Note 12. Income Taxes

The Company accounts for income taxes under the provisions of ASC 740, Accounting for Income Taxes. The Company adjusts its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company also records the tax effect of unusual or infrequently occurring discrete items, including changes in judgment about valuation allowances and effects of changes in tax laws or tax rates, in the interim period in which they occur. The Company's effective tax rate reflects the impact of a portion of its earnings being taxed in foreign jurisdictions as well as a valuation allowance maintained on certain deferred tax assets.

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

	Three Months Ended				Six Months Ended
	July 1, 2017		June 25, 2016		July 1, 2017		June 25, 2016
Provision for income taxes	$	2,622	$	856	$	2,736	$	1,236

The Company recorded a tax provision of $2.6 million and $0.9 million for the three months ended July 1, 2017 and June 25, 2016, respectively. The increase in the tax provision for 2017 from 2016 was primarily related to an increase in the Company’s profitability and a decrease in the Company’s tax benefit associated with the settlement of equity options/awards.

The Company recorded a tax provision of $2.7 million and $1.2 million for the six months ended July 1, 2017 and June 25, 2016, respectively. The increase in the tax provision for 2017 from 2016 was primarily related to an increase in the Company’s profitability and a decrease in the Company’s tax benefit associated with the settlement of equity options/awards offset by a one-time benefit related to an entity classification change.

The Company continues to maintain a valuation allowance against its California and certain foreign deferred tax assets as a result of uncertainties regarding the realization of the asset due to cumulative losses and uncertainty of future taxable income. The Company will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions and maintain the valuation allowances until sufficient positive evidence exists to support a reversal. In the event the Company determines that the deferred tax assets are realizable, an adjustment to the valuation allowance will be reflected in the tax provision for the period such determination is made.

The Company is subject to taxation in the U.S. and various states including California, and foreign jurisdictions including Korea, Japan, Taiwan, and China. Due to tax attribute carry-forwards, the Company is subject to examination for tax years 2003 forward for U.S. tax purposes. The Company is also subject to examination in various states for tax years 2002 forward. The Company is subject to examination for tax years 2007 forward for various foreign jurisdictions.

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 July 1, 2017 and June 25, 2016. During the next twelve months, the Company anticipates increases in its unrecognized tax benefits of approximately $0.4 million.