156,000 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.

We account for Global Intangible

Low-Taxed

Income (“GILTI”) earned by certain foreign subsidiaries 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 2019 and 2018 was as follows (in thousands):


	2019			2018
Income tax (benefit) at the federal statutory rate	$	947		$	(756	)
State income taxes, net of federal benefit		4			5
Change in valuation allowance:
U.S		(689	)		930
Foreign		—			(9,286	)
Effect of foreign operations taxed at various rates		(397	)		(254	)
Research tax credits		(1,710	)		(1,883	)
Effect of tax rate changes, permanent differences and adjustments of prior deferrals		3,685			4,142
Unrecognized tax benefits		1,519			(74	)

Total	$	3,359		$	(7,176	)

Intevac has not provided for foreign withholding taxes on approximately $1.5 million of undistributed earnings from

non-U.S.

operations as of December 28, 2019 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 $7.7 million as of December 28, 2019, 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 2019 and 2018:


	2019		2018
Beginning balance	$	6,164	$	5,678
Additions based on tax positions related to the current year		1,519		784
Settlements		—		(233	)
Lapse of statute of limitations		—		(65	)

Ending balance	$	7,683	$	6,164

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 2019 and 2018, Intevac recognized a net tax expense (benefit) for interest of $0 and $2,000, respectively. As of December 28, 2019 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”) conducted a review of the fiscal 2009 through 2010 tax returns of the Company’s wholly-owned subsidiary, Intevac Asia Pte. Ltd. IRAS challenged the Company’s tax position with respect to certain deductions. The Company paid all contested taxes and the related interest to have the right to defend its position under Singapore tax law. During 2019, the Company received an unfavorable decision on its appeal to the Singapore Income Tax Board of Review. Although management has decided to pursue an appeal to the Singapore High Court, management determined that the Company could no longer support a more likely than not position. Accordingly, the Company recorded a charge of $732,000 in provision for income taxes and fully reserved the contested tax deposits reported on its balance sheet. Presently, there are no other active income tax examinations in the jurisdictions where Intevac operates.