INCOME TAXES

Income tax provision consists of the following:



	Fiscal Year Ended
	July 2, 2016			June 27, 2015			June 28, 2014
	(in thousands)
Current income tax provision:
United States	$	1,014		$	1,701		$	1,220
Foreign	1,960			975			1,017
	2,974			2,676			2,237
Deferred income tax benefit:
United States	(1,285		)	(1,486		)	1,566
Foreign	(71		)	(194		)	(2,193		)
	(1,356		)	(1,680		)	(627		)
Total income tax provision	$	1,618		$	996		$	1,610

The Company has gross tax credit carryforwards of approximately $7.9 million at July 2, 2016. Included in total tax credits carryforwards is approximately $7.1 million in research and development (R&D) tax credits.

Management also has reviewed its other deferred tax assets for purposes of determining whether or not a valuation allowance may be required. A valuation allowance against these deferred tax assets is required if it is more likely than not that some of the deferred tax assets will not be realized. Based on the Company’s increased profitability and estimated future repatriations from foreign subsidiaries, it has been determined that it is more likely than not that the deferred tax assets will be realized.

Management has reviewed and updated as necessary estimates of future repatriations of the undistributed earnings of its foreign subsidiaries. Based on this analysis, management expects to repatriate a portion of the foreign undistributed earnings based on increased sales growth driving additional U.S. capital requirements, cash requirements for potential acquisitions and to potentially implement certain tax strategies. No foreign earnings were repatriated from either foreign subsidiary during fiscal 2016 or 2015. The Company currently estimates that future repatriations from foreign subsidiaries will approximate $11.9 million. As such, as earnings are recognized in the United States, the Company would be subject to U.S. federal and state income taxes and potential withholding taxes are estimated to be approximately $5.9 million. Both the domestic tax and estimated withholding tax have been recorded as part of deferred taxes as of July 2, 2016. All other unremitted foreign earnings are expected to remain permanently reinvested for planned fixed asset purchases in foreign locations.

The Company has not provided for U.S. income taxes or foreign withholding taxes on approximately $13.5 million of earnings from foreign subsidiaries which are permanently reinvested outside the U.S. The unrecognized net tax provision, after netting U.S. federal and state income tax and any related foreign tax credits, would be approximately $2.1 million associated with these earnings.

In recent years, the Company’s wholly owned foreign subsidiary in Mexico has been subject to a Mexican business flat tax called Impuesto Empresarial a Tasa Unica (IETU). However, effective January 1, 2014, IETU was repealed as part of a larger reform of the Mexican tax system and the impact of the repeal was recognized as a discrete tax benefit of $1.5 million during the second quarter of fiscal year 2014. The Company is now subject to the general Mexican tax regime (ISR). The effects of IETU and ISR have been included in the effective tax rate for the year ended June 28, 2014.

The Company’s effective tax rate differs from the federal tax rate as follows:



	Fiscal Year Ended
	July 2, 2016			June 27, 2015			June 28, 2014
	(in thousands)
Federal income tax provision at statutory rates	$	2,771		$	1,802		$	3,136
State income taxes, net of federal tax effect	250			133			—
Foreign tax rate differences	(442		)	(80		)	(439		)
Effect of income tax credits	(1,254		)	(1,085		)	(202		)
Effect of repatriation of foreign earnings, net	(161		)	(80		)	287
Other	454			124			330
Transaction costs	—			182			—
Effect of IETU repeal	—			—			(1,502		)
Income tax provision	$	1,618		$	996		$	1,610

The domestic and foreign components of income before income taxes were:



	Fiscal Year Ended
	July 2, 2016		June 27, 2015		June 28, 2014
	(in thousands)
Domestic	$	2,228	$	3,395	$	4,687
Foreign	5,923		1,905		4,536
Income before income taxes	$	8,151	$	5,300	$	9,223

Deferred income tax assets and liabilities consist of the following at:



	July 2, 2016			June 27, 2015
	(in thousands)
Deferred tax assets:
Tax credit carryforwards, net	$	4,056		$	2,843
Foreign subsidiaries - future tax credits	840			840
Inventory	508			559
Accruals	4,270			4,579
Mark-to-market adjustments	4,043			2,498
Other	86			138
Deferred income tax assets	$	13,803		$	11,457
Deferred tax liabilities:
Foreign subsidiaries – unremitted earnings	(2,098		)	(2,258		)
Fixed assets	(1,025		)	(941		)
Identifiable intangibles	(1,613		)	(1,866		)
Other	(85		)	(170		)
Deferred income tax liabilities	$	(4,821	)	$	(5,235	)
Net deferred income tax assets	$	8,982		$	6,222
Balance sheet caption reported in:
Long-term deferred income tax asset	$	8,982		$	6,723
Long-term deferred income tax liability	—			(501		)
Net deferred income tax asset	$	8,982		$	6,222

As a result of retroactive application of ASU 2015-17 (Topic 740), Balance Sheet Classification of Deferred Taxes, we have reclassified our net current deferred tax assets and liabilities to net non-current deferred tax assets and liabilities in our Consolidated Balance Sheet as of July 2, 2016 and June 27, 2015.

Uncertain Tax Positions

The Company has R&D tax credits that approximate $7.1 million that have 20 year carryforwards before expiring. The Company’s R&D tax credits expire in various fiscal years from 2021 to 2035. The Company also has alternative minimum tax credits, which do not expire, approximating $726,000.

As of July 2, 2016, the Company had unrecognized tax benefits of $3.8 million related to its gross R&D tax credits. The unrecognized tax benefits relate to certain R&D tax credits generated from 1999 to 2015.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	Fiscal Year Ended
	July 2, 2016		June 27, 2015		June 28, 2014
	(in thousands)
Beginning Balance	$	3,446	$	3,072	$	3,031
Additions based on tax positions related to the current year	314		374		41
Ending Balance	$	3,760	$	3,446	$	3,072

The increase from the prior year is due to additional R&D credits that were recorded in 2016 as discussed above. Management does not anticipate any material changes to this amount during the next 12 months.

The Company recognizes interest accrued related to unrecognized tax benefits and penalties in its income tax provision. The Company has not recognized any interest or penalties in the fiscal years presented in these financial statements. The Company is subject to income tax in the U.S. federal jurisdiction, various state jurisdictions, Mexico and China. Certain years remain subject to examination but there are currently no ongoing exams in any taxing jurisdictions.