Income Taxes

12 Months Ended

Dec. 31, 2016

11. INCOME TAXES

Income tax expense (benefit) for Fiscal 2016, Fiscal 2015 and Fiscal 2014 was as follows (dollars in thousands):

	Fiscal 2016			Fiscal 2015			Fiscal 2014
	(52 weeks)			(53 weeks)			(52 weeks)
Current:
Federal	$	—		$	—		$	—
State		397			211			100
Total current	$	397		$	211			100
Deferred:
Federal		(14,362	)		(21,801	)		(8,192	)
State		(1,281	)		(2,677	)		(1,364	)
Change in valuation allowance		17,458			26,245			1,933
Total deferred		1,815			1,767			(7,623	)
Total income tax expense (benefit)	$	2,212		$	1,978		$	(7,523	)

Reconciliations of the statutory federal income tax benefit to the effective tax expense (benefit) for Fiscal 2016, Fiscal 2015 and Fiscal 2014 are as follows (dollars in thousands):

	Fiscal 2016			Fiscal 2015			Fiscal 2014
	(52 weeks)			(53 weeks)			(52 weeks)
Statutory federal income tax benefit	$	(14,823	)	$	(21,093	)	$	(7,766	)
Valuation allowance		17,458			26,245			1,933
State income tax benefit, net of federal benefit		(1,512	)		(2,356	)		(1,272	)
Non-deductible expenses		79			193			165
Benefit of federal tax credits		—			(388	)		(270	)
Other		1,010			(623	)		(313	)
	$	2,212		$	1,978		$	(7,523	)

The components of deferred income tax assets and liabilities are comprised of the following (dollars in thousands):

	December 31, 2016			January 2, 2016
Inventory and other reserves	$	(3,687	)	$	(4,674	)
Prepaid taxes, insurance and service contracts		6,549			6,431
Property and equipment depreciation		(4,445	)		(11,142	)
Goodwill and intangible assets		(55,739	)		(58,148	)
Accrued compensation		1,282			1,271
Capital leases		13,007			11,536
Federal and state net operating loss carryforwards and federal credits		36,498			33,253
Valuation allowance		(46,207	)		(28,828	)
Other		7,233			6,607
	$	(45,509	)	$	(43,694	)

The Company has U.S. federal and state net operating losses of $80.4 million and $72.0 million, respectively, which expire beginning in 2031. In addition, the Company has federal tax credits of $5.3 million, which expire beginning in 2027.

The Company has performed the required assessment of positive and negative evidence regarding the realization of the net deferred income tax assets in accordance with ASC 740. The Company considers all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income and recent financial operations, to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of a net deferred income tax asset. Judgment is used in considering the relative impact of negative and positive evidence. In arriving at these judgments, the weight given to the potential effect of negative and positive evidence is commensurate with the extent to which such evidence can be objectively verified. In evaluating the objective evidence provided by historical results, the Company considers the past three years.

Based on an assessment of the available positive and negative evidence, including the Company’s historical results, the Company determined that there are uncertainties relating to its ability to utilize the net deferred tax assets excluding deferred tax liabilities attributable to the indefinite-lived tradename, which the Company cannot assume the reversal of under ASC 740. In recognition of these uncertainties, the Company provided a 100% valuation allowance on the net deferred income tax assets during Fiscal 2009. During Fiscal 2016, Fiscal 2015 and Fiscal 2014, the Company established additional valuation allowance of $17.5 million, $26.2 million and $1.9 million, respectively, with offsetting charges to income tax expense (benefit). Additionally, during Fiscal 2014, the Company established additional valuation allowance of $0.7 million related to amounts recorded in other comprehensive loss.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company did not have any unrecognized tax benefits during Fiscal 2016, Fiscal 2015 and Fiscal 2014, and the Company does not expect significant unrecognized tax benefits over the next twelve months.

The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The Company’s U.S. federal income tax return for the 2013 tax year and beyond remains subject to examination by the IRS. State returns remain subject to examination for tax years 2009 and beyond depending on each state’s statute of limitations.

In September 2013, the IRS issued final regulations affecting costs to acquire, produce, or improve tangible property and re-proposed regulations affecting dispositions of tangible property. The final regulations were effective for taxable years beginning on or after January 1, 2014. The final regulations did not have a material impact on the Company’s consolidated financial statements.

TOPS HOLDING II CORP 10-K