Income Taxes

The domestic and foreign components of Income (loss) before income taxes were as follows:



	Year Ended
(In thousands)	January 3, 2015		December 28, 2013		December 29, 2012
Domestic	$	6,292	$	6,293	$	51,859
Foreign	36,649		20,193		(60,720		)
Income (loss) before taxes	$	42,941	$	26,486	$	(8,861	)

The components of the income tax (benefit) expense are as follows:



	Year Ended
(In thousands)	January 3, 2015			December 28, 2013			December 29, 2012
Current:
Federal	$	329		$	251		$	(344	)
State	5			(527		)	36
Foreign	1,944			1,616			1,498
	2,278			1,340			1,190
Deferred:
Federal	(7,416		)	2,549			18,000
State	(513		)	342			1,487
Foreign	12			(66		)	68
	(7,917		)	2,825			19,555
Income tax (benefit) expense	$	(5,639	)	$	4,165		$	20,745

Income tax (benefit) expense differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:



	Year Ended
	January 3, 2015	December 28, 2013	December 29, 2012
	%	%	%
Statutory federal rate	35	35	35
Adjustments for tax effects of:
State taxes, net	1	2	(2)
Research and development credits	(9)	(11)	(1)
Stock compensation	1	3	(3)
Foreign rate differential	(25)	(20)	(252)
Foreign dividends	1	—	3
Capital loss expiration	7	2	—
Valuation allowance	(23)	6	(19)
Change in uncertain tax benefit accrual	1	(1)	3
Tax rate change	(4)	(1)	—
Other	2	1	2
Effective income tax rate	(13)	16	(234)

ASC 740, “Income Taxes”, provides for the recognition of deferred tax assets if realization of these assets is more-likely-than-not. We evaluate both positive and negative evidence to determine if some or all of our deferred tax assets should be recognized on a quarterly basis.

On December 31, 2011, we began to implement a global tax structure to more effectively align the Company's corporate structure with the geographic business operations including responsibility for sales and manufacturing activities. The global tax structure was completed during the first quarter of 2012 upon the intercompany sale of inventory and fixed assets. During 2012, this inventory was sold to end customers in the ordinary course of business resulting in income before taxes in the U.S. and a loss before taxes in foreign jurisdictions. Because these foreign jurisdictions have 0% income tax rates, we received no tax benefit associated with the losses resulting in a significant foreign rate differential. Taxes have been applied to the gain on sale based on U.S. statutory tax rates, offset by deferred tax assets. This resulted in an increase to the effective tax rate and a net income tax provision of $13.7 million during 2012.

During the fourth quarter of 2014, we concluded that it was more-likely-than-not that we would be able to realize the benefit of a portion of our remaining deferred tax assets, resulting in a tax benefit of $11.5 million and a federal and state net deferred tax asset of $21.3 million. We based this conclusion on improved operating results over the past two years and our expectations about generating taxable income in the foreseeable future. We exercised significant judgment and considered estimates about our ability to generate revenue, gross profits, operating income and jurisdictional taxable income in future periods under our tax structure in reaching this decision. We will continue to evaluate both positive and negative evidence in future periods to determine if additional deferred tax assets should be recognized. We do not have a valuation allowance in any foreign jurisdictions as it has been concluded it is more-likely-than-not that we will realize the net deferred tax assets in future periods. The net decrease in the total valuation allowance affecting the effective tax rate for the year ended January 3, 2015 was approximately $9.7 million.

The components of our net deferred tax assets are as follows:



(In thousands)	January 3, 2015			December 28, 2013
Deferred tax assets:
Accrued expenses and reserves	$	5,416		$	4,959
Stock-based and deferred compensation	5,530			4,986
Intangible assets	9,841			8,456
Fixed assets	983			828
Net operating loss carry forwards	96,543			101,144
Tax credit carry forwards	40,588			36,644
Capital loss carry forwards	4,142			6,698
Unrealized loss on securities	—			758
Other	220			143
	163,263			164,616
Less: valuation allowance	(141,215		)	(150,528		)
Net deferred tax assets	22,048			14,088
Deferred tax liabilities:
Other	717			969
Total deferred tax liabilities	717			969
Net deferred tax assets	$	21,331		$	13,119

Of the total Net deferred tax assets, $1.2 million and $1.4 million are considered current and included in Prepaid expenses and other current assets on the Consolidated Balance Sheets as of January 3, 2015 and December 28, 2013, respectively.

