Income Taxes

12 Months Ended

Jan. 01, 2023

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

In the year ended January 1, 2023, our income tax benefit of $8.4 million on income from continuing operations before income taxes and equity in earnings of unconsolidated investees of $87.7 million was primarily due to the reversal of deferred taxes previously accrued for California due to the enactment of Senate Bill 113 which restored our ability to utilize net operating losses in 2022, partially offset by state tax expense on realized gains from sale of equity investments. In the year ended January 2, 2022, our income tax provision of $7.3 million on income from continuing operations before income taxes and equity in earnings of unconsolidated investees of $3.9 million was primarily due to deferred tax liability related to mark-to-market unrealized gains on equity investments and state taxes on the sale of investments, partially offset by the benefit from stock-based compensation windfall deduction and true-up of prior year estimated state tax liability. In the year ended January 3, 2021, our income tax provision of $57.8 million on income from continuing operations before income taxes and equity in earnings of unconsolidated investees of $653.8 million was primarily due to state tax expenses arising from the taxable gains related to the Spin-Off transaction, withholding taxes from foreign dividend distributions, sale of equity investments, and deferred tax liability related to mark-to-market unrealized gain on equity investments.

In the year ended January 1, 2023, our income tax benefit of $0.6 million on a loss from discontinued operations before income taxes and equity in earnings of unconsolidated investees of $51.7 million was primarily due to the state tax benefit of operating losses of the C&I Solutions business prior to the sale of the business. In the year ended January 2, 2022, our income tax benefit of $2.0 million on a loss from discontinued operations before income taxes and equity in earnings of unconsolidated investees of $46.0 million was primarily due to the state tax benefits related to discontinued operations. In the year ended January 3, 2021, our income tax benefit of $3.3 million on a loss from discontinued operations before income taxes and equity in earnings of unconsolidated investees of $126.8 million was primarily related to the Maxeon spin-off and the allocation of state tax benefit related to discontinued operations, offset by foreign taxes in foreign jurisdictions that were profitable.

The sale of the C&I Solutions business to TotalEnergies Renewables resulted in a taxable gain in fiscal year 2022. The tax impact of $1.4 million was recorded in “additional paid-in capital” within our consolidated statements of equity, consistent with the accounting treatment of the gain and tax accounting guidance.

On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law by President Joe Biden. The IRA includes, among other provisions, a 15% minimum tax based on “adjusted financial statement income” exceeding $1.0 billion starting in 2023, and a 1% excise tax on net repurchases of stock after December 31, 2022. We do not expect these tax provisions of the IRA to have a significant impact on our business.

The geographic distribution of income (loss) from continuing operations before income taxes and equity earnings (losses) of unconsolidated investees and the components of provision for income taxes are summarized below:

	Fiscal Year
	January 1, 2023		January 2, 2022		January 3, 2021
(In thousands)	(As Restated)		(As Restated)		(As Restated)
Geographic distribution of income (loss) from continuing operations before income taxes and equity in earnings of unconsolidated investees:
U.S. income (loss)	$	89,082	$	828	$	659,238
Non-U.S. income (loss)	(1,373)		3,097		(5,460)
Income (loss) before income taxes and equity in earnings (loss) of unconsolidated investees	$	87,709	$	3,925	$	653,778
Provision for income taxes:
Current tax (expense) benefit
Federal	$	2,322	$	(125)	$	(846)
State	(7,783)		(4,142)		(35,652)
Foreign	(493)		568		(7,900)
Total current tax (expense) benefit	(5,954)		(3,699)		(44,398)
Deferred tax benefit (expense)
Federal	(438)		—		—
State	15,162		(3,022)		(13,715)
Foreign	(387)		(593)		296
Total deferred tax benefit (expense)	14,337		(3,615)		(13,419)
Benefit from (provision for) income taxes	$	8,383	$	(7,314)	$	(57,817)

The benefit from (provision for) for income taxes differs from the amounts obtained by applying the statutory U.S. federal tax rate to income before taxes as shown below:

