INCOME TAXES

12 Months Ended

Dec. 28, 2019

On December 22, 2017, the Tax Act was signed into law, significantly reforming the Code. The Tax Act, among other things, reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and put into effect the migration from a “worldwide” system of taxation to a territorial system. We recognized income tax expense of $5.7 million in 2017, primarily due to the revaluation of our net deferred tax asset based on a prospective U.S. federal income tax rate of 21%. We also recognized an immaterial one-time transition tax on our unremitted foreign earnings and profits. During 2018, we finalized the accounting for the enactment of the Tax Act, with an immaterial adjustment to the amount recorded in the year of enactment.

The components of income before income taxes were as follows for the periods indicated (in thousands):


	Fiscal Year Ended
	December 28, 2019		December 29, 2018		December 30, 2017
Domestic	$	65,469	$	69,209	$	31,927
Foreign	1,789		406		132
Income before income taxes	$	67,258	$	69,615	$	32,059

The components of income tax expense were as follows for the periods indicated (in thousands):


	Fiscal Year Ended
	December 28, 2019		December 29, 2018		December 30, 2017
Current tax expense:
U.S. federal	$	627	$	7,190	$	7,440
State	1,505		2,316		379
Foreign	526		247		46
Total current tax expense	2,658		9,753		7,865
Deferred tax expense (benefit):
U.S. federal	12,911		3,298		8,915
State	1,304		(1,172)		(114)
Foreign	(49)		(27)		(8)
Total deferred tax expense	14,166		2,099		8,793
Total income tax expense	$	16,824	$	11,852	$	16,658

A reconciliation of income taxes computed at the statutory federal income tax rate of 21% in 2019 and 2018 and 35% in 2017 to the effective income tax rate is as follows for the periods indicated (in thousands):


	Fiscal Year Ended
	December 28, 2019		December 29, 2018		December 30, 2017
Income taxes at the statutory rate	$	14,124	$	14,619	$	11,223
Increase (decrease) resulting from:
State income taxes, net of federal tax effect	2,989		2,030		212
Nondeductible expenses	203		248		180
Domestic production activities deduction	—		—		(121)
Research and development tax credits	(2,157)		(578)		(656)
Nontaxable income attributable to noncontrolling interest	—		—		223
Tax expense (benefit) related to stock-based compensation	950		(2,396)		(803)
Enactment of the Tax Act	—		—		5,737
Nondeductible interest expense	—		4		637
Revaluation of deferred tax assets for state income taxes	(92)		(1,154)		(36)
Other	807		(921)		62
Income tax expense	$	16,824	$	11,852	$	16,658

Deferred tax assets and liabilities consisted of the following for the periods indicated (in thousands):


	Fiscal Year Ended
	December 28, 2019		December 29, 2018
Deferred tax assets:
Accrued liabilities	$	4,482	$	3,943
Allowances and other reserves	2,030		1,683
Inventory	1,929		5,472
Stock-based compensation	4,761		14,085
Operating lease liabilities	12,286		—
Deferred rent	—		2,657
Deferred interest	1,703		—
Other	1,497		1,719
Total deferred tax assets	$	28,688	$	29,559
Deferred tax liabilities:
Operating lease assets	$	(9,528)	$	—
Prepaid expenses	(1,897)		(782)
Property and equipment	(10,971)		(8,433)
Intangible assets	(13,546)		(11,857)
Other	(744)		(710)
Total deferred tax liabilities	(36,686)		(21,782)
Net deferred tax (liabilities) assets	$	(7,998)	$	7,777
Amounts included in the Consolidated Balance Sheets:
Deferred income taxes	$	1,082	$	7,777
Other liabilities	(9,080)		—
Net deferred income tax (liabilities) assets	$	(7,998)	$	7,777

We consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested, and, accordingly, no taxes have been recognized on such earnings except for the transition tax recognized as part of the Tax Act. We continue to evaluate our plans for reinvestment or repatriation of unremitted foreign earnings. If we determine that all or a portion of our foreign earnings are no longer indefinitely reinvested, we may be subject to additional foreign withholding taxes and U.S. state income taxes. At December 28, 2019, we had unremitted earnings of foreign subsidiaries of $2.0 million.

As of December 28, 2019, we had Texas research and development tax credit carryforwards of approximately $1.9 million, which if not utilized, will expire beginning in 2037.

The following table summarizes the activity related to our unrecognized tax benefits for the periods indicated (excluding interest and penalties) (in thousands):


	Fiscal Year Ended
	December 28, 2019		December 29, 2018
Balance, beginning of year	$	2,381	$	1,064
Gross increases related to current year tax positions	987		1,350
Gross increases related to prior year tax positions	37		—
Gross decreases related to prior year tax positions	—		(14)
Lapse of statute of limitations	(47)		(19)
Balance, end of year	$	3,358	$	2,381

If our positions are sustained by the relevant taxing authorities, approximately $3.4 million (excluding interest and penalties) of uncertain tax position liabilities as of December 28, 2019 would favorably impact our effective tax rate in future periods. We do not anticipate that the balance of gross unrecognized tax benefits will change significantly during the next twelve months.

We include interest and penalties related to unrecognized tax benefits in our current provision for income taxes in the accompanying consolidated statements of operations. As of December 28, 2019, we had recognized a liability of $0.3 million for interest and penalties related to unrecognized tax benefits.

We file income tax returns in the United States and various state jurisdictions. The tax years 2016 through 2019 remain open to examination in the United States, and the tax years 2015 through 2019 remain open to examination in Texas and most other state jurisdictions. The 2017 through 2019 tax years remain open to examination in foreign jurisdictions.