Income Taxes

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



	Year Ended
(In thousands)	December 30, 2017			December 31, 2016			January 2, 2016
Domestic	$	(17,341	)	$	(33,962	)	$	(93,229	)
Foreign	(52,372		)	(10,220		)	(33,464		)
Loss before taxes	$	(69,713	)	$	(44,182	)	$	(126,693	)

The components of the income tax expense are as follows:



	Year Ended
(In thousands)	December 30, 2017		December 31, 2016		January 2, 2016
Current:
Federal	$	508	$	1,896	$	968
State	30		13		80
Foreign	304		7,918		10,634
	842		9,827		11,682
Deferred:
Federal	—		—		18,713
State	—		—		2,318
Foreign	7		90		(173		)
	7		90		20,858
Income tax expense	$	849	$	9,917	$	32,540

Income tax 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
	December 30, 2017	December 31, 2016	January 2, 2016
	%	%	%
Statutory federal rate	(35)	(35)	(35)
Adjustments for tax effects of:
State taxes, net	(7)	7	(6)
Research and development credits	(1)	(2)	(2)
Stock compensation	3	3	1
Foreign rate differential	28	15	12
Foreign dividends	1	—	5
Foreign withholding taxes	—	9	3
Other permanent	—	3	4
Goodwill impairment	—	—	4
Valuation allowance	(73)	17	46
Change in uncertain tax benefit accrual	1	5	(8)
Stock compensation adoption	(8)	—	—
Tax rate change	93	—	3
Other	(1)	1	(1)
Effective income tax rate	1	23	26

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.

In fiscal 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 fiscal 2015, the company recorded a valuation allowance on its net federal and state deferred tax assets. 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 in fiscal 2015. 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.

Through December 30, 2017, 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 decrease in the total valuation allowance affecting the effective tax rate for the year ended December 30, 2017 was approximately $51.0 million, mainly attributable to the tax impact of the recent tax law change that reduced the value of our income tax deferred tax assets and reduced the related valuation allowance.

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



(In thousands)	December 30, 2017			December 31, 2016
Deferred tax assets:
Accrued expenses and reserves	$	3,096		$	5,143
Inventory	2			290
Deferred Revenue	228			426
Stock-based and deferred compensation	4,018			7,269
Intangible assets	19,576			20,063
Fixed assets	216			678
Net operating loss carry forwards	86,410			137,521
Tax credit carry forwards	90,530			89,174
Capital loss carry forwards	3,926			962
Other	2,323			2,973
	210,325			264,499
Less: valuation allowance	(209,691		)	(260,687		)
Net deferred tax assets	634			3,812
Deferred tax liabilities:
Fixed Assets	559			—
Other	16			3,746
Total deferred tax liabilities	575			3,746
Net deferred tax assets	$	59		$	66

At December 30, 2017, we had U.S. federal net operating loss ("NOL") carryforwards (pretax) of approximately $351.4 million that expire at various dates between 2018 and 2036. We had state NOL carryforwards (pretax) of approximately $162.9 million that expire at various dates from 2018 through 2036. We also had federal and state credit carryforwards of $50.2 million and $59.2 million, respectively. Of the $59.3 million state credit carryforwards, $57.9 million do not expire. The federal and remaining state credits expire at various dates from 2018 through 2037.

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. This has not occurred through fiscal 2017. If there is a significant change in ownership, future tax attribute utilization may be restricted (§382 limitation) and NOL carryforwards and/or R&D credits will be reduced to reflect the limitation.

U.S. tax reform required a deemed repatriation of deferred foreign earnings as of December 30, 2017 and no future U.S. taxes will be due on these earnings because of enactment of a 100% dividends received deduction. At December 30, 2017, we had no impact from this transition tax due to negative post-1986 earnings and profits.

At December 30, 2017, our unrecognized tax benefits associated with uncertain tax positions were $44.8 million, of which $42.9 million, if recognized, would affect the effective tax rate, subject to valuation allowance. As of December 30, 2017, interest and penalties associated with unrecognized tax benefits were $8.1 million.

Our liability for uncertain tax positions (including penalties and interest) was $26.9 million and $29.6 million at December 30, 2017 and December 31, 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 of $24.6 million is netted against deferred tax assets.

The following table summarizes the changes to unrecognized tax benefits for fiscal years 2017, 2016 and 2015:



(In thousands)	Amount
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	—
Reduction 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
Additions based on tax positions related to the current year	471
Additions based on tax positions of prior years	11
Additions due to acquisition	—
Reductions for tax positions of prior years	(1,226		)
Settlements	—
Reduction as a result of lapse of applicable statute of limitations	(2,047		)
Balance at December 30, 2017	$	44,832

At December 30, 2017, it is reasonably possible that $1.5 million of unrecognized tax benefits and $0.1 million of associated interest and penalties could be recognized during the next twelve months.

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 2014 for federal income taxes, 2013 for state income taxes, and 2011 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.

Our income tax return for China is currently under examination for 2014 through 2016. We are not under examination in any other jurisdiction.

On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (the "2015 Tax Act") was enacted. The 2015 Tax 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.

The Tax Cuts and Jobs Act (the "2017 Tax Act"), enacted December 22, 2017, contains provisions that affect us, but the impact will be absorbed by utilizing NOL carry forwards. Reduction of the corporate tax rate from 35% to 21% reduced the value of our domestic deferred tax assets and reduced our associated full valuation allowance on those assets, resulting in no net impact on our Consolidated Statements of Operation.

The SEC issued SAB 118 on December 22, 2017 which addresses situations where the registrant does not have all the necessary information available or analyzed to complete the accounting for certain income tax effects under the 2017 Tax Act. Due to the lack of authoritative guidance issued, complexity, and enactment timing of the 2017 Tax Act, we have made a reasonable estimate of the income tax effect of the deemed repatriation of deferred foreign earnings. We may refine this as additional guidance, clarification, and analysis is available. Any changes to our estimate will be reflected in continuing operations in the period the amounts are determined and within the “measurement period” allowed under SAB 118.

We are not currently paying U.S. federal income taxes and do not expect to pay such taxes until we fully utilize our tax NOL and credit carryforwards. We expect to pay a nominal amount of state income tax. We are paying foreign income and withholding taxes, which are reflected in income tax expense in our Consolidated Statements of Operations and are primarily related to the cost of operating offshore activities and subsidiaries. We accrue interest and penalties related to uncertain tax positions in income tax expense.