Income Taxes

12 Months Ended

Dec. 28, 2018

Note 7: Income Taxes

Income before income taxes includes income from foreign operations of $8,005,000, $7,707,000 and $5,616,000 for fiscal years 2018, 2017 and 2016, respectively.

Total income tax expense for fiscal years 2018, 2017 and 2016 consisted of the following:

	Fiscal Years
(In thousands)	2018			2017			2016

Current
Federal	$	16,487		$	22,821		$	18,877
Foreign		1,624			1,514			1,085
State		6,667			5,083			4,282
		24,778			29,418			24,244
Deferred
Federal		(2,604	)		12,570			(2,047	)
State		(1,111	)		(784	)		(555	)
		(3,715	)		11,786			(2,602	)
Total	$	21,063		$	41,204		$	21,642

The Company’s effective tax rate differs from the statutory federal tax rate of 21% for 2018 and 35% for 2017 and 2016 as shown in the following schedule:

	Fiscal Years
(In thousands)	2018			2017			2016

Tax at federal statutory rate	$	19,597		$	28,878		$	24,193
Re-measurement of deferred tax assets to lower enacted domestic tax rate		-			15,137			-
Mandatory repatriation of foreign earnings		-			1,370			-
State taxes, net of federal benefit		4,391			2,806			2,423
Non-deductible expenses		335			417			274
Non-deductible stock-based compensation		20			18			11
Excess tax benefit from equity incentive plans		(3,310	)		(5,831	)		(4,321	)
Difference between statutory rate and foreign effective tax rate		(217	)		(1,339	)		(889	)
Other		247			(252	)		(49	)
Tax expense	$	21,063		$	41,204		$	21,642

Effective tax rate		22.6	%		49.9	%		31.3	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 28, 2018 and December 29, 2017 are presented in the following schedule:

	Fiscal Years
(In thousands)	2018			2017

Deferred tax assets:
Accrued liabilities and allowances	$	13,964		$	13,265
Deferred compensation plan		22,944			22,297
Property, equipment and leasehold improvements		192			288
Unrealized loss on deferred compensation plan assets		320			-
Other		34			98
Total deferred tax assets		37,454			35,948

Deferred tax liabilities:
State taxes		(1,184	)		(1,232	)
Deductible goodwill		(2,086	)		(2,078	)
Property, equipment and leasehold improvements		-			-
Unrealized gain of deferred compensation plan assets		-			(2,119	)
Other		(94	)		(82	)
Total deferred tax liabilities		(3,364	)		(5,511	)
Net deferred tax assets	$	34,090		$	30,437

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 Tax Cuts and Jobs Act (Tax Legislation) was enacted on December 22, 2017 and lowers U.S. corporate income tax rates as of January 1, 2018, implements a territorial tax system and imposes a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The impact of the Tax Legislation to the Company was an increase in income tax expense of $16,507,000 during 2017. The Company’s deferred tax assets were re-measured at the lower enacted corporate tax rate of 21% which contributed $15,137,000 to the 2017 increase in income tax expense associated with the Tax Legislation. The Company also has foreign earnings that were subject to the mandatory repatriation tax. The total mandatory repatriation tax, net of the benefit of the Company’s foreign tax credits, contributed $1,370,000 to the 2017 increase in income tax expense associated with the Tax Legislation. The Company elected to pay the mandatory repatriation tax over a period of eight years.

The Tax Legislation also includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries. An accounting policy election is available to either account for the tax effects of GILTI in the period that is subject to such taxes or to provide deferred taxes for book and tax basis differences that upon reversal may be subject to such taxes. The Company has elected to account for the tax effects of GILTI in the period that it is subject to such tax.

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 recorded as an income tax benefit. For fiscal years 2018, 2017 and 2016, the net deduction in tax payable arising from employees’ stock award activity was $4,154,000, $6,528,000 and $4,827,000, 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 2015. The Company is no longer subject to California franchise tax examinations for years prior to 2014. 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 2014.

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

Balance at December 30, 2016	$	1,956,000
Additions based on tax positions related to the current year		597,000
Additions for tax positions of prior years		11,000
Reductions due to lapse of statute of limitations		(338,000	)
Reductions for tax positions of prior years		(437,000	)
Settlements		-

Balance at December 29, 2017	$	1,789,000
Additions based on tax positions related to the current year		599,000
Additions for tax positions of prior years		-
Reductions due to lapse of statute of limitations		(257,000	)
Reductions for tax positions of prior years		(383,000	)
Settlements		-

Balance at December 28, 2018	$	1,748,000

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 $1,423,000 in a future period. There are no uncertain tax positions whose resolution in the next 12 months is expected to materially affect operating results.