Income Taxes

The domestic and foreign components of (Loss) income before income taxes were as follows:



	Year Ended
(In thousands)	January 2, 2016			January 3, 2015		December 28, 2013
Domestic	$	(92,989	)	$	6,292	$	6,293
Foreign	(33,464		)	36,649		20,193
(Loss) income before taxes	$	(126,453	)	$	42,941	$	26,486

The components of the income tax expense (benefit) are as follows:



	Year Ended
(In thousands)	January 2, 2016			January 3, 2015			December 28, 2013
Current:
Federal	$	968		$	329		$	251
State	80			5			(527		)
Foreign	10,634			1,944			1,616
	11,682			2,278			1,340
Deferred:
Federal	18,713			(7,416		)	2,549
State	2,318			(513		)	342
Foreign	(173		)	12			(66		)
	20,858			(7,917		)	2,825
Income tax expense (benefit)	$	32,540		$	(5,639	)	$	4,165

Income tax expense (benefit) differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:



	Year Ended
	January 2, 2016	January 3, 2015	December 28, 2013
	%	%	%
Statutory federal rate	(35)	35	35
Adjustments for tax effects of:
State taxes, net	(6)	1	2
Research and development credits	(3)	(9)	(11)
Stock compensation	1	1	3
Foreign rate differential	12	(25)	(20)
Foreign dividends	5	1	—
Foreign withholding taxes	3	—	—
Capital loss expiration	—	7	2
Other permanent	4	—	—
Goodwill impairment	4	—	—
Valuation allowance	46	(23)	6
Change in uncertain tax benefit accrual	(8)	1	(1)
Tax rate change	3	(4)	(1)
Other	—	2	1
Effective income tax rate	26	(13)	16

ASC 740, “Income Taxes”, provides for the recognition of deferred tax assets if realization of these assets is more-likely-than-not. We evaluate both positive and negative evidence to determine if some or all of our deferred tax assets should be recognized on a quarterly basis.

During the fourth quarter of 2014, we concluded that it was more-likely-than-not that we would be able to realize the benefit of a portion of our remaining deferred tax assets, resulting in a tax benefit of $11.5 million and a federal and state net deferred tax asset of $21.3 million. We based this conclusion on improved operating results over the past two years and our expectations about generating taxable income in the foreseeable future. We exercised significant judgment and considered estimates about our ability to generate revenue, gross profits, operating income and jurisdictional taxable income in future periods under our tax structure in reaching this decision.

In 2015, we completed the acquisition of Silicon Image, Inc. At the time of the acquisition, we evaluated the combined entity's net deferred income taxes, which included an assessment of the cumulative income or loss over the prior three-year period, to determine if a valuation allowance is required. After considering the significant loss for 2015, the Company recorded a valuation allowance on its net federal and state deferred tax assets.

We will continue to evaluate both positive and negative evidence in future periods to determine if more deferred tax assets should be recognized. We don't have a valuation allowance in any foreign jurisdictions as it has been concluded it is more likely than not that we will realize the net deferred tax assets in future periods. The net increase in the total valuation allowance affecting the effective tax rate for the year ended January 2, 2016 was approximately $58.7 million.

The components of our net deferred tax assets are as follows:



(In thousands)	January 2, 2016			January 3, 2015
Deferred tax assets:
Accrued expenses and reserves	$	5,690		$	5,416
Inventory	303			—
Deferred Revenue	3,177			—
Stock-based and deferred compensation	7,674			5,530
Intangible assets	16,959			9,841
Fixed assets	—			983
Net operating loss carry forwards	131,829			96,543
Tax credit carry forwards	87,909			40,588
Capital loss carry forwards	1,262			4,142
Other	2,458			220
	257,261			163,263
Less: valuation allowance	(252,578		)	(141,215		)
Net deferred tax assets	4,683			22,048
Deferred tax liabilities:
Fixed Assets	791			—
Other	3,734			717
Total deferred tax liabilities	4,525			717
Net deferred tax assets	$	158		$	21,331

At January 2, 2016, we had federal net operating loss carryforwards (pretax) of approximately $339.9 million that expire at various dates between 2023 and 2035. We had state net operating loss carryforwards (pretax) of approximately $239.9 million that expire at various dates from 2016 through 2035. We also had federal and state credit carryforwards of $48.2 million and $55.9 million of which $53.4 million do not expire. The remaining credits expire at various dates from 2016 through 2035.

Future utilization of federal and state net operating losses and tax credit carry forwards may be limited if cumulative changes to ownership exceed 50% within any three-year period, which has not occurred through fiscal 2015. However, if there is a significant change in ownership, the future utilization may be limited and the deferred tax asset would be reduced to the amount available.

At January 2, 2016, U.S. income taxes were not provided for approximately $3.2 million of the undistributed earnings of our Chinese subsidiary. We intend to reinvest these earnings indefinitely. If these earnings were distributed to the U.S. in the form of dividends or otherwise, we would be subject to additional U.S. income taxes and foreign withholding taxes.

At January 2, 2016, our unrecognized tax benefits associated with uncertain tax positions were $48.2 million, of which $45.1 million, if recognized, would affect the effective tax rate, subject to valuation allowance. As of January 2, 2016, interest and penalties associated with unrecognized tax benefits were $5.3 million.

The following table summarizes the changes to unrecognized tax benefits for fiscal years 2015, 2014 and 2013:



(In thousands)	Amount
Balance at December 29, 2012	$	21,680
Additions based on tax positions related to the current year	1,600
Additions based on tax positions of prior years	68
Reduction for tax positions of prior years	—
Settlements	(338		)
Reduction as a result of lapse of applicable statute of limitations	(367		)
Balance at December 28, 2013	22,643
Additions based on tax positions related to the current year	770
Additions based on tax positions of prior years	—
Reduction for tax positions of prior years	(4,673		)
Settlements	—
Reduction as a result of lapse of applicable statute of limitations	(67		)
Balance at January 3, 2015	18,673
Additions based on tax positions related to the current year	4,381
Additions based on tax positions of prior years	—
Additions due to acquisition	41,083
Reductions for tax positions of prior years	(14,958		)
Reduction as a result of lapse of applicable statute of limitations	(972		)
Balance at January 2, 2016	48,207

At January 2, 2016, it is reasonably possible that $1.8 million of unrecognized tax benefits and less than $0.1 million of associated interest and penalties could significantly change during the next twelve months.

Our French income tax returns are currently under examination for 2011 and 2012, as well as our Singapore income tax return for 2012. We are not under examination in any state jurisdictions or any other foreign jurisdictions.

We are subject to federal and state income tax as well as income tax in the various foreign jurisdictions in which we operate. Additionally, the years that remain subject to examination are 2012 for federal income taxes, 2011 for state income taxes, and 2009 for foreign income taxes, including years ending thereafter. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating losses or credit carryforward amount.

The American Taxpayer Relief Act of 2012, which reinstated the United States federal research and development tax credit retroactively from January 1, 2012 through December 31, 2013, was not enacted into law until the first quarter of 2013. The Tax Increase Prevention Tax Act of 2014 was enacted into law in the fourth quarter of 2014 and extended the research and development tax credit through December 31, 2014. On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 was enacted. The Act included several business tax provisions including the permanent extension of the credit for qualified research and development. The tax benefit in each year resulting from these reinstatements of the federal research and development tax credit was offset by a valuation allowance and therefore did not impact our annual effective tax rate.