	Fiscal Year
	January 1, 2023			January 2, 2022			January 3, 2021
(In thousands)	(As Restated)			(As Restated)			(As Restated)
Statutory rate	21		%	21		%	21		%
Tax benefit (expense) at U.S. statutory rate	$	(18,421)		$	(824)		$	(137,309)
Foreign rate differential	(1,272)			(222)			(3,694)
State income taxes, net of benefit	7,581			(4,532)			(44,217)
Section 956 and Subpart F	—			(493)			(2,431)
Tax credits (investment tax credit and other)	(331)			1,661			1,323
Change in valuation allowance	16,915			(11,398)			201,510
Unrecognized tax benefits	2,273			(2,105)			(6,977)
Non-controlling interest & nontaxable income	844			740			—
Global intangible low-taxed income (“GILTI”)	—			(355)			(794)
Section 163L interest	(630)			(840)			(1,189)
Maxeon Spin-Off taxable gain	—			—			(54,537)
Excess tax benefit on stock-based compensation	2,380			13,789			711
Non-deductible executive compensation	(151)			(2,734)			(1,256)
Other, net	(805)			(1)			(8,957)
Total	$	8,383		$	(7,314)		$	(57,817)

	As of
	January 1, 2023		January 2, 2022
(In thousands)	(As Restated)		(As Restated)
Deferred tax assets:
Net operating loss carryforwards	$	90,639	$	164,133
Tax credit carryforwards	25,293		53,101
Reserves and accruals	37,732		60,108
Stock-based compensation stock deductions	4,675		3,187
Basis difference on third-party project sales	28,658		35,013
Identified intangible assets	13,002		5,644
Other	2,475		2,638
Total deferred tax assets	202,474		323,824
Valuation allowance	(126,656)		(175,008)
Total deferred tax assets, net of valuation allowance	75,818		148,816
Deferred tax liabilities:
Fixed asset basis difference	(18,713)		(15,031)
Investments	(36,456)		(118,885)
Other	(21,163)		(29,697)
Total deferred tax liabilities	(76,332)		(163,613)
Net deferred tax liabilities	$	(514)	$	(14,797)

As of January 1, 2023, we had federal net operating loss carryforwards of $168.7 million for tax purposes, of which $26.1 million was generated prior to 2018 and will expire at various dates from 2033 to 2035. The remaining federal net operating loss carryforward of $142.6 million was generated in fiscal year 2018 and after and can be carried forward indefinitely under the Tax Cuts and Job Acts of 2017 (“The Tax Act”). As of January 1, 2023, we had California state net operating loss carryforwards of approximately $648.5 million for tax purposes, of which $59.5 million relates to debt issuance and the tax benefit of which will be recorded to equity when realized. These California net operating loss carryforwards will expire at various dates from 2029 to 2039. We also had gross credit carryforwards of approximately $74.0 million for federal tax purposes, of which $16.6 million relate to debt issuance and will benefit equity when realized. We had gross California credit carryforwards of $2.4 million for state tax purposes, of which $1.1 million relate to debt issuance and will benefit equity when realized. These federal credit carryforwards will expire at various dates from 2024 to 2042, and the California credit carryforwards do not expire. Our ability to utilize a portion of the net operating loss and credit carryforwards is dependent upon our being able to generate taxable income in future periods or being able to carryback net operating losses to prior year tax returns. Our ability to utilize net operating losses may be limited due to restrictions imposed on utilization of net operating loss and credit carryforwards under federal and state laws upon a change in ownership.

As of the end of fiscal year 2022, as part of SunPower’s continuing operations, an insignificant amount of the accumulated foreign earnings was located outside of the United States and may be subjected to foreign income tax or withholding tax liability upon repatriations. However, the accumulated foreign earnings are intended to be indefinitely reinvested in our foreign subsidiaries; therefore, no such foreign taxes have been provided. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.

On June 29, 2020, the California Assembly Bill (“AB 85”) suspended the use of California net operating loss deduction and limited the maximum business incentive tax credit utilization to $5.0 million annually starting with tax years beginning on or after January 1, 2020 through December 31, 2022. Subsequently on February 9, 2022, California Senate Bill (“SB 113”) was enacted and restores the use of net operating losses and business tax credits that were suspended or limited under AB 85 one year earlier, allowing tax attributes to be used in fiscal year 2022.