At January 3, 2015, we had federal net operating loss carryforwards (pretax) of approximately $301.8 million that expire at various dates between 2023 and 2032. We had state net operating loss carryforwards (pretax) of approximately $141.3 million that expire at various dates from 2015 through 2032. We also had federal and state credit carryforwards of $17.7 million and $26.3 million of which $24.5 million do not expire. The remaining credits expire at various dates from 2015 through 2034.

Future utilization of federal and state net operating losses and tax credit carry forwards may be limited if cumulative changes to ownership exceed 50% within any three-year period, which has not occurred through fiscal 2014. However, if there is a significant change in ownership, the future utilization may be limited and the deferred tax asset would be reduced to the amount available.

At January 3, 2015, U.S. income taxes were not provided for approximately $3.3 million of the undistributed earnings of our Chinese subsidiary. We intend to reinvest these earnings indefinitely. If these earnings were distributed to the U.S. in the form of dividends or otherwise, we would be subject to additional U.S. income taxes and foreign withholding taxes.

At January 3, 2015, our unrecognized tax benefits associated with uncertain tax positions were $18.7 million, of which $17.4 million, if recognized, would affect the effective tax rate, subject to valuation allowance. As of January 3, 2015, interest and penalties associated with unrecognized tax benefits were $0.2 million.

The following table summarizes the changes to unrecognized tax benefits for fiscal years 2014, 2013 and 2012:



(In thousands)	Amount
Balance at December 31, 2011	21,552
Additions based on tax positions related to the current year	384
Additions based on tax positions of prior years	192
Reduction for tax positions of prior years	(26		)
Settlements	(30		)
Reduction as a result of lapse of applicable statute of limitations	(392		)
Balance at December 29, 2012	$	21,680
Additions based on tax positions related to the current year	1,600
Additions based on tax positions of prior years	68
Reduction for tax positions of prior years	—
Settlements	(338		)
Reduction as a result of lapse of applicable statute of limitations	(367		)
Balance at December 28, 2013	22,643
Additions based on tax positions related to the current year	770
Additions based on tax positions of prior years	—
Reduction for tax positions of prior years	(4,673		)
Settlements	—
Reduction as a result of lapse of applicable statute of limitations	(67		)
Balance at January 3, 2015	18,673

At January 3, 2015, it was reasonably possible that $14.2 million of unrecognized tax benefits and less than $0.1 million of associated interest and penalties could significantly change during the next twelve months. The $14.2 million potential change would represent a decrease in unrecognized tax benefits, with $14.1 million related to the valuation of our intellectual property sold to our Bermuda subsidiary, which is currently under tax authority examination. The remaining $0.1 million related to tax filings for years that will no longer be subject to examination under expiring statutes of limitations.

Our U.S. and French income tax returns are both currently under examination for 2011 and 2012, as well as our Singapore income tax return for 2012. We are not under examination in any state jurisdictions or any other foreign jurisdictions.

We are subject to federal and state income tax as well as income tax in the various foreign jurisdictions in which we operate. Additionally, the years that remain subject to examination are 2011 for federal income taxes, 2010 for state income taxes, and 2008 for foreign income taxes, including years ending thereafter. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating losses or credit carryforward amount.

The American Taxpayer Relief Act of 2012, which reinstated the United States federal research and development tax credit retroactively from January 1, 2012 through December 31, 2013, was not enacted into law until the first quarter of 2013. The Tax Increase Prevention Tax Act of 2014 was enacted into law in the fourth quarter of 2014 and extended the research and development tax credit through December 31, 2014. The tax benefit in each year resulting from these reinstatements of the federal research and development tax credit was offset by a valuation allowance and therefore did not impact our annual effective tax rate.