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. 31, 2016

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



	Fiscal Year Ended
	December 31, 2016			January 2, 2016			January 3, 2015
Domestic operations	$	(1,305	)	$	(3,718	)	$	(7,424	)
Foreign operations	503			483			476
Total loss before income taxes	$	(802	)	$	(3,235	)	$	(6,948	)

Income tax (benefit) provision for fiscal year 2016, 2015 and 2014 consists of the following:



	Fiscal Year Ended
	December 31, 2016			January 2, 2016			January 3, 2015
Current:
Federal tax	$	—		$	—		$	—
State tax	7			7			(15		)
Foreign tax	162			88			78
Total current taxes	169			95			63
Deferred:
Federal tax	(331		)	(1,887		)	(2,232		)
State tax	(616		)	591			(125		)
Foreign tax	—			61			74
Total deferred taxes	(947		)	(1,235		)	(2,283		)
Valuation allowance	579			329			2,358
Income tax (benefit) provision	$	(199	)	$	(811	)	$	138

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



	December 31, 2016			January 2, 2016			January 3, 2015
Income tax at U.S. federal statutory rate	$	(273	)	$	(1,100	)	$	(2,362	)
Share-based compensation	316			50			33
State income tax, net of federal tax effect	(559		)	672			(143		)
Foreign tax	20			(18		)	117
Basis difference in subsidiary equity	(267		)	(820		)	—
Other	(15		)	76			127
Change in valuation allowance	579			329			2,366
Effective tax (benefit) provision	$	(199	)	$	(811	)	$	138

For fiscal year 2016, 2015 and 2014, the effective tax rate for the Company was 24.8%, 25.1% and (2.0)%, respectively. 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. The Company’s effective tax rate for fiscal year 2014 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:



	December 31, 2016			January 2, 2016
Deferred tax assets:
Inventory and inventory related allowance	$	839		$	976
Share-based compensation	5,083			4,924
Amortization	7,636			9,244
Sales and bad debt allowances	749			443
Vacation accrual	224			220
Book over tax amortization	—			31
Net operating loss and AMT credit carry-forwards	33,026			30,254
Other	800			843
Total deferred tax assets	48,357			46,935
Valuation Allowance	(46,775		)	(46,196		)
Net deferred tax assets	1,582			739
Deferred tax liabilities:
Investment in subsidiary	—			368
Tax over book depreciation	1,518			639
Foreign tax withholdings	—			470
Prepaid catalog expenses	64			100
Total deferred tax liabilities	1,582			1,577
Net deferred tax liabilities	$	—		$	(838	)

At December 31, 2016, federal and state net operating loss (“NOL”) carryforwards were $75,261 and $83,027, 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 2017. The state NOL carryforwards expire in the respective tax years as follows:



2017	$	6,930
2018	1,132
2019	7,646
2020	2,121
2021	4,050
Thereafter	61,148
	$	83,027

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%. As a result, AutoMD was excluded from the consolidated state and federal tax filings of the Company for fiscal year 2016. 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 December 31, 2016, AutoMD had net operating loss carryforwards (NOLs) of approximately $7,506 for federal tax purposes that begin to expire in 2031. AutoMD state NOLs were not material as of December 31, 2016.

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. Based on this evaluation, as of December 31, 2016, a valuation allowance of $46,775 has been recorded against our deferred tax assets.

We are subject to U.S. federal income tax as well as income tax of foreign and state tax jurisdictions. During fiscal 2010, the Company was audited by the Internal Revenue Service for the year ended December 31, 2008. The audit was concluded with no change. The tax years 2012-2015 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 2013-2015 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 $35 and $12 for the fiscal year 2016 and 2015 respectively, consisting primarily of current foreign taxes. Included in other non-current liabilities are income taxes payable of $525, $470 and $409 for the fiscal year 2016, 2015 and 2014 respectively relating to future foreign withholding taxes.