Valuation Allowance

Our valuation allowance is related to deferred tax assets in the United States and Mexico and was determined by assessing both positive and negative evidence. When determining whether it is more likely than not that deferred assets are recoverable, with such assessment being required on a jurisdiction-by-jurisdiction basis, we believe that sufficient uncertainty exists with regard to the realizability of these assets such that a valuation allowance is necessary. Factors considered in providing a valuation allowance include the lack of a significant history of consistent profits, the lack of consistent profitability in the solar industry, the limited capacity of carrybacks to realize these assets, and other factors. Based on the absence of sufficient positive objective evidence, we are unable to assert that it is more likely than not that we will generate sufficient taxable income to realize the U.S. net deferred tax assets. Should we achieve a certain level of profitability in the future, we may be in a position to reverse the valuation allowance which would result in a non-cash income statement benefit. The change in valuation allowance for continuing operations for fiscal 2022 and 2021 was $48.4 million and $34.2 million, respectively.

Unrecognized Tax Benefits

Current accounting guidance contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits for continuing operations during fiscal 2022, 2021, and 2020 is as follows:

	Fiscal Year
(In thousands)	January 1, 2023		January 2, 2022		January 3, 2021
Balance, beginning of year	$	84,213	$	86,953	$	73,439
Additions for tax positions related to the current year	122		2,345		15,179
Additions for tax positions from prior years	103		113		41
Reductions for tax positions from prior years/statute of limitations expirations	(14,444)		(5,129)		(1,634)
Foreign exchange (gain) loss	(8)		(69)		(72)
Balance at the end of the period	$	69,986	$	84,213	$	86,953

Included in the unrecognized tax benefits at fiscal 2022 and 2021 for continuing operations is $10.0 million and $16.7 million, respectively, that if recognized, would result in a reduction of our effective tax rate. The amounts differ from the long-term liability recorded of $12.3 million and $14.7 million as of fiscal 2022 and 2021, respectively, primarily due to accrued interest and penalties.

We believe that events that could occur in the next 12 months and cause a change in unrecognized tax benefits include, but are not limited to, the following:

•commencement, continuation or completion of examinations of our tax returns by the U.S. or foreign taxing authorities; and

•expiration of statutes of limitation on our tax returns.

The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Uncertainties include, but are not limited to, the impact of legislative, regulatory, and judicial developments, transfer pricing and the application of withholding taxes. We regularly assess our tax positions in light of legislative, bilateral tax treaty, regulatory, and judicial developments in the countries in which we do business. We determined that an estimate of the range of reasonably possible change in the amounts of unrecognized tax benefits within the next 12 months cannot be made.

Classification of Interests and Penalties

We accrue interest and penalties on tax contingencies and classify them as “provision for income taxes” in our consolidated statements of operations. Accrued interest as of January 1, 2023 and January 2, 2022 was approximately $1.1 million and $2.3 million, respectively. Accrued penalties as of January 1, 2023 was $1.3 million and not material for the period ending January 2, 2022.

Tax Years and Examination

We file tax returns in each jurisdiction in which we are registered to do business. In the United States and many of the state jurisdictions, and in many foreign countries in which we file tax returns, a statute of limitations period exists. After a statute of limitations period expires, the respective tax authorities may no longer assess additional income tax for the expired period. Similarly, we are no longer eligible to file claims for refund for any tax that we may have overpaid. The following table summarizes our major tax jurisdictions and the tax years that remain subject to examination by these jurisdictions as of January 1, 2023:

Tax Jurisdictions	Tax Years
United States	2019 and onward
California	2018 and onward
Philippines	2020 and onward

While the respective tax authorities may no longer assess additional taxes for expired periods, they may adjust net operating loss and credit carryovers amounts which were generated from such years.

We are under tax examinations in various jurisdictions. We do not expect the examinations to result in a material assessment outside of existing reserves. If a material assessment in excess of current reserves results, the excess will adversely impact earnings in the period of assessment.