11. Income Taxes

Income Tax Expense

We consider all income sources, including other comprehensive income, in determining the amount of tax expense allocated to continuing operations.

The components of income tax expense are as follows (in thousands):


	Year Ended
	December 30,			December 31,		January 2,
	2017			2016		2016
Current:
Federal	$	8,063		$	4,602	$	8,861
State		1,066			921		443

		9,129			5,523		9,304

Deferred:
Federal		(10,010	)		5,371		4,893
State		944			906		1,100

		(9,066	)		6,277		5,993

Income tax expense	$	63		$	11,800	$	15,297

The aggregate amount of income taxes included in the consolidated statements of operations and consolidated statements of shareholders’ equity are as follows (in thousands):


	Year Ended
	December 30,		December 31,			January 2,
	2017		2016			2016
Consolidated statements of income:
Income tax expense relating to continuing operations	$	63	$	11,800		$	15,297
Consolidated statements of shareholders’ equity:
Reversal of intraperiod tax allocation	$	—	$	—		$	(1,595	)
Income tax expense relating to derivative financial instruments	$	—	$	—		$	50
Income tax benefit relating to share-based compensation	$	—	$	(1,872	)	$	(3,840	)

The reversal of intra-period income tax allocation of $1.6 million in the year ended January 2, 2016 represents income tax expense previously classified within accumulated other comprehensive losses, relating to the intra-period income taxes on our effective aluminum hedges, which we reversed in the second quarter of 2015 as the result of the culmination of our remaining cash flow hedges.

Reconciliation Of The Statutory Rate To The Effective Rate

A reconciliation of the statutory federal income tax rate to our effective rate is provided below:


	Year Ended
	December 30,			December 31,			January 2,
	2017			2016			2016
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal income tax benefit		3.8	%		3.8	%		3.8	%
Change in net deferred tax liability related to U.S. tax reform		(31.1	)%		—			—
Excess stock-based compensation tax benefits		(4.6	)%		—			—
Domestic manufacturing deduction		(2.5	)%		(1.8	)%		(2.2	)%
Research activities credits		(0.2	)%		(2.8	)%		—
Florida jobs creation incentive credits		(0.5	)%		(0.6	)%		(2.0	)%
Change in valuation allowance on deferred tax assets		—			(0.2	)%		0.3	%
Non-deductible expenses		0.5	%		0.2	%		0.2	%
Reversal of intraperiod tax allocation		—			—			4.1	%
Other		(0.2	)%		(0.4	)%		0.2	%

		0.2	%		33.2	%		39.4	%

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our net deferred tax liability are as follows:


	December 30,			December 31,
	2017			2016
	(in thousands)
Deferred tax assets:
State and federal net operating loss carryforwards	$	965		$	2,000
Stock-based compensation expense		1,663			2,979
Accrued warranty		1,378			2,149
Obsolete inventory and UNICAP adjustment		412			503
Other deferrals and accruals, net		691			899
Allowance for doubtful accounts		292			195
Acquisition costs		306			537
Other		132			—

Total deferred tax assets		5,839			9,262

Deferred tax liabilities:
Trade names and other intangible assets, net		(16,749	)		(26,007	)
Property, plant and equipment		(8,056	)		(10,492	)
Goodwill		(3,099	)		(3,193	)
Deferred financing costs		(659	)		(1,241	)
Prepaid expenses		(48	)		(167	)

Total deferred tax liabilities		(28,611	)		(41,100	)

Total deferred tax liabilities, net	$	(22,772	)	$	(31,838	)

We acquired goodwill deductible for tax purposes in the CGI acquisition as the transaction was treated as an acquisition of stock for tax purposes. At the date of the acquisition, the amount of goodwill deductible for tax purposes from the CGI acquisition was $9.3 million. At the time of the acquisition, this goodwill was the same amount for both book and tax purposes and, therefore, no deferred tax asset or liability was recognized. As we amortize this goodwill for tax purposes over its remaining life, which was approximately 7.4 years at the time of the acquisition, we will recognize a deferred tax liability. The unamortized amount of this goodwill was $5.2 million and $6.5 million at December 30, 2017, and December 31, 2016, respectively.

We have goodwill deductible for tax purposes in the WinDoor acquisition as the transaction was treated as an acquisition of stock treated as a step-up acquisition of assets and assumption of liabilities pursuant to our election under section 338(h)(10) of the Internal Revenue Code. We expect to be able to deduct goodwill for tax purposes of $38.9 million from the WinDoor transaction. The unamortized amount of this goodwill was $33.9 million and $36.5 million at December 30, 2017, and December 31, 2016, respectively.

Also, acquisition costs totaling $0.9 million included in selling, general, and administrative expenses on the consolidated statement of operations for the year ended December 31, 2016, and relating to legal expenses, representations and warranties insurance, diligence, and accounting services, are being deferred and amortized for tax purposes over the same period as tax deductible goodwill.

We have goodwill deductible for tax purposes in the USI acquisition as the transaction was treated as an acquisition of assets and assumption of liabilities for both book and tax purposes. We expect to be able to deduct goodwill for tax purposes of $0.6 million from the USI transaction. The unamortized amount of this goodwill was $0.5 million and $0.6 million at December 30, 2017, and December 31, 2016, respectively.

We estimate that we have $1.0 million of tax-affected state operating loss carryforwards, as of December 30, 2017, expiring at various dates through 2027.

We adopted ASU 2016-09 effective on January 1, 2017. As a result, excess tax benefits resulting from the exercise of stock options and lapse of restriction on stock awards are now recognized as a discrete item in tax expense, where previously such tax effects had been recognized in additional paid-in-capital. Income tax expense in the year ended December 30, 2017, includes excess tax benefits totaling $1.8 million. Prior to the adoption of ASU 2016-09 at the beginning of 2017, concurrent with the full utilization of all of our regular net operating loss carry-forwards during 2013, for the years ended December 31, 2016, and January 2, 2016, we recognized $1.9 million and $3.8 million, respectively, of excess tax benefits (ETBs) in additional paid-in capital. Our prior policy with regard to providing for income tax expense when ETBs are utilized was to follow the “with-and-without” approach as described in ASC 740-20 and ASC 718 and include in the measurement the indirect effects of the excess tax deduction.

At January 2, 2016, we provided for a valuation allowance against net operating losses of approximately $0.2 million that we have to carryforward in North Carolina as we concluded it is not more likely than not that we will realize the full benefit of the net operating losses before expiration. During the year ended December 31, 2016, we reduced this valuation allowance by approximately $0.1 million to reflect an increase in our estimate of net operating losses we will be able to realize in North Carolina. For financial reporting purposes, we classified this valuation allowance as a reduction of state and federal net operating loss carryforwards in the above table shown above. We have no other valuation allowances on deferred tax assets at December 30, 2017, or December 31, 2016, as management’s assessment of our ability to realize our deferred tax assets is that it is more likely than not that we will generate sufficient future taxable income to realize all of our deferred tax assets.

Open Tax Years

The tax years 2011 to 2017 remain open for examination by the IRS due to the statute of limitations and net operating losses utilized in prior tax years.

The Tax Cuts And Jobs Act of 2017 (the Act)

On December 22, 2017, the President of the United States signed into law the Act. The Act includes significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from 35% to 21%, effective January 1, 2018, limitations on the deductibility of interest expense and executive compensation, the elimination of the Section 199 domestic production activities deduction, and further restricting the deductibility of certain already restricted expenses.

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Act, the Company revalued its ending net deferred tax liabilities at December 30, 2017 and recognized a $12.4 million tax benefit in the Company’s consolidated statement of operations for the year ended December 30, 2017.