Note 7: Income Taxes

Income before income taxes includes income from foreign operations of $6,656,000, $4,157,000 and $6,007,000 for fiscal 2015, 2014 and 2013, respectively.

Total income tax expense for the fiscal years ended January 1, 2016, January 2, 2015 and January 3, 2014 consisted of the following:

	Fiscal Years
(In thousands)	2015		2014		2013

Current
Federal	$	25,081	$	26,647	$	22,468
Foreign		1,385		896		1,411
State		4,895		5,798		4,824
		31,361		33,341		28,703
Deferred
Federal		(3,411)		(5,059)		(2,703)
State		(416)		(1,018)		(695)
		(3,827)		(6,077)		(3,398)
Total	$	27,534	$	27,264	$	25,305

The Company’s effective tax rate differs from the statutory federal tax rate of 35% as shown in the following schedule:

	Fiscal Years
(In thousands)	2015			2014			2013

Tax at federal statutory rate	$	24,897		$	23,788		$	22,381
State taxes, net of federal benefit		2,910			3,226			2,819
Tax exempt interest income		(23)			(44)			(36)
Non-deductible expenses		261			289			226
Non-deductible stock-based compensation		(42)			-			(79)
Other		(469)			5			(6)
Tax expense	$	27,534		$	27,264		$	25,305

Effective tax rate		38.7	%		40.1	%		39.6	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at January 1, 2016 and January 2, 2015 are presented in the following schedule:

	Fiscal Years
(In thousands)	2015		2014

Deferred tax assets:
Accrued liabilities and allowances	$	17,780	$	17,244
Deferred compensation		27,425		26,873
Other		43		28
Total deferred tax assets		45,248		44,145

Deferred tax liabilities:
State taxes		(1,850)		(1,717)
Deductible goodwill		(3,014)		(2,978)
Property, equipment and leasehold improvements		(205)		(459)
Unrealized gain of deferred compensation plan assets		(723)		(3,377)
Other		-		-
Total deferred tax liabilities		(5,792)		(8,531)
Net deferred tax assets	$	39,456	$	35,614

Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.

The Company is entitled to a deduction for federal and state tax purposes with respect to employees’ stock award activity. The net deduction in taxes otherwise payable arising from that deduction has been credited to additional paid-in capital. For the fiscal years ended January 1, 2016, January 2, 2015 and January 3, 2014, the net deduction in tax payable arising from employees’ stock award activity was $6,396,000, $5,100,000 and $4,267,000, respectively.

The Company and its subsidiaries file income tax returns in the United States federal jurisdiction, California and various other state and foreign jurisdictions. The Company is no longer subject to United States federal income tax examination for years prior to 2012. The Company is no longer subject to California franchise tax examinations for years prior to 2011. With few exceptions, the Company is no longer subject to state and local or non-United States income tax examination by tax authorities for years prior to 2011.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Balance at January 3, 2014	$	1,147,000
Additions based on tax positions related to the current year		486,000
Additions for tax positions of prior years		-
Reductions due to lapse of statute of limitations		(87,000)
Reductions due to change in accounting method		-
Settlements		-
Balance at January 2, 2015	$	1,546,000
Additions based on tax positions related to the current year		406,000
Additions for tax positions of prior years		80,000
Reductions due to lapse of statute of limitations		(154,000)
Reductions due to change in accounting method		-
Settlements		-
Balance at January 1, 2016	$	1,878,000

Unrecognized tax benefits are included in other liabilities in the accompanying balance sheet. To the extent these unrecognized tax benefits are ultimately recognized, they will impact the effective tax rate by $1,296,000 in a future period. There are no uncertain tax positions whose resolution in the next 12 months is expected to materially affect operating results.

Deferred income taxes have not been provided on the undistributed earnings of foreign subsidiaries in the United Kingdom, Germany, China and Hong Kong. The amount of such earnings at January 1, 2016 was $7,736,000. These earnings have been permanently reinvested and the Company does not plan to initiate any action that would precipitate the payment of income taxes thereon. The unrecognized deferred tax liability for these earnings is estimated to be approximately $1,478,000.