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

Jan. 02, 2016

The components of loss before income tax provision consist of the following:



	Fiscal Year Ended
	January 2, 2016			January 3, 2015			December 28, 2013
Domestic operations	$	(3,718	)	$	(7,424	)	$	(16,155	)
Foreign operations	483			476			564
Total loss before income taxes	$	(3,235	)	$	(6,948	)	$	(15,591	)

Income tax (benefit) provision for fiscal year 2015, 2014 and 2013 consists of the following:



	Fiscal Year Ended
	January 2, 2016			January 3, 2015			December 28, 2013
Current:
Federal tax	$	—		$	—		$	—
State tax	7			(15		)	20
Foreign tax	88			78			(37		)
Total current taxes	95			63			(17		)
Deferred:
Federal tax	(1,887		)	(2,232		)	(5,260		)
State tax	591			(125		)	(1,353		)
Foreign tax	61			74			60
Total deferred taxes	(1,235		)	(2,283		)	(6,553		)
Valuation allowance	329			2,358			6,613
Income tax (benefit) provision	$	(811	)	$	138		$	43

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



	January 2, 2016			January 3, 2015			December 28, 2013
Income tax at U.S. federal statutory rate	$	(1,100	)	$	(2,362	)	$	(5,301	)
Share-based compensation	50			33			43
State income tax, net of federal tax effect	672			(143		)	(1,348		)
Foreign tax	(18		)	117			70
Basis difference in subsidiary equity	(820		)	—			—
Other	76			127			(42		)
Change in valuation allowance	329			2,366			6,621
Effective tax (benefit) provision	$	(811	)	$	138		$	43

For fiscal year 2015, 2014 and 2013, the effective tax rate for the Company was 25.1%, (2.0)% and (0.3)%, respectively. The Company’s effective tax rate for fiscal year 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. The Company’s effective tax rate for fiscal years 2014 and 2013 differs from the U.S. federal rate primarily as a result of the recording of valuation allowances against the Company’s deferred tax assets.

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



	January 2, 2016			January 3, 2015
Deferred tax assets:
Inventory and inventory related allowance	$	976		$	1,334
Share-based compensation	4,924			5,248
Amortization	9,244			11,805
Sales and bad debt allowances	443			472
Vacation accrual	220			264
Book over tax amortization	31			10
Net operating loss and AMT credit carry-forwards	30,254			26,186
Other	843			807
Total deferred tax assets	46,935			46,126
Valuation Allowance	(46,196		)	(45,867		)
Net deferred tax assets	739			259
Deferred tax liabilities:
Investment in subsidiary	368			1,335
Tax over book depreciation	639			79
Foreign tax withholdings	470			409
Prepaid catalog expenses	100			180
Total deferred tax liabilities	1,577			2,003
Net deferred tax liabilities	$	(838	)	$	(1,744	)

At January 2, 2016, federal and state net operating loss (“NOL”) carryforwards were $68,307 and $79,046, respectively. Federal NOL carryforwards of $2,690 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 2016. The state NOL carryforwards expire in the respective tax years as follows:



2016-2022	$	40,569
2023-2033	38,477
Total	$	79,046

On October 8, 2014, AutoMD sold seven million shares of its common stock to third-party investors, reducing the Company’s ownership interest in AutoMD to 64.1%. AutoMD will no longer be included in the consolidated state and federal tax filings of the Company. As a result of the investment a deferred tax liability of $1,335 was created which reduced the increase in additional paid-in-capital which was created as a result of the investment. At January 2, 2016, AutoMD had net operating loss carryforwards (NOLs) of approximately $5,152 for federal tax purposes that begin to expire in 2031. AutoMD state NOLs were not material as of January 2, 2016.

The valuation allowance for deferred tax assets recorded during fiscal year 2015 and 2014 is based on a more likely than not threshold. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. We considered the following possible sources of taxable income when assessing the realization of deferred tax assets:


•	Future reversals of existing taxable temporary differences;


•	Future taxable income exclusive of reversing temporary differences and carryforwards;


•	Taxable income in prior carryback years; and


•	Tax-planning strategies.

Under the provisions of ASC 740, “Income Taxes”, 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. Based on this evaluation, as of January 2, 2016, a valuation allowance of $46,196 has been recorded against our deferred tax assets.

If, in the future, we generate taxable income on a sustained basis in jurisdictions where we have recorded full valuation allowances, our conclusion regarding the need for full valuation allowances in these tax jurisdictions could change, resulting in the reversal of some or all of the valuation allowances. If our operations generate taxable income prior to reaching profitability on a sustained basis, we would reverse a portion of the valuation allowance related to the corresponding realized tax benefit for that period, without changing our conclusions on the need for a full valuation allowance against the remaining net deferred tax assets.

Included in accrued expenses are income taxes payable of $12 and $33 for the fiscal year 2015 and 2014 respectively, consisting primarily of foreign taxes.