CarParts.com, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 30, 2017

The components of income (loss)from continuing operations before income tax provision consist of the following:



	Fiscal Year Ended
	December 30, 2017		December 31, 2016		January 2, 2016
Domestic operations	$	2,553	$	2,570	$	(531	)
Foreign operations	481		503		483
Total income (loss) before income taxes	$	3,034	$	3,073	$	(48	)

Income tax (benefit) provision for fiscal year 2017, 2016 and 2015 consists of the following:



	Fiscal Year Ended
	December 30, 2017			December 31, 2016			January 2, 2016
Current:
Federal tax	$	—		$	—		$	—
State tax	6			6			6
Foreign tax	115			94			82
Total current taxes	121			100			88
Deferred:
Federal tax	2,118			1,067			(84		)
State tax	1,122			(401		)	866
Foreign tax	—			—			—
Total deferred taxes	3,240			666			782
Change in federal tax rate - deferred tax impact	12,171			—			—
Valuation allowance	(37,072		)	(666		)	(782		)
Income tax (benefit) provision	$	(21,540	)	$	100		$	88

Income tax (benefit) provision differs from the amount that would result from applying the federal statutory rate as follows:



	December 30, 2017			December 31, 2016			January 2, 2016
Income tax at U.S. federal statutory rate	$	1,032		$	1,044		$	(17	)
Change in U.S. federal statutory rate	12,171			—			—
Tax attributes written off	1,110			—			—
Share-based compensation	1,027			316			50
State income tax, net of federal tax effect	231			(261		)	576
Foreign tax	(77		)	(48		)	(24		)
Basis difference in subsidiary equity	—			—			—
Other	38			(149		)	51
Change in valuation allowance	(37,072		)	(802		)	(548		)
Effective tax (benefit) provision	$	(21,540	)	$	100		$	88

For fiscal years 2017, 2016 and 2015, the effective tax rate for the Company was (710.0)%, 5.5% and (179.6)%, respectively. The Company’s effective tax rate for fiscal year 2017 differs from the U.S. federal rate primarily as a result of the release of valuation allowances against the Companies deferred tax assets. The Company’s effective tax rate for fiscal years 2016 and 2015 differs from the U.S. federal rate primarily as a result of the recording of the basis difference in the Company’s subsidiary and the recording of valuation allowances against the Company’s deferred tax assets.

Deferred tax assets and deferred tax liabilities consisted of the following:



	December 30, 2017			December 31, 2016
Deferred tax assets:
Inventory and inventory related allowance	$	537		$	839
Share-based compensation	2,281			4,803
Amortization	3,702			7,602
Sales and bad debt allowances	603			749
Vacation accrual	145			209
Book over tax amortization	677			—
Net operating loss and AMT credit carry-forwards	19,740			30,474
Other	101			792
Total deferred tax assets	27,786			45,468
Valuation Allowance	(6,309		)	(43,877		)
Net deferred tax assets	21,477			1,591
Deferred tax liabilities:
Tax over book depreciation	—			1,527
Prepaid catalog expenses	1			64
Total deferred tax liabilities	1			1,591
Net deferred tax assets	$	21,476		$	—

At December 30, 2017, federal and state net operating loss (“NOL”) carryforwards were $67,492 and $72,092, respectively. Federal NOL carryforwards of $2,475 were acquired in the acquisition of WAG which are subject to Internal Revenue Code section 382 and limited to an annual usage limitation of $135. Federal NOL carryforwards begin to expire in 2029, while state NOL carryforwards begin to expire in 2018. The state NOL carryforwards expire in the respective tax years as follows:



2018	$	5,520
2019	917
2020	673
2021	5,474
2022	1,050
Thereafter	58,458
	$	72,092

Under the provisions of ASC 740, management is required to evaluate whether a valuation allowance should be established against its deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. Realization of deferred tax assets is dependent upon taxable income in prior carryback years, estimates of future taxable income, tax planning strategies, and reversal of existing taxable temporary differences. ASC 740 provides that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years or losses expected in early future years. As of December 31, 2016, the Company’s deferred tax assets were primarily the result of U.S. federal and state net operating loss carryforwards. A valuation allowance of $43,877 was recorded against our gross deferred tax asset balance as of December 31, 2016. As of December 30, 2017 in part because in the year then ended the Company achieved three years of cumulative pre-tax income in the U.S. federal tax jurisdiction, management determined that sufficient positive evidence existed to conclude that it was more likely than not that deferred taxes of $32,153 were realizable, and therefore, reduced the valuation allowance accordingly.

The Tax Cuts and Jobs Act was enacted on December 22, 2017 and reduced the U.S. federal corporate tax rate to 21 percent, effective January 1, 2018. Consequently, we have recorded a decrease in our deferred tax assets, deferred tax liabilities and valuation allowance of $13,630, $1,459 and $1,494, respectively, with a corresponding net adjustment to deferred income tax expense of $10,677 for the year ended December 30, 2017. In addition, we recognized a deemed repatriation of $1,123 of deferred foreign income from our Philippines subsidiary, which did not result in any incremental tax cost after application of foreign tax credits.

We are subject to U.S. federal income tax as well as income tax of foreign and state tax jurisdictions. The tax years 2013-2017 remain open to examination by the major taxing jurisdictions to which the Company is subject, except the Internal Revenue Service for which the tax years 2014-2017 remain open. The Company does not anticipate a significant change to the amount of unrecognized tax benefits within the next twelve months.

Included in accrued expenses are income taxes payable of $3 and $35 for the fiscal year 2017 and 2016 respectively, consisting primarily of current foreign taxes. Included in other non-current liabilities are income taxes payable of $601 and $525 for the fiscal year 2017 and 2016, respectively, relating to future foreign withholding taxes.