Income Taxes

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



	Year Ended
(In thousands)	December 31, 2016			January 2, 2016			January 3, 2015
Domestic	$	(32,503	)	$	(92,737	)	$	6,292
Foreign	(10,220		)	(33,464		)	36,649
(Loss) income before taxes	$	(42,723	)	$	(126,201	)	$	42,941

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



	Year Ended
(In thousands)	December 31, 2016		January 2, 2016			January 3, 2015
Current:
Federal	$	1,896	$	968		$	329
State	13		80			5
Foreign	7,918		10,634			1,944
	9,827		11,682			2,278
Deferred:
Federal	—		18,713			(7,416		)
State	—		2,318			(513		)
Foreign	90		(173		)	12
	90		20,858			(7,917		)
Income tax expense (benefit)	$	9,917	$	32,540		$	(5,639	)

Income tax expense (benefit) 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
	December 31, 2016	January 2, 2016	January 3, 2015
	%	%	%
Statutory federal rate	(35)	(35)	35
Adjustments for tax effects of:
State taxes, net	7	(6)	1
Research and development credits	(2)	(3)	(9)
Stock compensation	3	1	1
Foreign rate differential	14	12	(25)
Foreign dividends	—	5	1
Foreign withholding taxes	9	3	—
Capital loss expiration	—	—	7
Other permanent	3	4	—
Goodwill impairment	—	4	—
Valuation allowance	17	46	(23)
Change in uncertain tax benefit accrual	5	(8)	1
Tax rate change	—	3	(4)
Other	2	—	2
Effective income tax rate	23	26	(13)

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.

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.

In 2015, we completed the acquisition of Silicon Image, Inc. At the time of the acquisition, we evaluated the combined entity's net deferred income taxes, which included an assessment of the cumulative income or loss over the prior three-year period, to determine if a valuation allowance is required. After considering the significant loss for 2015, we concluded that it was more-likely-than-not that we would not be able to realize the benefit of our remaining U.S. deferred tax assets, resulting in an increase to the valuation allowance and an increase to the tax provision of $21.0 million. We exercised significant judgment and considered estimates about our ability to generate revenue and gross profits sufficient enough to offset expenditures in future periods within the United States.

In 2016, we continued to evaluate the valuation allowance position in the United States and concluded we should maintain a valuation allowance against the net federal and state deferred tax assets.

We will continue to evaluate both positive and negative evidence in future periods to determine if more deferred tax assets should be recognized. We don't 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 increase in the total valuation allowance affecting the effective tax rate for the year ended December 31, 2016 was approximately $7.5 million.

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



(In thousands)	December 31, 2016			January 2, 2016
Deferred tax assets:
Accrued expenses and reserves	$	5,143		$	5,690
Inventory	290			303
Deferred Revenue	426			3,177
Stock-based and deferred compensation	7,269			7,674
Intangible assets	20,063			16,959
Fixed assets	678			—
Net operating loss carry forwards	137,521			131,829
Tax credit carry forwards	89,174			87,909
Capital loss carry forwards	962			1,262
Other	2,975			2,458
	264,501			257,261
Less: valuation allowance	(260,687		)	(252,578		)
Net deferred tax assets	3,814			4,683
Deferred tax liabilities:
Fixed Assets	—			791
Other	3,746			3,734
Total deferred tax liabilities	3,746			4,525
Net deferred tax assets	$	68		$	158

At December 31, 2016, we had federal net operating loss carryforwards (pretax) of approximately $367.0 million that expire at various dates between 2025 and 2036. We had state net operating loss carryforwards (pretax) of approximately $193.3 million that expire at various dates from 2017 through 2036. We also had federal and state credit carryforwards of $49.2 million and $56.7 million of which $55.5 million do not expire. The remaining credits expire at various dates from 2017 through 2036.

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 2016. 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 December 31, 2016, U.S. income taxes were not provided for approximately $3.0 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 December 31, 2016, our unrecognized tax benefits associated with uncertain tax positions were $47.6 million, of which $44.5 million, if recognized, would affect the effective tax rate, subject to valuation allowance. As of December 31, 2016, interest and penalties associated with unrecognized tax benefits were $7.5 million.

The following table summarizes the changes to unrecognized tax benefits for fiscal years 2016, 2015 and 2014:



(In thousands)	Amount
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
Additions based on tax positions related to the current year	4,381
Additions based on tax positions of prior years	—
Additions due to acquisition	41,083
Reduction for tax positions of prior years	(14,958		)
Settlements	—
Reduction as a result of lapse of applicable statute of limitations	(972		)
Balance at January 2, 2016	48,207
Additions based on tax positions related to the current year	2,573
Additions based on tax positions of prior years	530
Additions due to acquisition	—
Reductions for tax positions of prior years	(1,824		)
Settlements	—
Reduction as a result of lapse of applicable statute of limitations	(1,863		)
Balance at December 31, 2016	$	47,623

At December 31, 2016, it is reasonably possible that $2.2 million of unrecognized tax benefits and $0.1 million of associated interest and penalties could significantly change during the next twelve months. Our liability for uncertain tax positions (including penalties and interest) was $29.6 million and $26.9 million at December 31, 2016 and January 2, 2016, respectively, and is recorded as a component of other long-term liabilities on our Consolidated Balance Sheets. The remainder of our uncertain tax position exposure is netted against deferred tax assets.

Our income tax return for India is currently under examination for the tax year ended March 31, 2015. We are not under examination in any other jurisdiction.

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 2013 for federal income taxes, 2012 for state income taxes, and 2010 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 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. On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 was enacted. The Act included several business tax provisions including the permanent extension of the credit for qualified research and development. 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.