Income Taxes

12 Months Ended

Dec. 28, 2019

10. Income Taxes

U.S. Tax Reform: Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted in the United States. The TCJA represented sweeping changes in U.S. tax law. Among the numerous changes in tax law, the TCJA permanently reduced the U.S. corporate income tax rate to 21% beginning in 2018; allowed 100% expensing for qualified property placed in service after September 27, 2017; imposed a one-time transition tax on deferred foreign earnings; established a participation exemption system by allowing a 100% dividends received deduction on qualifying dividends paid by foreign subsidiaries; limited deductions for net interest expense; and expanded the U.S. taxation of foreign earned income to include "global intangible low taxed income."

The TCJA transitions the U.S. from a worldwide tax system to a territorial tax system. Under previous law, companies could indefinitely defer U.S. income taxation on unremitted foreign earnings. The TCJA imposed a one-time transition tax on deferred foreign earnings of 15.5% for liquid assets and 8% for illiquid assets, payable in defined increments over eight years. We did not recognize any transition tax expense due to having no accumulated earnings and profits in our non-U.S. subsidiaries.

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

(in thousands)	2019			2018			2017
Current:
Federal	$	19,090		$	33,362		$	56,641
State		2,091			2,618			8,293
Foreign		(194	)		1,611			379
		20,987			37,591			65,313
Deferred:
Federal		2,084			1,398			4,582
State		(280	)		186			343
Foreign		(746	)		(1,642	)		(249	)
		1,058			(58	)		4,676
Total	$	22,045		$	37,533		$	69,989

The following is a reconciliation of income taxes at the statutory tax rate to the Company's effective tax rate:

	2019			2018			2017
Federal taxes at statutory rate		21.0	%		21.0	%		35.0	%
State taxes, net of federal tax benefit		1.3			1.3			3.4
Research and development tax credit		(0.5	)		(0.4	)		(0.3	)
Federal permanent items		(0.3	)		(0.1	)		(0.4	)
Tax reform		—			—			2.5
Effect of foreign operations		(1.1	)		(0.2	)		(0.1	)
Other		0.4			0.3			(0.5	)
Effective tax rate		20.8	%		21.9	%		39.6	%

At December 28, 2019, we had $2.3 million of unrecognized tax benefits, $2.0 million of which would affect our effective tax rate if recognized.

The following table summarizes the change in unrecognized tax benefits for the three years ended December 28, 2019:

(in thousands)	2019			2018			2017
Balance at beginning of year	$	2,390		$	2,301		$	3,567
Reductions due to lapses in statutes of limitations		(200	)		(95	)		(181	)
Reductions due to tax positions settled		—			(368	)		(4,543	)
Reductions due to reversals of prior year positions		(28	)		(4	)		—
Additions based on tax positions taken during the prior period		—			—			3,005
Additions based on tax positions taken during the current period		139			556			453
Balance at end of year	$	2,301		$	2,390		$	2,301

We recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of December 28, 2019, we had approximately $0.3 million of accrued interest and penalties related to unrecognized tax benefits.

Deferred income taxes result from timing differences in the recognition of revenue and expense for tax and financial statement purposes. The sources of temporary differences are as follows:

(in thousands)	December 28, 2019			December 29, 2018
Assets:
Inventories	$	9,545		$	9,006
Accounts receivable		10,695			11,052
Operating lease liability		7,273			-
Accrued expenses		1,974			1,792
Foreign tax credits		844			1,050
Total deferred tax assets		30,331			22,900
Valuation allowance		(844	)		(1,050	)
Net deferred tax assets		29,487			21,850
Liabilities:
Depreciation		10,296			9,094
Goodwill and intangible assets		11,742			11,310
Operating lease right of use asset		6,656			-
Other		416			12
Gross deferred tax liabilities		29,110			20,416
Net deferred tax assets	$	377		$	1,434

Based on our history of taxable income and our projection of future earnings, we believe that it is more likely than not that sufficient taxable income will be generated in the foreseeable future to realize the remaining net deferred tax assets.

We file income tax returns in the United States, India, China, Canada and Mexico. All years before 2016 are closed for federal tax purposes. Tax years before 2015 are closed for the states in which we file. Tax years before 2016 are closed for tax purposes in China and Canada. All tax years remain open for Mexico and India.