Income Taxes

Income Tax Assets and Liabilities - The Company accounts for income taxes whereby deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax accounting for assets and liabilities. Also, deferred tax assets are reduced by a valuation allowance to the extent that management cannot conclude that it is more likely than not that a portion of the deferred tax asset will be realized in the future. The Company evaluates the deferred tax assets on a continuous basis throughout the year to determine whether or not a valuation allowance is appropriate. Factors used in this determination include future expected income and the underlying asset or liability which generated the temporary tax difference. The income tax provision is primarily impacted by federal statutory rates, state and foreign income taxes, and changes in the valuation allowance.

Income (loss) before provision for income taxes consists of the following (in thousands):



	Years Ended
	December 28, 2013			December 29, 2012		December 31, 2011
Domestic	$	(26,447	)	$	1,887	$	41,773
Foreign	2,882			2,732		2,811
Income (loss) before income taxes	$	(23,565	)	$	4,619	$	44,584

The provision (benefit) for income taxes consists of the following (in thousands):



	Years Ended
	December 28, 2013			December 29, 2012			December 31, 2011
Current:
Federal	$	119		$	(2,403	)	$	11,059
State	5			(492		)	1,048
Foreign	933			270			354
Total current	1,057			(2,625		)	12,461
Deferred:
Federal	(10,686		)	1,753			2,366
State	(325		)	379			(158		)
Foreign	535			647			1,230
Total deferred	(10,476		)	2,779			3,438
Provision (benefit) for income taxes	$	(9,419	)	$	154		$	15,899

Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):



	At
	December 28, 2013			December 29, 2012
Deferred tax assets:
Reserves and accruals	$	10,592		$	7,682
Deferred revenue	1,614			1,714
Shared based compensation	3,789			3,129
Tax credit carry-forwards	6,591			1,510
Net operating losses	10,220			10,830
Depreciation & amortization	3,241			3,273
Other	966			945
Total deferred tax assets	37,013			29,083
Less: Valuation allowance	(11,665		)	(10,229		)
Total deferred tax assets net of valuation allowance	25,348			18,854
Deferred tax liabilities:
Depreciation & amortization	(5,567		)	(5,797		)
Other	(926		)	(793		)
Total deferred tax liabilities	(6,493		)	(6,590		)
Net deferred tax assets	$	18,855		$	12,264

As of December 28, 2013, the Company had net operating loss carryforwards of $27.5 million in California and $37.6 million in foreign countries, which begin to expire in 2015 and 2014, respectively. A total of $2.7 million of the California net operating loss carryforward and $1.8 million of the foreign net operating loss carryforwards are related to excess tax benefits as a result of stock option exercises, and therefore will be recorded in additional paid-in capital in the period that they become realized. During the year ended December 28, 2013, the Company realized excess benefits as a result of stock option exercises in the amount of $0.1 million, which was appropriately recorded to additional paid-in-capital.

As of December 28, 2013, the Company had available carryforward Federal and state R&D tax credits of $5.5 million and $5.0 million, respectively. Federal R&D tax credit carryforwards begin to expire in 2024. State R&D tax credit carryforwards indefinitely. A total of $0.2 million of the state R&D tax credits are related to excess tax benefits as a result of stock option exercises, and therefore will be recorded to additional paid-in-capital in the period that they become realized.

During the years ended December 28, 2013 and December 29, 2012, the valuation allowances increased by $1.4 million and $2.1 million, respectively. The valuation allowance increase in 2013 was primarily related to foreign losses without benefit and an increase in the carryforwards for California R&D tax credit which no benefit was realized.

Changes in tax laws and tax rates could affect the Company's recorded deferred tax assets and liabilities in the future. The Company's tax liabilities involve dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across its global operations. Management will account for any such changes or factors in the period in which such law changes are enacted.

Differences between income taxes computed by applying the statutory federal income tax rate to income (loss) before income taxes and the provision (benefit) for income taxes consist of the following (in thousands):



	Years Ended
	December 28, 2013			December 29, 2012			December 31, 2011
Income taxes computed at U.S. statutory rate	$	(8,247	)	$	1,616		$	15,604
State income taxes	(324		)	(116		)	636
Foreign tax rate differential	9			(275		)	907
Change in valuation allowance	—			—			17
Domestic production activities deduction	—			(17		)	(1,033		)
Tax credits	(1,377		)	—			(601		)
Benefit of tax elections	—			(1,309		)	—
Liabilities for uncertain tax positions	111			66			153
Other, net	409			189			216
Provision (benefit) for income taxes	$	(9,419	)	$	154		$	15,899

As of December 28, 2013, approximately $2.9 million of undistributed earnings from non-U.S. operations held by the Company's foreign subsidiaries are designated as indefinitely reinvested outside the U.S. Accordingly, no additional U.S. income taxes or additional foreign withholding taxes have been provided thereon. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.

On January 2, 2013, the President signed into law The American Taxpayer Relief Act of 2012 ("ATRA"). Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts incurred through December 31, 2011. ATRA extends the research credit for two years for qualified research expenditures incurred through the end of 2013. The extension of the research credit is retroactive and includes amounts incurred after 2011. The benefit the Company received related to 2012 as a result of the credit extension was approximately $0.6 million. The benefit for 2012 was recognized in 2013, the year of enactment.

The Company recognizes tax liabilities for uncertain tax positions and adjust these liabilities when its judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company's current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.

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 on 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):



	Years Ended
	December 28, 2013			December 29, 2012			December 31, 2011
Unrecognized tax benefits - beginning of the period	$	3,464		$	3,599		$	3,370
Foreign currency movements	—			—			—
Gross increases-tax positions in prior period	305			—			154
Gross decreases-tax positions in prior period	—			(183		)	—
Gross increases-current-period tax positions	688			265			622
Lapse of statute of limitations	(21		)	(217		)	(547		)
Unrecognized tax benefits - end of the period	$	4,436		$	3,464		$	3,599

The unrecognized tax benefit at December 28, 2013 was $4.4 million, of which $1.2 million would impact the effective tax rate if recognized. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest were not material as of December 28, 2013, December 29, 2012 and December 31, 2011. The Company does not expect a material change in its unrecognized tax benefits within the next 12 months.

The Company is subject to taxation in the U.S. and various states including California, and foreign jurisdictions including Korea, Japan and United Kingdom. Due to tax attribute carry-forwards, the Company is subject to examination for tax years 2003 forward for U.S. tax purposes. The Company was also subject to examination in various states for tax years 2002 forward. The Company is subject to examination for tax years 2006 forward for various foreign jurisdictions.

On September 13, 2013, the U.S. Treasury Department and the IRS issued final regulations that address costs incurred in acquiring, producing, or improving tangible property (the "tangible property regulations"). The tangible property regulations are generally effective for tax years beginning on or after January 1, 2014, and may be adopted in earlier years. The tangible property regulations will require the Company to make additional tax accounting method changes as of January 1, 2014; however, management does not anticipate the impact of these changes to be material to the Company’s consolidated financial position, its results of operations, or both.