Income Taxes

12 Months Ended

Jan. 03, 2020

Note 7: Income Taxes

Income before income taxes includes income from foreign operations of $8,017,000, $8,005,000 and $7,707,000 for 2019, 2018 and 2017, respectively.

Total income tax expense for 2019, 2018 and 2017 consisted of the following:

	Fiscal Years
(In thousands)	2019			2018			2017
Current
Federal	$	16,498		$	16,487		$	22,821
Foreign		1,523			1,624			1,514
State		6,554			6,667			5,083
		24,575			24,778			29,418
Deferred
Federal		(1,727	)		(2,604	)		12,570
State		(1,118	)		(1,111	)		(784	)
		(2,845	)		(3,715	)		11,786
Total	$	21,730		$	21,063		$	41,204

The Company’s effective tax rate differs from the statutory federal tax rate of 21% for 2019 and 2018 and 35% for 2017 as shown in the following schedule:

	Fiscal Years
(In thousands)	2019			2018			2017
Tax at federal statutory rate	$	21,880		$	19,597		$	28,878
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		4,129			4,391			2,806
Divestiture of foreign subsidiary		956			—			—
Nondeductible officer compensation		759			—			—
Non-deductible expenses		345			335			417
Non-deductible stock-based compensation		2			20			18
Excess tax benefit from equity incentive plans		(6,394	)		(3,310	)		(5,831	)
Difference between statutory rate and foreign effective tax rate		(341	)		(217	)		(1,339	)
Other		394			247			(252	)
Tax expense	$	21,730		$	21,063		$	41,204

Effective tax rate		20.9	%		22.6	%		49.9	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at January 3, 2020 and December 28, 2018 are presented in the following schedule:

	Fiscal Years
(In thousands)	2019			2018
Deferred tax assets:
Accrued liabilities and allowances	$	15,658		$	13,964
Deferred compensation plan		28,463			22,944
Operating leases		6,867			—
Property, equipment and leasehold improvements		—			192
Unrealized loss on deferred compensation plan assets		—			320
Other		—			34
Total deferred tax assets	$	50,988		$	37,454

Deferred tax liabilities:
State taxes	$	(1,624	)	$	(1,184	)
Deductible goodwill		(2,104	)		(2,086	)
Operating leases		(6,867	)		—
Property, equipment and leasehold improvements		(84	)		—
Unrealized gain of deferred compensation plan assets		(2,339	)		—
Divestiture of foreign subsidiary		(956	)
Other		(193	)		(94	)
Total deferred tax liabilities		(14,167	)		(3,364	)
Net deferred tax assets	$	36,821		$	34,090

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 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 2019, 2018 and 2017, the net deduction in tax payable arising from employees’ stock award activity was $8,067,000, $4,154,000 and $6,528,000, 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 2016. The Company is no longer subject to California franchise tax examinations for years prior to 2015. 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 2015.

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

Balance at December 29, 2017	$	1,789,000
Additions based on tax positions related to the current year		599,000
Reductions due to lapse of statute of limitations		(257,000	)
Reductions for tax positions of prior years		(383,000	)
Balance at December 28, 2018	$	1,748,000
Additions based on tax positions related to the current year		515,000
Reductions due to lapse of statute of limitations		(340,000	)
Balance at January 3, 2020	$	1,923,000

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 $1,557,000 in a future period. There are no uncertain tax positions whose resolution in the next 12 months is expected to materially affect operating results.